Super, the Budget and YOU!
Understanding the recent federal budget and its potential impact on individual financial affairs is challenging and certainly doesn’t happen overnight. So we’re here to provide support with analysing and assessing the proposed changes on you and your superannuation.
What these superannuation changes mean for you:
- $500,000 lifetime non-concessional contributions cap
One of the most substantial changes to superannuation since 2007, a new lifetime cap of $500,000 for non-concessional (after-tax) contributions is proposed to apply from 3 May 2016. Currently the non-concessional contributions cap is $180,000 per annum (or up to $540,000 brought forward over a 3-year period if under the age of 65). This proposed change is to be applied retrospectively. This means that if you have already made non-concessional contributions to your super fund in excess of $500,000 from 1 July 2007 to date, no further non-concessional contributions can be made for the remainder of your life (without detrimental tax consequences) effective as at 7:30pm on Tuesday 3 May 2016. Keep in mind that if you haven’t as yet utilised your new lifetime non-concessional cap of $500,000, you may be able to make additional after-tax contributions (subject to age and work status conditions). Please also note that we are able to correspond directly with the Australian Tax Office to confirm details pertaining to non-concessional contributions made by our clients since 1 July 2007. We recommend that you call our office to discuss how these changes may affect you and your retirement.
- Reduction in concessional contribution cap from 1 July 2017
Currently individuals under the age of 50 can contribute up to $30,000 per annum into superannuation from pre-tax income. This cap currently increases to $35,000 per annum for individuals aged 50 and over. From 1 July 2017, the annual cap on concessional contributions is proposed to be reduced to $25,000 per annum for all individuals. With less than a month remaining until the end of the 2016 financial year, it is important to contact BLG to review the status of your concessional contributions levels for the current and future financial years.
Note that there is a concession proposed for individuals with total superannuation balances of less than $500,000 to make additional concessional contributions where they have not reached their concessional contributions cap in prior years.
- Introduction of $1.6 million cap on superannuation transfer balances
Another unprecedented change that has been proposed is the amount of superannuation that can be maintained in a tax-free environment (pension phase). From 1 July 2017, individuals will be restricted in relation to the level of superannuation benefits that can be transferred to pension accounts (up to $1,600,000 per individual). Further, individuals with pension accounts totaling in excess of $1,600,000 will be required to reduce their pension account balances to $1,600,000 by 1 July 2017.
The practical effect of this new cap is that it will limit the extent to which tax-free benefits of retirement phase / pension accounts can be used by individuals with substantial superannuation balances (i.e. the tax exemption on earnings of assets supporting pension accounts will be limited to account balances of $1,600,000 from 1 July 2017). However it is important to note that other taxable Fund earnings will generally only be subject to a 15% tax rate (or in some cases 10% on discountable capital gains). We expect that this new cap will be subject to substantial commentary within the next 12 months, in particular in relation to the practical consequences of the cap in future years. We will keep you updated on this change as further information is made available.
- ‘High income earners’ tax on concessional contributions (Division 293)
The threshold at which high income earners pay additional contributions tax will be lowered to $250,000 from 1 July 2017. The $250,000 cap is made up of a persons adjusted taxable income and also includes concessional contributions made for the applicable financial year. That means there could be a short window of opportunity for those earning between $250,000-$300,000 a year to beef up their super balance at the lower contributions tax rate of 15%, a discount of more than 30% to their marginal income tax rate. If you think you might be affected by Division 293, be sure to contact BLG to confirm whether or not this cap will affect you.
- Transition to Retirement Income Streams (Pensions)
The tax exemption on earnings of assets supporting these pensions is proposed to be removed from 1 July 2017.
- Removal of certain contribution restrictions
From 1 July 2017, it is proposed that individuals aged between 65 and 74 will not be required to satisfy a ‘work test’ to make contributions to superannuation (concessional and non-concessional). Currently individuals aged between 65 and 74 are required to work for at least 40 hours in a consecutive 30-day period each financial year to contribute to superannuation. Further, it is proposed from 1 July 2017 that the deductibility of personal superannuation contributions will not be subject to the employment status of the contributing individual (currently subject to a ‘10% test’ based on adjusted assessable income). Both of these proposed changes will provide greater certainty and flexibility in respect of contributions to superannuation.
Keep in mind that the above proposed changes are not yet law and may be subject to further variation (largely dependent on the result of the upcoming federal election). Therefore it is important to contact your business or tax adviser to discuss any changes you intend to make to your financial affairs in light of the recent federal budget. To discuss how the above proposed changes, and more, may impact on you, please do not hesitate to contact one of our tax specialists at BLG Business Advisers on (02) 4229 2211.