Treasurer Scott Morrison has handed down the biggest shake-up to the superannuation system in 10 years. As widely expected, there were dramatic changes in last night’s Federal Budget, but while some changes were expected, the number and extent of the changes, as well as their far-reaching consequences came as somewhat of a surprise.
Some of the highlights of the superannuation and retirement announcements are:
Concessional contribution limit slashed
The annual cap on contributions entitled to the concessional tax rates has been reduced to $25,000 for everybody, from the current $30,000 for under-50s and $35,000 for those aged 50-plus. This will apply from 1 July 2017.
Lifetime limit for non-concessional contributions
Non-concessional contributions will be subject to a lifetime cap of $500,000 down from the current annual limit of $180,000. This change applies from Budget Night but also counts any non-concessional contributions made since July 2007. However, it is not retrospective so members who have already made non-concessional contributions in excess of this limit will not have to withdraw them.
Superannuation transfer balance cap
A superannuation transfer balance cap introduced which limits the total superannuation an individual can transfer into retirement phase at $1.6 million. This will apply from 1 July 2017 and will include current retirees as well as those yet to enter retirement phase. Any amounts in excess of $1.6 million will have to be transferred to accumulation and subject to 15% tax on earnings.
Lower income limit for extra contributions tax
People with combined income and superannuation contributions of greater than $250,000 will pay 30% tax on their concessional contributions. This lowers the current level of income applicable to this tax rate from $300,000.
Low income superannuation tax offset
This will replace the Low Income Superannuation Contribution which is set to finish on 30 June 2017. This will allow individuals with an adjusted taxable income of $37,000 or less to receive an effective refund of the tax paid on their concessional contributions up to a cap of $500.
Increased access to concessional contributions
All individuals under the age of 75 will be able to claim tax deductions for personal superannuation contributions from 1 July 2017. This removes the current restriction on employees making concessional contributions for which they can claim a personal tax deduction allowing everyone to have the same opportunities to contribute.
Abolition of the “work-test”
The current legislation which requires individuals aged 65 to 74 to satisfy minimum work requirements to be able to contribute to superannuation will be removed from 1 July 2017. This means that the same contribution acceptance rules will apply to everybody under the age of 75.
Catch-up of concessional contributions
Unused concessional contribution caps can be carried forward on a rolling basis for up to five years for those with account balances of $500,000 or less. This will allow people with changing circumstances or interrupted work patterns to boost their superannuation through catch-up contributions.
Change to Transition to Retirement Income Streams
The tax exemption on earnings supporting a Transition to Retirement Income Stream (TRIS) will be removed from 1 July 2017. Currently these earnings are tax-free but they will be taxed at the standard tax rate of 15% moving forward. Essentially, while these arrangements can remain in place, they lose their tax effectiveness. There does not appear to be any “grandfathering” provision for existing TRIS’.
Further to this, individuals will no longer be able to treat these income stream payments as lump sums for tax purposes.
- Anti-detriment provisions will be removed
- Restriction on the development of retirement income products removed
- Income threshold for spouse contribution offset increased from $10,800 to $37,000
While some of the proposed changes like abolishing the work-test and allowing everyone the opportunity to make personal concessional contributions are positive and move to make the system more equitable, there are a number of counterproductive measures like lowering the concessional contribution limit and introduction of a lifetime cap on non-concessional contributions. Treasurer Morrison was quick to say that the negative impacts were limited to only “1% of the population” which signals his intent to focus on the fact that the average Australian will apparently be better off. Despite his reassurances that “changes would not be retrospective” it is difficult to believe this is actually the case when clearly people with existing superannuation benefits are detrimentally impacted.
Of course the devil will be in the detail and how these changes will be implemented and accounted for will likely lead to planning opportunities over the next 12 months, as most changes do not commence until 1 July, 2017.
Author Clive Todd
© Hanrick Curran 2016
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.