Budget superannuation reforms become law
30 Nov 2016
By Shadforth Financial Group
On Wednesday 23 November 2016, legislation to make the changes to the superannuation laws announced in the 2016 Federal Budget passed into law (subject to Royal Assent). The final legislation differed somewhat to the proposals announced back in May 2016.
The new rules
- Lower contribution caps – this applies to all taxpayers from 1 July 2017 as outlined below:
Cap per annum
Concessional contributions (pre-tax contributions)
Non-concessional contributions (after-tax contributions)
There will be tighter restrictions than the above caps if you have total monies in superannuation and income streams close to or over $1.6 million.
- Non-concessional ‘bring forward’ rules – if you have exceeded the annual $180,000 non-concessional cap in either 2015/16 or 2016/17 and have not used the full three-year ‘bring forward’ cap by 30 June 2017, the amount you can contribute in 2017/18 and later years will be reduced from the current $540,000.
- $1.6 million balance transfer cap – the cap places a limit on the amount you can hold in the tax-free retirement phase (for most people this will be an account based pension) from 1 July 2017. People with existing income stream balances above this limit at 1 July 2017 will need to move amounts above this cap out of the tax-free retirement phase by that date.
- High income earners threshold reduction - the income threshold at which individuals are required to pay an additional 15 per cent contributions tax reduces from $300,000 per year to $250,000.
- Flexibility on concessional contributions – from 1 July 2018, unused concessional cap amounts can be used to make larger contributions in a given year, as they will be carried forward on a rolling basis over a consecutive five-year period. This measure will help grow the super of those with irregular work patterns such as contractors, the self-employed or women, but can be used by anyone with a super balance below $500,000.
- Removal of the tax-free treatment of earnings – income on assets backing transition to retirement income streams will be taxed at 15 per cent.
- Removal of the 10 per cent test to make tax deductible super contributions – any individual will be able to claim a tax deduction for personal super contributions (up to the maximum concessional contribution cap less any employer contributions) without testing the proportion of employment income received (the 10 per cent test). This will help people who are not self-employed but don’t have the opportunity to salary sacrifice into super.
Changes to the non-concessional contributions cap
In September 2016, the Government decided not to proceed with the proposed $500,000 lifetime cap on non-concessional contributions, including the retrospective ‘look back’ to contributions made since 2007. Instead, they have reduced the current $180,000 annual cap on non-concessional contributions to $100,000 annually.
You will still be able to bring forward the next two years of the cap (but limited to $300,000 over three years to reflect a lower annual cap). Also, as is currently the case, the bring-forward provisions will not apply to those aged 65 or over.
The $100,000 non-concessional contributions cap will be fixed at four times the concessional contributions cap. Consistent with current rules, increases will be linked to changes in the concessional contributions cap.
Transitional measures from 1 July 2017
The current rules allow for a non-concessional contributions cap of $180,000 annually or a bring-forward cap of $540,000 over three years. However, transitional measures will apply if you triggered the bring-forward rule in 2015/16 or 2016/17 AND have not fully used your NCC bring-forward amount before 1 July 2017. The remaining ‘bring forward’ limit will be reassessed on 1 July 2017 to reflect the new lower annual caps of $460,000 (if you triggered in 2015/16) or $380,000 (if you triggered in 2016/17).
Jane triggered the bring-forward cap in 2015/16 by contributing $200,000, but she has no cash available to make further contributions in 2016/17. Therefore, in 2017/18, Jane can contribute a maximum of $260,000 to superannuation (being the new cap of $460,000 less the first year contribution of $200,000).
Jane triggers the bring-forward cap in 2016/17 by contributing $200,000 which is all the available cash that she has. She receives an inheritance in 2017/18, but the maximum she can contribute in 2017/18 is $180,000 (being the new cap of $380,000 less the first year contribution of $200,000).
Current NCC rules apply up to the start date of this change, 1 July 2017. Therefore if you have not triggered the bring-forward cap in the previous two years you can contribute $540,000 of non-concessional contributions by 30 June 2017. If you have triggered the bring-forward cap in 2015/16 or 2016/17, you can contribute the balance up to $540,000 by 30 June 2017.
Following on from Example 1, Jane decides to sell a property in 2016/17 and has cash available to contribute. Jane can contribute a maximum of $340,000 as long as she does so before 30 June 2017 (being the current $540,000 bring forward cap minus the 2015/16 contribution of $200,000).
$1.6 million balance threshold introduction
If you have a ‘total superannuation balance’ (defined as the sum of all superannuation accumulation and income stream/pension accounts for each individual) over $1.6 million, you will not be able to make further non-concessional contributions after 1 July 2017. This threshold is intended to be measured on 30 June of the previous financial year.
If your account balance is below $1.4 million, you will still be able to use the three year bring forward cap that applies. If your balance is between $1.4 million and $1.5 million, you will only be able to use double the annual cap. If your balance is $1.5 million or over, you will only be able to use the annual cap at the time with no bring-forward available.
How does this affect you?
The passing of this legislation creates a seven month window of opportunity to maximise non-concessional contributions under the more generous current rules prior to 1 July 2017. If you have a ‘total super balance’ over $1.6 million it is even more important to consider making more non-concessional contributions this financial year, as you will be prevented from making further contributions from 1 July 2017.
Depending on how much you have contributed in the current and prior two financial years, you may be able to contribute up to $540,000 before the new rules commence. It is important to check your contribution history before making any superannuation contributions.
The other changes may require you to adjust your future contribution, pension, investment and estate planning strategies, particularly if you:
- have monies in income streams of over or close to $1.6 million
- are planning on making significant contributions to superannuation in the coming years
- are a high income earner
- have a transition to retirement pension in place.
Remember, before making any changes to your arrangements, it is important to speak with your Shadforth adviser.