From 1 July 2017 there will be some key changes to superannuation which may affect you. In particular, those who are planning to make contributions or draw an income stream should review their strategies and seek professional advice.
We have outlined some of the important changes below:
Reduced age-based concessional contribution cap
The age-based concessional (tax deductible) contribution cap reduces to $25,000 per year. Currently, the cap is $35,000 for anyone over 50 and $30,000 those below. Concessional contributions include employer and salary sacrifice contributions as well as lump sums contributed by those who are self-employed. This means this is the last year you can contribute at the higher amount.
Changes to tax-deductible contribution for self-employed
The current rules restrict who can make a tax-deductible contribution to those who are substantially self-employed. From 1 July this restriction will be removed, which means employees will have the option to make their own deductible contribution or salary sacrifice through their employer. Be wary of the reduced cap mentioned above.
Catch-up concessional contributions
Catch-up concessional contributions over a 5 year period will been introduced from July 2018. This is a great initiative aimed at those who would like to make use of their annual unused concessional contribution limits at a future date when cashflow permits. This will be particularly useful to those with broken work patterns, such as females who take time off work for maternity leave.
Retirement-phase income streams to be capped at $1.6m
Unlike the super accumulation phase, retirement-phase income streams do not currently pay tax on earnings within fund. From 1 July 2017 a ‘transfer balance cap’ will be introduced to limit this concessional environment to $1.6m. People with balances greater than $1.6m in income streams (such as account based pensions) must withdraw the difference or transfer it back into accumulation phase where earnings are taxed at 15%. Those who need to take action before then can elect to take special Capital Gains Tax relief to reset the asset’s cost base. While many individuals may already fall under the $1.6m cap, retired couples with reversionary pensions should be wary that their spouse’s pension may form part of their cap upon death. We recommend seeking professional advice to navigate through the complexities of this important change.
Earnings on Transition to Retirement income streams to be taxed
Earnings and realised capital gains will now be taxed at 15% on transition to retirement income streams. Currently these income streams pay no tax internally. Account based pensions for those who have declared retirement after age 60 or have reached age 65 will continue to pay no tax on earnings or capital gains within the fund up to the new $1.6m transfer balance cap mentioned above. This is not to be confused with the tax paid on the income drawn from the pension, which remains unchanged. Those with transition to retirement arrangements should look to have them reviewed to ensure they are still suitable. Transitional Capital Gains Tax relief is available to those who need to make changes to their super pensions to comply with the new changes.
Non-concessional contribution cap reduced
The non-concessional (after tax) contribution cap has been reduced to $100,000 per year or $300,000 under the 3 year bring forward rules. This will be reduced from $180,000 per year or $540,000 over 3 years. There is scope to maximise contributions under the current rules before the reduction starts from 1 July. Be sure to get advice to ensure you stay within the transitional rules to not exceed the new cap. Contributions will be restricted by those who already have or are nearing an account balance of $1.6m.
Contributions tax refund remains for low income earners
The Low Income Super Contribution will continue, albeit with a change of name to the Low Income Super Tax Offset. Those who earn less than $37,000 per year are entitled to a refund of the 15% contributions tax paid on concessional contributions made into super each year (up to $500). This about fairness and ensuring that low income earners are not paying a higher rate of tax on contributions made into super than what they otherwise would have paid personally.
Spouse superannuation tax offset threshold increased
The spouse superannuation tax offset allows a contributing spouse to claim an 18% offset worth up to $540 for contributions made to an eligible spouse’s superannuation account. The income threshold will increase from $10,800 to $37,000, and then phase out at $40,000 (previously phased out at $13,800). This gives more flexibility and incentive to make contributions on behalf of a spouse.
As always, be sure to check if these changes apply to your circumstances and seek professional if unsure.