Budget 2016 | Superannuation
Concessional contribution cap reduced to $25,000
The concessional contributions cap will reduce to $25,000 per annum for everyone regardless of age from 1 July 2017. Currently the concessional contributions cap is $30,000 for clients under age 50 and $35,000 for ages 50 and over.
What this means
The reduced concessional contributions cap of $25,000 does not apply until 2017-18. Clients should consider taking advantage of the current higher concessional cap of $30,000 (under age 50) and $35,000 (age 50 and over) in the 2015-16 and 2016-17 financial years.
- Clients should review salary sacrifice arrangements and personal deductible super contributions to ensure they comply with the reduced concessional cap.
- Clients may need to ‘drip-feed’ contributions over a longer period in order to meet retirement goals as a result of the reduced concessional cap.
- The ability to salary sacrifice will be restricted as superannuation guarantee may take up a large portion of the concessional cap from 1 July 2017.
Catch-up concessional contributions
From 1 July 2017 unused concessional contribution cap amounts will be able to be carried forward on a rolling basis over 5 consecutive years. This applies to unused cap amounts from 1 July 2017. Access to unused cap amounts will be limited to individuals with a superannuation balance less than $500,000.
The Government states this measure will allow those who take breaks from the workforce the opportunity to ‘catch-up’ if they have the capacity and choose to do so. The measure will also apply to members of defined benefit schemes.
What this means
- The ability to carry forward unused concessional cap amounts appears to apply to everyone who has contributed less than the concessional cap, not just those who take breaks from the workforce such as women and carers. However the reduction in the concessional cap to $25,000 pa will reduce the amount of concessional cap available to be carried forward.
- Finally, it is unclear how the $500,000 threshold will be calculated and whether it will include previous withdrawals.
Lifetime cap for non-concessional contributions
A lifetime non-concessional contributions cap of $500,000 will be introduced effective Budget night, 7.30 pm (AEST) on 3 May 2016. The $500,000 lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007.
Contributions made before commencement (i.e. 7.30 pm AEST on 3 May 2016) cannot result in an excess of the lifetime cap, however those who have exceeded the cap prior to commencement will be taken to have used up their lifetime cap.
Non-concessional contributions made after Budget night that exceed the cap (taking into account all non-concessional contributions since 1 July 2007) will need to be removed or be subject to the current penalty tax arrangements.
What this means
- The lifetime non-concessional cap will replace the existing annual non-concessional contributions cap of up to $180,000 per year (or $540,000 every 3-years under the bring-forward rule for individuals aged under 65). Those aged 65 to 74 who are currently limited to $180,000 per year will have access to the $500,000 cap without having to meet a work test.
- The lifetime cap will be indexed in $50,000 increments in line with AWOTE.
- To determine how much of the lifetime non-concessional cap has been utilised with prior non-concessional contributions, clients will need to add their non-concessional contributions since 1 July 2007 from all funds to determine how much counts towards their lifetime non-concessional cap.
- Clients who have previously utilised the bring-forward provisions will need to carefully review their situation to determine whether they have exhausted their lifetime cap.
- Non-concessional contributions made into defined benefit accounts and constitutionally protected funds will be included in an individual’s lifetime non-concessional cap. If a member of a defined benefit fund exceeds their lifetime cap, ongoing contributions to the defined benefit account can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold.
Removal of contribution eligibility requirements for those aged 65 to 74
The current work test that applies for people making voluntary contributions between the ages of 65 and 74 will be removed. This change will allow individuals to make contributions for a spouse under the age of 75 without requiring the spouse to satisfy a work test.
What this means
- The Government says this will simplify the superannuation system for older Australians and allow them to increase their retirement savings, especially from sources that may not have been available to them before retirement, including downsizing their home.
- This proposal will effectively remove the ‘work test’ and make it easier for people over age 65 to contribute to super. When combined with the life-time non-concessional cap this proposal could allow non-working people aged between 65 and 74 who were previously ineligible to contribute to make non-concessional contributions of up to $500,000 after 1 July 2017.
Additional 15% contributions tax: threshold reduces to $250,000
‘Division 293 tax’, which is an additional 15% contributions tax payable by high income earners with income exceeding $300,000, will apply to those with income exceeding $250,000 from 1 July 2017.
It is important to note the definition of income for Division 293 purposes includes:
- Taxable income (including the net amount on which family trust distribution tax has been paid).
- Reportable fringe benefits.
- Total net investment loss (including net financial investment loss and net rental property loss).
- Low tax contributions (non-excessive concessional contributions) including super guarantee, salary sacrifice and personal concessional contributions.
Division 293 tax will apply to any low tax contributions that exceed the $250,000 threshold, assuming they form the top slice of income.
What this means
- The overall impact of this measure will be to increase the tax burden by up to $3,750 (i.e. 15% of $25,000) on concessional contributions. However concessional contributions still offer a tax concession of 19% for those paying Division 293 tax so it is unlikely to significantly reduce the level of concessional superannuation contributions.
- Clients will not receive a Division 293 notice from the ATO until up to 18 months after making the concessional contribution which may come as a surprise to those unaware that they have exceeded the threshold. The tax can be paid personally or via a release authority from their superannuation fund.
- Another important implication of this proposal is the increased cost of funding insurance in superannuation using concessional contributions for those subject to Division 293 tax.
Increased access to spouse superannuation tax offset
The current spouse superannuation tax offset will be available to more people due to an increase in the spouse income threshold from 1 July 2017. The income threshold for the spouse superannuation tax offset is increasing from $10,800 to $37,000.
A contributing spouse will be eligible for an 18% offset worth up to $540 for contributions made to an eligible spouse’s superannuation account.
What this means
- Currently the spouse superannuation tax offset reduces where the spouse’s income exceeds $10,800 and cuts out altogether when their income reaches $13,800.
- If the same methodology applies, the tax offset would reduce where the spouse’s income exceeds $37,000 and cut out altogether at $40,000.
Low income superannuation tax offset
Effective 1 July 2017 a Low Income Superannuation Tax Offset (LISTO) will be introduced to reduce tax on superannuation contributions for low income earners.
The LISTO will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions up to a cap of $500. The LISTO will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf. The ATO will determine a person’s eligibility for the LISTO and advise their superannuation fund annually. The fund will contribute the LISTO to the member’s account.
Anti-detriment payments abolished
Effective 1 July 2017 anti-detriment provisions will be abolished, effectively removing the ability of superannuation funds to increase lump sum superannuation death benefits when paid to eligible beneficiaries.
The anti-detriment provisions allow a superannuation fund to claim a corresponding tax deduction where it is able to increase the amount of a member’s death benefit paid to certain eligible beneficiaries to compensate for the impact of tax on contributions. The Government says removing the anti-detriment provision will better align the treatment of lump sum death benefits across all superannuation funds and the treatment of bequests outside of superannuation.
What this means
- If this proposal is legislated as announced, eligible beneficiaries will no longer qualify to have a death benefit payment uplifted by 17.65% (under the formula method). This may result in more beneficiaries electing to receive their benefit in the form of a death benefit income stream.
- This change will also mean that re-contribution strategies will no longer adversely impact beneficiaries that would have qualified as eligible beneficiaries for an anti-detriment payment. However, the ability to implement a re-contribution strategy will be restricted if the $500,000 life-time non-concessional cap is introduced.
- Finally anti-detriment payments have traditionally been very difficult for Self-Managed Superannuation Funds (SMSFs) to pay compared to large funds, as these payments needed to be funded by the super fund first with the trustee then qualifying for a corresponding deduction of the same value. This announcement will remove this competitive disadvantage for SMSFs.
Extend deductions for personal contributions
Effective 1 July 2017 Australians under age 75 will be able to claim an income tax deduction for any personal superannuation contributions made to a complying superannuation fund up to their concessional cap. This effectively allows all individuals, regardless of their employment circumstances, to claim a deduction for their personal contributions up to the value of the concessional cap.
To access the tax deduction, individuals will need to lodge a notice of their intention to claim the deduction with their superannuation fund or retirement savings provider prior to lodging their tax return. These amounts will count towards the individual’s concessional contributions cap, and be subject to 15% contributions tax.
Individuals can choose how much of their contributions to deduct however if they end up exceeding their concessional cap, the deduction claimed on the excess contributions will have no effect as these amounts will be included back into the member’s assessable income.
What this means
- This announcement will dramatically simplify the eligibility requirements for a member to qualify to claim a deduction for a personal super contribution. The requirement to not be an employee during the financial year or to satisfy the 10% test will be replaced with a simple requirement to be under age 75.
- The announcement also gives employees more flexibility and allows them to make personal deductible contributions in addition to super guarantee and salary sacrifice contributions, to use up any unused concessional cap at the end of the year.
