Superannuation Changes to Implement Prior to 1 July 2017

Superannuation – what you need to know

Australia’s superannuation system is about to undergo significant change. With 15 short weeks until 30 June, we thought it appropriate to highlight the key changes to be aware of and the actions to consider in the pre and post 30 June 2017 environment. The list compiled below is not intended to be exhaustive and there are other strategies that may be appropriate which emerge as a by-product of the primary changes.

By building your awareness and understanding now, you provide yourself with an opportunity to act and benefit in the interim.

1. Pre-tax super contributions (Concessional Contributions)

The pre-tax superannuation annual contributions cap will be reduced to $25,000 from 1 July 2017. Currently the cap is $30,000 (if under the age of 50 as at 30 June 2016); and $35,000 otherwise.

Actions to consider

If you are salary sacrificing a portion of your earned income and the total contribution exceeds $25,000pa, you will need to adjust it from 1 July to ensure that your total concessional contributions (e.g. employer contributions plus salary sacrifice) are less than or equal to the new reduced limit.
From 1 July, all employed or self-employed people will be able to claim personal tax deductions (up to age 75), for concessional contributions. In essence, the relative importance of salary sacrificing is diminished.
Importantly, if your adjusted taxable income exceeds $250,000pa, concessional contributions will be taxed at 30% rather than 15% upon entry. This income threshold is being reduced from $300,000 to $250,000 from 1 July.

2. After-tax super contributions (Non Concessional Contributions)

The NCC annual cap will be reduced from $180,000 to $100,000 from 1 July 2017. If you are under 65 years of age at any time during the current tax year, you can ‘bring forward’ two future years of contribution capacity. Importantly, the existing threshold of $180,000 per annum (and $540,000 on a ‘bring forward’ basis) remains in place until 30 June 2017.

From 1 July 2017, if your total superannuation balances across all super funds exceeds $1.6 million as at 30 June 2017, you will not be able to make any after-tax contributions post 1 July. Instead you will be limited to concessional contributions with a cap of $25,000.

Actions to consider

If you are under 65 and have not made a substantial contribution (of more than $180,000) in the previous 2 financial years, you may be able to contribute up to $540,000 as a NCC prior to 1 July.
If your consolidated super and pension balance exceeds $1.6m, this window represents your last chance to make a NCC.

3. The $1.6 million pension cap

The amount you will be able to hold in the tax exempt pension phase of superannuation will be capped at $1.6 million from 1 July 2017. Any existing superannuation pensions will be assessed against the cap based on the 30 June 2017 balances of those accounts. Amounts assessed as being in excess of the cap will need to be transferred out of the tax exempt pension phase, either back to the accumulation phase (taxable at 15% on earnings) or out of the superannuation system entirely.

Actions to consider

Roll back pensions that exceed $1.6m to a superannuation fund in order to avoid any penalty tax.
Keep in mind it is only the tax exempt pension that will be limited to $1.6 million. There is no restriction on how much you can hold in the accumulation phase (superannuation). Super is taxed at the concessional rate of 15% on earnings and 10% on crystallised capital gains where the asset has been held for more than 12 months.
So long as you meet a condition of release (e.g. preservation age and retired, or over 65 years of age), you will have access to your super fund assets which can be paid to you as a pension or lump sum.
Unlike a pension, regular payments are not required from a superannuation fund. In this way the amount and regularity of future drawdowns will be at your discretion.

Transition to retirement (TTR) pensions

From 1 July 2017, the investment earnings of TTR pensions will no longer be exempt from tax. Instead they will be taxed as if they were in the superannuation (accumulation) environment.

Actions to consider

If you do not require the additional pension income to support lifestyle needs, it may be advantageous to roll back the TTR pension to super prior to 1 July.
If you have attained your preservation age and retired from work, change the TTR pension to an ‘Account Based Pension’ and continue to benefit from the tax exempt pension environment (for balances up to $1.6m).

5. Capital Gains Tax (CGT) relief

A CGT relief election has been introduced to alleviate the possible tax consequences of the $1.6 million cap and taxation of TTR pensions. The CGT relief will help preserve the tax free status of capital gains accrued while supporting a pension.

The cost base will generally be re-set at 1 July so that you will not be taxed on unrealised gains while in the ‘tax exempt’ pension phase.

Important

The new cost base will be the market value of the assets transferred to an accumulation account as at 1 July.
The account records will show the revised cost base in the new financial year. This is to ensure that the conditions of relief are met – one of which is that the asset is held throughout the pre-commencement period (from 9^th November 2016 to 30 June 2017).
The claiming of the CGT relief is optional. Action will be required if you wish to make an election prior to 30 June 2017.
If you are a member of a Self-Managed Super Fund where one member is in pension phase and the other in accumulation, there are some added complexities around the tax liabilities that will be assessed at this point and in future years.