The May 2016 budget proposals have generated an incredible amount of commentary, not only from industry participants, but also from the mainstream media outlets. There is no doubting the importance of superannuation and the role it plays for many in ensuring they have an adequate standard of living in retirement.
This article considers the impact of the proposed changes to the concessional contribution rules and the steps members can take to maximise their retirement savings if the proposed changes are in fact legislated in the form as announced.
Concessional contribution regime
For members who are not yet nearing retirement, the changes to the superannuation regime require a significant rethink as to how and when they save for their retirement.
Historically, there were age based limits on the deductible contributions that could be made to superannuation, but no limits on the undeducted contributions (or what we now refer to as non-concessional contributions) that could be made to superannuation. These rules allowed a small handful of superannuation funds to amass large amounts of wealth in superannuation.
From 1 July 2007, the superannuation environment shifted quite significantly, putting greater restrictions on the amounts that could be contributed to superannuation. The budget proposals further restrict concessionally taxed contributions to superannuation.
While the stated object of the excess concessional contributions provisions in s 291-5 of the Income Tax Assessment Act 1997 (Cth) is:
… to ensure, in relation to concessional contributions to superannuation, that the amount of concessionally taxed superannuation benefits that an individual receives results from contributions that have been made gradually over the course of the individual’s life…
for most people, the ability to earn sufficient discretionary income to make gradual concessional contributions to superannuation (for example, by way of salary sacrifice amounts) over the course of their life is not practical or feasible. It is more common for contributions to superannuation to increase once large life-time milestones have been met, such as paying off the home mortgage.
In this respect, the budget proposals offer some real opportunities for concessional contributions to be made to superannuation, despite the cap being reduced to $25,000 (indexed) from 1 July 2017.
So let’s take a look at some of the key budget proposals, and how these potential changes to the law may effect the ability to make concessional contributions to superannuation.
Rolling 5 year concessional contribution cap
Members with a superannuation balance of less than $500,000 will be permitted to make additional concessional contributions where they have not reached their concessional contributions cap in the prior five financial years. Thus, this effectively equates to a rolling five-year concessional contributions cap of up to $125,000.
For example, if David has a member balance of $250,000 and contributes $10,000 in the 2018 financial year, he will effectively have a concessional contribution cap of up to $40,000 (ie, $25,000 plus $15,000) in the 2019 financial year.
The stated purpose of this measure is to assist people with broken work patterns to top up their superannuation and attempts to address some of the inequity issues around superannuation concessions that appear to be a current focus of the Government.
Excess concessional contributions
Subject to how this proposal is in fact legislated, issued could arise in relation to inadvertent excess concessional contributions, akin to the issues that plague the bring forward provisions for non-concessional contributions and the unintended triggering of these provisions. Further, as excess concessional contributions count against the non-concessional contributions cap (subject to the member electing to withdraw 85% of the excess contribution), there is a greater likelihood that the rolling 5 year cap could result in both excess concessional and non-concessional contributions in the future. Therefore, it will be critical that members that can access this rolling cap keep excellent records of the amounts and dates of contributions to superannuation.
It will also be interesting to see whether the introduction of the rolling 5 year concessional contributions cap is accompanied by an extension to the fund capped contribution provisions that currently apply to non-concessional contributions. For example, will provisions be legislated to prevent a single concessional contribution that exceeds the member’s contribution cap ie, $25,000 or $125,000, subject to the member’s balance at the relevant point in time.
Calculating the member balance cap
Other issues likely to arise in relation to this measure include how the $500,000 member balance will be calculated and at what point in time? Presumably the $500,000 member balance will be a total member balance across all superannuation funds and interests. But at what time will the balance amount need to be calculated? For example:
- at the start of the relevant financial year – this would synchronise with the requirement to value fund assets at market value (although keep in mind in this scenario, the balance would not in fact be known until later in the year when the fund accounts are prepared). This would also allow member’s with a balance of less than $500,000 at the start of the year to make subsequent non-concessional contributions in that same financial year which would cause them to exceed the $500,000 member balance cap, but would arguably not impact on their ability to maximise their rolling 5 year cap in that financial year (but would prevent any further use in subsequent financial years).
- at the point in time the contribution is made – this would be difficult to administer and likely require interim fund accounts to be prepared, particularly where the fund holds assets other than listed shares, which may not be easily valued mid way through a financial year.
Thus, while a positive measure, drafting the legislation for this proposed change is likely to require some considered thinking on the practical implications from a member perspective.
Salary sacrifice arrangements
The proposed measure to reduce the non-concessional contribution cap by introducing a life-time cap of $500,000 will mean that maximising concessional contributions over a member’s life will become increasingly important.
For this reason, we expect salary sacrifice arrangements to become more common place and widely used to maximise a member’s concessional contributions.
It is crucial, however, to ensure that the salary sacrifice agreement is effective. Some key issues to consider are:
- Care should be taken when entering into a salary sacrifice arrangement to ensure the employer still makes the minimum superannuation guarantee contributions required to avoid a shortfall under the Superannuation Guarantee (Administration) Act 1992 (Cth) (‘SGAA’), as salary sacrificed amounts apply to reduce an employer’s shortfall for superannuation purposes.
- The employer and employee should clearly agree in writing on the quantum and timing of the amounts to be salary sacrificed to superannuation to avoid excess contribution issues, for example, where the salary sacrificed amount referrable to the June quarter is received by the fund in July and thus, in the next financial year.
- The salary sacrifice arrangement must be prospective. This requires the salary sacrifice arrangement to be in respect of salary or wages not already earned, such that the work (and corresponding entitlement to be paid) has not been undertaken (refer to TR 2001/10).
Payments made under an ineffective salary sacrifice arrangement are deemed to be salary or wages of the employee for tax purposes and taxed in their hands, as well as being a member contribution to superannuation.
Keep in mind that for members age 75 or more, contributions (other than mandated employer contributions to avoid a shortfall under the SGAA or contributions required under an enterprise bargaining agreement etc) can only be made up to 28 days after the end of the month in which the member reached age 75. Therefore, where the member is age 75 on 15 June 2016, salary sacrifice amounts can only be contributed to superannuation until 28 July 2016. At this point, the salary sacrifice agreement will be required to terminate as the fund trustee will not be permitted to accept the contributions.
This will continue to be the case under the budget announcement to abolish the work test for members aged between 65 and 74. The work test requires a member to be gainfully employed for at least 40 hours in 30 consecutive days for remuneration or reward in the relevant financial year before a contribution to superannuation can be accepted by the fund trustee.
As can be seen, the proposed budget changes to the contribution caps represent a shift in the way members will need to save for their retirement if they are to achieve a comfortable and self-funded retirement. The proposed life-time non-concessional contributions cap makes it critical that members maximise their concessional contributions cap to ensure they will be in a position to accumulate sufficient amounts for retirement in the concessionally taxed superannuation environment.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.