The information below is a broad snapshot summary of recently enacted super reform measures as at 20 December 2016. Note, further reforms have yet to issue. The reforms outlined below largely apply from 1 July 2017 unless stated otherwise.
Transfer balance cap
A transfer balance cap (‘TBC’) of $1.6 million limits the total amount of superannuation assets a member can transfer to the tax-free pension phase from 1 July 2017. However, there is no restriction placed on subsequent earnings or capital growth on the assets supporting a member’s TBC.
Amounts in excess of a member’s TBC can be maintained in accumulation phase. Generally, taxable income derived from accumulation assets are taxed at 15%, with a 10% rate applying to net capital gains on assets held for more than 12 months (after allowing for a 1/3rd CGT discount).
All members who are in receipt of an account-based pension (‘ABP’) on 1 July 2017 will have a personal TBC of $1.6 million. Members with pension balances above $1.6 million will generally be required to reduce their pension assets to $1.6 million by 1 July 2017. However, there will be no extra tax payable if the person’s transfer balance account does not exceed $1.7 million for a pension that was payable prior to 1 July 2017 provided the member’s transfer balance account is reduced to below $1.6 million by 31 December 2017.
A person who starts a pension after 30 June 2017 obtains a TBC amount when they first become entitled to a pension in retirement phase (eg, when they retire from gainful employment after attaining 60 years or attain age 65). The $1.6 million amount will be indexed in $100,000 increments in line with CPI. Any remaining unused amount of a person’s TBC will be subject to proportionate indexation.
Members who exceed their personal TBC will be required to commute their pension (in full or in part) back to accumulation phase to avoid paying an excess transfer balance tax. This tax will apply to notional earnings on amounts that exceed the person’s TBC. Notional earnings will be taxed at 15% for FY2018 and 30% for second and subsequent excess breaches after 1 July 2018.
Transitional CGT relief broadly enables the cost base of assets to be reset to market value when assets may need to be transferred from retirement phase to accumulation phase to comply with the TBC or the TRIS reform measures prior 1 July 2017. An election can be made on an asset by asset basis and must be completed in an approved form prior to the lodgement of the fund’s FY2017 income tax return.
An SMSF with a member with more than $1.6 million in superannuation will not be entitled to claim a pension exemption based on the segregated asset method. Rather, an SMSF trustee must use the unsegregated method to calculate the pension exemption.
Note that a TRIS is not covered by the TBC measures.
Transition to retirement income streams
The tax exemption on earnings derived from assets supporting a TRIS is removed from 1 July 2017. Therefore, members who have met a relevant condition of release (eg, have reached their preservation age and retired), will generally be interested in converting their TRIS to an ABP to obtain a pension exemption from 1 July 2017.
Lump sum election
The election that allows a member to treat a superannuation income stream payment as a lump sum payment for tax purposes under reg 995-1.03 of the Income Tax Assessment Regulations 1997 (Cth) will be removed from 1 July 2017. This will preclude those under age 60 receiving TRIS payments accessing the low rate cap.
The annual concessional contributions (‘CC’) cap will be reduced from the current $30,000 ($35,000 if age 49 or over on prior 30 June) to $25,000 each financial year (‘FY’) regardless of age from 1 July 2017 (indexed in line with average weekly ordinary time earnings ‘AWOTE’).
Tax deduction for personal contributions
Members will be allowed to claim an income tax deduction for personal superannuation contributions up to their CC cap. This effectively allows employees and the self-employed (whether partly or fully) to make CCs up to the balance of their CC cap. However, those over 65 years must still satisfy the gainful employment test before making a contribution. Further, a deduction is limited to the person’s taxable income and cannot give rise to a tax loss.
For example, if an employer makes superannuation contributions of $10,000 on behalf of an employee, the employee may make an additional $15,000 of personal CCs to superannuation, and claim a deduction for this amount (subject to having sufficient taxable income to offset the deduction).
Division 293 threshold
The threshold at which high income earners pay an 15% additional contributions tax will be reduced from $300,000 to $250,000 from 1 July 2017.
Non-concessional contributions cap
From 1 July 2017 an annual NCC cap of $100,000 per FY applies. However, from 1 July 2017 a person will be precluded from making further NCCs if their total superannuation balance (‘TSB’) on the prior 30 June exceeds $1.6 million.
For those under 65 there is a modified ‘bring forward’ rule that allows members to bring forward up to two or three FYs worth of NCCs.
The maximum amount of NCCs that can be brought forward is $300,000, provided the member’s ‘first year cap space’ (ie, the difference between the general TBC of $1.6m and the member’s TSB immediately before the start of the first year) exceeds $200,000.
If the member’s ‘first year cap space’ is less than $200,000, then a maximum $200,000 two year bring forward NCC cap generally applies.
However, if the member’s ‘first year cap space’ is less than $100,000, then a maximum $100,000 NCC applies for that FY.
From 1 July 2017 no further NCCs can be made if the member’s TSB is greater than $1.6 million on the prior 30 June. This threshold is indexed in $100,000 increments.
Thus, the amount of NCCs that a member can make depends on the amount of their TSB on the prior 30 June. This is summarised in the following table:
|Total superannuation balance on prior 30 June||NCC for first FY||Bring forward period in years|
|$1.4m to < $1.5m||$200,000||2|
|$1.5m to < $1.6m||$100,000||1 (no bring forward period)|
|$1.6m or more||Nil||N/A|
Where a member has not fully used their ‘bring forward’ NCC cap before 1 July 2017, special transitional arrangements apply. If the ‘bring forward’ rule was invoked in FY2016, then the remaining NCC cap at 1 July 2017 is $460,000 less any previous NCCs made in FY2016 and/or FY2017. If the ‘bring forward’ rule was invoked in FY2017, then the remaining NCC cap at 1 July 2017 is $380,000 less any previous NCCs made in FY2017.
Low income superannuation tax offset
A low income superannuation tax offset (LISTO) applies to reduce tax on superannuation contributions for low income earners. This is designed to ensure that the Low Income Superannuation Contribution (LISC) which is due to cease on 30 June 2017, will effectively continue to operate under a new name and new legislation.
Broadly, individuals with adjusted taxable incomes that do not exceed $37,000 per FY will be entitled to a maximum $500 tax offset. At least 10% of the individual’s income for the FY must be from business or employment. Individuals with adjusted taxable incomes that exceed $37,000 per FY are not entitled to an offset.
Eligible spouse tax offset
The income threshold for the recipient spouse (whether married or de facto) for the low income eligible spouse contribution tax offset will increase from $10,800 to $37,000 on 1 July 2017.
The contributing spouse may be entitled to a maximum tax offset up to $540 each FY for NCCs made on behalf of the recipient spouse.
This rebate is reduced by 18% for each $1.00 above the income threshold and phases out entirely when the spouse’s adjusted taxable income exceeds the maximum income threshold which will increase from $13,800 to $40,000. This offset is also subject to:
- the member’s spouse’s NCCs for the FY not exceeding the NCC cap for that FY; and
- immediately before the start of that FY, the member’s TSB being less than $1.6 million.
Superannuation guarantee contributions
From 1 July 2017 an employer will not be required under the Superannuation Guarantee (Administration) Act 1992 (Cth) (‘SGAA’) to contribute beyond an employee’s CC cap under the superannuation guarantee system, measured quarterly.
The anti-detriment provision in respect of providing a tax deduction for ‘top-up’ amounts paid to a spouse or child in respect of a member’s death benefit from superannuation fund will be removed from 1 July 2017. If a member dies prior to 1 July 2017, their death benefit must be paid prior to 1 July 2019 to be eligible to claim a deduction. This is a complex area and requires expert advice.
Rolling 5 year concessional contribution cap — 1 July 2018
From 1 July 2018, members with a TSB just before the start of the FY of less than $500,000 will be permitted to make additional CCs where they have not reached their CCs cap in the prior five FYs starting from 1 July 2018. This will effectively equate to a rolling five year average CC cap of up to $125,000 (as indexed) for those that satisfy the new five year unused CC carry forward criteria after 1 July 2018.
For example, if a member contributes $10,000 in FY2019, the member will effectively have an unused CC carry forward cap of $40,000 in FY 2021 (ie, $15,000 unused CC in FY2019 plus $25,000 unused CC in FY2020).
As you will gather from the above brief summary, there is considerable complexity and unfortunately limited time to become familiar with and implement these complex changes. Advisers must start taking action now and notify clients of what must be attended to and by when.
This article does not take into account your particular circumstances and therefore should not be relied on as advice. Expert advice should be sought if there is any doubt. For financial product advice an adviser with an Australian Financial Services licence should be consulted.
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For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
20 December 2016