The budget was handed down this week and for a change there have been some significant changes to superannuation. It may take us some time to get our head around the impact of the changes but on first glance:
- The annual cap on concessional contributions has been reduced from $30,000 for the under 50’s and $35,000 for the over 50’s to $25,000. This means that if you are close to retirement and want to top you super by way of salary sacrifice your ability to do that will be reduced somewhat.
- Concessional contributions are taxed at 15% on contribution. However if you are a high income earner then the tax paid is 30%. The income threshold has been changed from $300,000 to $250,000. Bear in mind that if you are earning this sort of money 30% is still better than your marginal tax rate, so there is still an incentive to contribute to your superannuation.
- A transfer balance cap of $1.6 million has been introduced. This applies on funds which have moved from the growth phase to the pension phase. This means that the most you will be able to have in the tax free environment of pensions is now capped. The biggest concern is that this change is not grandfathered in. If you are retired and have more than $1.6 million in an account based pension you will be required to transfer the excess back to an accumulation account. While in accumulation any earnings on those investments will be taxed at 15%. The main concern with this change is that it is retrospective. It will be a bit of a headache for retirees and their advisors who will be required to reorganise their retirement plans by 1 July 2017.
- There will also now be a lifetime cap of $500,000 on non-concessional contributions. These are contributions which are paid from post-tax income. Unlike concessional contributions no tax is paid when the funds are contributed although earnings are taxed at 15% per annum while in the accumulations phase, just like with concessional contributions. There is currently an annual cap of $180,000. These caps are usually used by people who may have sold a business or an investment such as a rental property and contribute the proceeds to their superannuation. Whereas before you could stagger these contributions to fit the annual cap there is now a limit.
- So that there can be some equity the transfer balance cap and the lifetime non-concessional contributions cap will also be effecting Defined Benefit Schemes. There will also be changes to the tax arrangements for members of defined benefit schemes were the pension exceed $100,000 per annum. Likewise the cap on contributions will also apply to defined benefit schemes such that any excess and earnings will then have to be deduced from an accumulation account. If a defined benefit member falls into the high income category of $250,00 p.a. and they became a member of a defined benefit scheme after 12 May 2009 their contributions will be taxed at the higher rate of 30% (unless they fall into the small group of constitutionally protected office holders). It will be particularly interesting to see the fine print on these changes as it may have an impact on people who are separating and considering splitting superannuation under the Family Law Act 1975.
- In the last budget the government had tried to get rid of the Low Income Superannuation Contribution but it was rejected by the Senate. This budget however it has been kept although the name has been changed to Low Income Superannuation Offset (the phrase “a rose by any other name…” comes to mind). The Low Income Superannuation Offset allows a tax offset of $500 on concessional contributions who earn less than $37,000 p.a.
- The current restrictions (known as the work test) which restrict the ability of people aged between 65 and 75 from contributing to their superannuation will be lifted. This makes sense considering the demographic changes which are seeing more people continuing to work past the usual retirement age and longer life expectancies.
- Probably one of the most welcome changes is that people who have had interrupted work cycles will be able to catch-up on contributions if they were not able to make $25,000 concessional contributions in the five previous years. This is designed so carers and those with child-rearing responsibilities will be able to make adequate contributions to their super and not be as disadvantaged by their other important social contributions.
- The income threshold for spouse contributions (that is contributions by the higher income earner to the superannuation of the lower income earner is lifted from $10,000 to $37,000. This entitles the higher income earner to claim an 18% tax offset up to $540.
- The tax exemption on earnings in the retirement phase will be extended to other products such as annuities. This will allow those who are concerned about risk or whether their savings will be adequate to buy other retirement products which suit their needs.
- As expected anti-detriment payments will no longer be allowed after 1 July 2017. This is largely because it is an option which is not widely available across all sectors (for example, SMSFs are usually not able to make these sorts of payments).
- There are changes to the Transition to Retirement Income Streams (TRIS). Previously people over preservation age could access the income stream tax free. Now income from a TRIS will be taxed at 15%. This is still better than being taxed at marginal rates.
- The objective of superannuation, that is ‘to provide income in retirement to substitute or supplement the Age Pension’, will be enshrined in legislation. This is to address the concern that the driver behind a lot of superannuation strategies of late has been as an estate planning tool (i.e. transfer wealth to the next generation) rather than for retirement.
These changes are particularly significant and it will be interesting to see how they percolate through the superannuation industry. We expect it will be a busy time ahead for advisors and people near retirement age who will now need to rethink their plans. Whether the above changes are the full extent of the governments planned changes or whether they are keeping a few more changes in the kitty for the upcoming election campaign later this year remains to be seen.
Paul Salinas, Lawyer, Farrar Gesini Dunn, Canberra Office.