Superannuation and the Federal Budget 2016/17

Assigned to: Tax 

There is significant speculation the Federal Government will be looking at superannuation in the upcoming 2016 Budget.

The Government’s objective will be to raise revenue, but also to limit the superannuation concessions that are available to those on higher incomes and those with large superannuation balances.

Even though Budget night is on 3 May, there is also speculation the Government could announce superannuation changes before the Budget. This has happened before, as recently as 2013, and there are a number of measures on the table:

  • Higher tax on concessional contributions for high income earners

Presently, very high income earners (those with adjusted taxable income of over $300,000) are subjected to an additional 15% super contribution surcharge on their concessional contributions (called Division 293 tax).  There is speculation that the threshold of $300,000 could be reduced to $180,000 to further limit the tax concessions to high income earners.

It is unlikely this change, if implemented, will be applicable from the date of the announcement, but rather from 1 July.

  • Contributions could be further limited

The idea of a life time contribution cap has been floated for some time, with the aim of limiting a person’s superannuation balance. The Government has stated on many occasions (and particularly recently) that an individual’s super is for supporting their retirement, not as an estate planning vehicle for their dependants.

Concessional contributions

It’s not likely that the caps on concessional contributions will change for the current 2016 financial year, but they could for future years. The concessional contributions caps are $35,000 for those born before 1 July 1966 and eligible to have contributions, otherwise $30,000, for the current year.

Non-concessional contributions

The cap for non-concessional contributions is $180,000 for the 2016 year. People who are under 65 years of age on 1 July 2015 may be able to make non-concessional contributions of up to $540,000 over a three-year period under the ‘bring-forward’ provision.

It is worth checking the 2014 and 2015 non-concessional contributions made (and contributions already made this financial year) to ensure the ‘bring-forward’ provision has not already been triggered.

Superannuation

  • Contributions could be restricted or disallowed if in pension mode

Presently, a person can be in pension mode and also be able to make superannuation contributions (subject to normal contribution rules regarding age and work status). New restrictions or additional imposts may well be imposed.

  • Transition to retirement income streams (TRIS) could be abolished or rules around them could become more restrictive

Under the current superannuation regulatory regime, a person who is over preservation age (i.e. born before 1 July 1960) can start a pension and have access to concessional tax treatment even though they remain working. The pension payment is tax free if the person is aged 60 or more.  If the person is under 60, there may be tax to pay on the pension, but the income of the fund (to the extent the fund’s assets support that pension) will be exempt from tax.

There is speculation the ability to commence a TRIS will be removed. This could have an adverse effect on anyone planning to commence a TRIS (particularly in the current financial year), or in the near future, to fund either a phasing down of workload towards retirement or as a strategy to provide cash flow for contributions and protect the net income position of their Fund.

It is unclear at this stage whether there will be any adverse changes to the TRIS rules, or any changes, if made and implemented, be applied retrospectively. However, historically the government sought to apply changes prospectively rather than retrospectively.

  • Pension payments could lose tax concessions

Currently, tax free pensions are not classified as assessable income (and are not counted as exempt income).

For a retired person who is over their preservation age and receiving a retirement pension, there is no maximum withdrawal limit.  In addition, for a non-retired member between their preservation age to age 65 who is receiving a transition to retirement income stream, the minimum pension is 4% and the maximum pension payment is 10% of the pension account balance.

There is a possibility that pensions paid as a TRIS could be limited to 4% of the person’s account balance. However, the Treasurer, Scott Morrison, recently stated he does not want to tax people in the retirement phase so the taxation treatment of these pensions may not change.

  • Other restrictions could be on the agenda

Restrictions could be imposed on strategies around tax free components of super funds or indeed on establishing a self-managed super fund (SMSF).

  • Reduced or cancellation of discount on capital gains in superannuation funds

Presently, where a super fund is paying tax, any capital gain (after applying capital losses) is discounted by one-third to determine the assessable capital gain.

There is speculation that the one-third discount could be abolished or reduced for superannuation funds.

For immediate insight into the impact of the Budget announcement, pre-register for our upcoming webinar on 4 May 2016 and to receive a Deloitte Federal Budget Report 2016.