What you need to know about the changes to contribution rules…

As of 3 May 2016 “Budget Night’, the Government introduced new superannuation legalisation changes affecting superannuation contributions.  The majority of these will not be implemented until 1 July 2017, but it’s imperative that you start planning now.

Superannuation Contribution Changes at a Glance

  1. A lifetime non-concessional contributions cap of $500,000 will be established.
  2. The annual cap on concessional superannuation contributions will be reduced to $25,000 regardless of a members’ age, with the ability to carry forward unused amounts for up to five years.
  3. The work test for those aged 65 to 74 will be abolished from 1 July 2017.
  4. From 1 July 2017, the Government will lower the Division 293 threshold from $300,000 to $250,000. This means that concessional contributions, when added to a client’s income that is over $250,000, will be taxed at 30%.

Who will be adversely affected by these changes?

  • Individuals who want to make concessional Contributions over $25,000
  • Individuals who have Income above $250,000 (incl Super Contributions)
  • Individuals who have previously made significant non-concessional contributions, or had plans of utilising the non-concessional contribution caps to grow their super in the future
  • Members with superannuation balances over $500,000

It’s never been more important to start contributing to super early, and be consistent over your lifetime if you want to maximise the money you have available in retirement.

1.     New lifetime cap

A $500,000 lifetime non-concessional contribution cap will replace the existing annual NCC cap of $180,000 and 3 year bring-forward rules.

Some traps to be aware of:

  • The lifetime cap counts all non -oncessional contributions to super since 1 July 2007!
  • If you have exceeded the cap prior to 3 May 2016, you will have used up your lifetime cap – you are now prevented from making any further contributions, but you will not be required to repay the excess.
  • If you make contributions that cause you to exceed your cap, you will be notified by the ATO to withdraw the excess from your account.
  • If you choose not to withdraw the excess, you will be subject to the current penalty arrangements for excess contributions.

2.     New rules for concessional contributions

From 1 July, 2017 the Government proposes to lower the concessional contributions cap to $25,000 for all taxpayers. This cap will then be indexed in line with wages growth. Individuals will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.

Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward. Access to these unused cap amounts will be limited to those individuals with a superannuation balance of less than $500,000.

This will allow those with lower contributions, interrupted work patterns or irregular capacity to make contributions to make ‘catch-up’ payments to boost their superannuation savings.

3.     Removal of work test for over-65s

If you’re aged between 65 and 74, the good news is that from 1 July 2017,  you no longer have to meet the work test (i.e. the requirement that you work 40 hours over a consecutive 30-day period before you can make a contribution).

This means it will be easier for older Australians to increase their retirement savings.

4.     Division 293 threshold

At the moment people with an annual income of over $300,000 pay an additional 15% tax on the amount of concessional contributions that push the income above the $300,000 threshold. This tax is known as Division 293 tax and is calculated by the ATO when your tax return is completed. From 1 July 2017, this threshold will be reduced to $250,000.

Concerned by these changes? Keep in mind that changes haven’t been legislated yet and with an election looming, we will wait to see what makes it through come 1 July.

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