Superannuation and the Federal Budget – unravelling the changes

The changes proposed for superannuation on Budget night 2016 have been described by many  as fair and reasonable as a whole and in the long-term interest.

Although there were some components of the changes that lacked flexibility and may cause significant individual concern and financial cost in the shorter term.

Many of those changes will be effective from 1 July 2017, others were immediate. We discuss some of the major changes announced below:

Non-concessional contributions (broadly after-tax contributions to a superannuation fund)

The most significant and immediate change is the introduction of a lifetime non-concessional contributions cap of AU$500,000 effective from 7.30 pm (AEST) on budget night. The lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007 (which has resulted in claims the changes are retrospective). However, contributions made before commencement cannot result in an excess and can remain in super, yet excess contributions made after 7.30pm (AEST) budget night will need to be removed or be subject to penalty tax.

Concessional contributions (broadly pre-tax contributions to a superannuation fund)

The annual concessional contributions cap will be reduced to AU$25,000 for all individuals from 1 July 2017 (a reduction of either AU$5,000 or AU$10,000 on the previous caps depending on your age).

However to cater for individuals with broken work patterns, from 1 July 2017, individuals with a superannuation balance less than AU$500,000 will be allowed to make additional concessional contributions where they have not contributed up to their concessional contributions cap in previous years. Unused contribution cap amounts can be carried forward on a rolling basis for a period of five consecutive years, if accrued after 1 July 2017.

To cater for those individuals who are self-employed, part self-employed or lack employer superannuation support from 1 July 2017 they will be allowed to claim an income tax deduction for personal superannuation contributions up to the concessional contribution cap, regardless of work status. Additionally, individuals aged up to 75 will be able to contribute or have contributions made for them up to the concessional contribution cap and be eligible for a deduction to the extent the contribution is made by them personally.

Additional contributions tax for high income earners extended to more taxpayers

In an effort to reduce the marginal tax benefit a higher income earner receives from contributing to superannuation, from 1 July 2017, the Division 293 threshold (beyond which high income earners pay an additional 15% contributions tax) will be lowered from AU$300,000 to AU$250,000. This means more taxpayers will be subject to the tax based on the lower income limit.


Pension balances

In an effort to “better target tax concessions to ensure the superannuation system is sustainable, and improve confidence in the system by reducing the extent superannuation is used for tax minimisation and estate planning” (Budget 2016 Superannuation Fact Sheet 02), a transfer cap of AU$1.6m on the total amount of superannuation savings that can be transferred from accumulation phase to pension phase will be introduced from 1 July 2017.

Subsequent earnings on these transferred balances will be allowed to remain in pension phase, but if the full AU$1.6m transfer cap has been used, any reduction of balances below that cap amount can’t be added to from accumulation accounts or contributions.

Where superannuation balances have accumulated in excess of AU$1.6m, the excess can remain in accumulation phase (and earnings will be taxed at the concessional rate of 15%).

Perhaps the biggest surprise was for individuals who already have benefits in pension (earnings exempt) phase. Come 1 July 2017, if their pension phase balance exceeds AU$1.6m they will be required to ‘transfer’ the excess over AU$1.6m back into accumulation (earnings taxable) phase or pay out the benefits. (This measure has also been opposed by the ALP as being retrospective taxation, despite its similarities to the ALP superannuation policy platform based on taxing income over AU$75,000 in the pension phase from 1 July 2017.)

There have been no changes to the taxation of superannuation benefits received, with the exception of certain pensions from defined benefit schemes and constitutionally protected schemes – benefits received from age 60 will continue to be exempt from tax in the hands of the individual. Benefits received in pension form from the pension phase account will also continue to be taxed at marginal rates with a 15% offset if the individual is aged under 60.

There was also some tightening of the rules around transition to retirement income streams and anti-detriment payments, while for low income earners a new low-income superannuation tax offset was announced, and the low income spouse tax offset was extended to apply to more taxpayers.  Special rules apply for defined benefit funds and some other superannuation vehicles.

For more insight into the implications of the Budget announcement, download a copy of our Deloitte Federal Budget Report 2016.

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