The Government announced several changes to Australia’s superannuation system in the 2016 Budget, most of which will take affect from 1 July 2017.
The changes apply to all Australians with superannuation and have significant impact for members of high value superannuation funds, many of which comprise Self-Managed Superannuation Funds (SMSFs). These funds are popular for their tax benefits and for those wishing to have control over the choice and management of their investments.
However, with implementation of the reforms imminent, trustees and members are encouraged to seek professional advice regarding the impact of the laws on their funds.
All Australians with superannuation should take time to understand how their plans will be affected and how the reforms can be utilised to enhance savings or minimise potential tax implications.
The changes at a glance
- The annual concessional (pre-tax) contributions cap has been reduced from $30,000, and $35,000 for those aged 50 years and over, to $25,000 regardless of age. From 1 July 2018, a ‘catch-up’ contribution option is available for a five-year term for those with a fund value under $500,000.
- The annual non-concessional (after-tax) contribution cap is reduced from $180,000 to $100,000 with members whose total superannuation balance is greater than $1.6 million precluded from making non-concessional contributions altogether. (Note for those under 65 a bring-forward rule applies for two to three years’ non-concessional contributions.)
- The earning threshold for tax offsets for spouse contributions has increased from $13,800 to $40,000.
- From 1 July 2017 contributions tax will double (from 15% to 30%) for high income earners. The present threshold of $300,000 for high-income earners will reduce to $250,000.
- A lifetime limit of $1.6 million (asset value) will apply for fund transfers into the pension phase. Previously transfers were unlimited and income earned from the pension account tax-free. Earnings above the limit will from 1 July 2017 be taxed at 15%.
- Tax exemptions for income from assets supporting transition to retirement pensions will be removed. From 1 July 2017 these will be taxed at 15% (as per earnings on assets in accumulation accounts).
- Tax deductions will be available for voluntary pre-tax contributions made to superannuation funds whether you are self-employed or a salary / wage earner. Deductions were previously only available for self-employed persons who earned less than 10% of their income from salary or wages – this requirement will no longer apply. Note, the work test still applies for those aged 65 – 74 and who wish to claim a deduction for voluntary contributions.
The transfer balance cap – what it means for larger funds
Generally, a superannuation fund has two phases. The accumulation phase is where contributions are made and earnings retained (preserved) in the fund member’s account. These accounts are subject to 15% tax on contributions and taxable income.
Once a fund member satisfies conditions of release, (i.e. the member attains retirement age) he / she may choose to transfer funds from the accumulation account to a pension account. The benefit in doing so has traditionally been that the portion of the fund from the accumulation account that is transferred to support the pension account becomes tax-free. This means that no tax is payable on income received from the account or capital gains from assets held in the account.
However, from 1 July 2017 a lifetime transfer balance cap (TBC) of $1.6 million applies to new and existing pension accounts and members will be required to reduce excess amounts.
Funds exceeding the TBC will be subject to an excess transfer balance tax of 15% (on notional earnings exceeding the TBC) for the financial year ending 30 June 2018 and 30% for breaches in subsequent tax years.
The $1.6 million cap will be indexed in $100,000 increments over time.
Members of SMSFs or high value funds will need to work with their trustees to ensure the cap is not exceeded and, if so, decide which assets should be commuted or transferred out of the pension account back to the accumulation account or out of the superannuation fund altogether. This will require a pragmatic and calculated approach, preferably under the guidance of an experienced professional.
Many SMSFs hold a considerable portion of their assets in real estate. With increases in the property market over recent years, it is conceivable that some funds will hold single assets with values exceeding the $1.6 million TBC. Consequently, fund members may need to consider transferring or selling real estate or liquefy assets or diversifying funds into other investments.
This is a complex area requiring careful consideration and fund managers should seek appropriate advice.
Maximising contributions – using the bring forward rules
Fund members should consider strategies in anticipation of the annual non-concessional contribution cap of $100,000 and preclusion from making non-concessional contributions (for funds valued over $1.6 million) which take effect from 1 July 2017.
Where funds are available, members might consider a ‘last opportunity’ for a non-concessional contribution of up to $180,000 this financial year.
Fund members under 65 years will be able to access the bring forward rules allowing them to inject up to $540,000 (two to three year’s non-concessional contributions) prior to 1 July 2017.
Members of SMSFs may consider re-shuffling assets to take advantage of a final opportunity to make a significant non-concessional contribution. This may require restructuring of the SMSF assets based on a qualified expert opinion.
Re-balancing superannuation accounts through contribution-splitting strategies between member spouses may also be an option.
Superannuation and taxation laws are complex and tend to change frequently. Even small changes can have a large impact.
With implementation of the reforms imminent, everybody should take time to understand how these changes will affect them.
Those with high value funds and SMSFs are encouraged to seek professional financial and legal advice to ensure the fund’s optimum performance and, where necessary, minimise adverse tax implications.
The take-home message from the new reforms is to act quickly but not irrationally.
If you or someone you know wants more information or needs help or advice, please contact us on 03 9497 2622 or email a[email protected]