Scott Morrison’s first federal budget has seen the biggest changes to the superannuation system since Peter Costello’s ‘Simpler Super’ package announced in the 2006/2007 budget.
This budget is somewhat of a mixed bag, with changes targeting higher income earners and superfunds with larger balances. Improvements have been made to reduce red tape, while superannuation tax concessions have been tightened and new caps introduced.
The significant changes include:
- $1.6m limit on assets in retirement phase that will receive tax-free earnings.
- A lifetime limit of $500,000 for non-concessional (after-tax) contributions.
- No work test for super contributions up to 74 years of age.
- A reduction in concessional (pre-tax) caps for all taxpayers to $25,000 and removal of the ‘10% rule’.
- A reduction in the income threshold from $300,000 to $250,000 from which an extra 15% tax applies on concessional contributions.
- Transition to Retirement income streams will no longer receive tax free earnings.
- Anti-detriment payments will be abolished.
$1.6m superannuation transfer cap
From 1 July 2017, the Government has proposed limiting the amount of superannuation that can be transferred to the retirement phase (i.e. an Account Based Pension) to $1.6m per person. Any earnings on the $1.6m cap will not be restricted. Amounts in excess of the $1.6m will remain in the superannuation accumulation phase incurring a concessional tax rate of 15%.
Those members already in the pension phase and with a balance greater than $1.6m will be required to reduce their retirement pension balances to $1.6m by 1 July 2017. The surplus amount will sit in the accumulation phase.
SW view: With the Labour party talking about taxing earnings above $75,000 in pension accounts, this is actually a much easier way to administer the reduction in tax concessions for pension accounts. With a couple being able to hold $3.2m in the pension phase generating tax free earnings, with any surplus being tax at only 15%, we believe it is a reasonable measure.
$500,000 lifetime cap for non-concessional contributions and work test
The $500,000 non-concessional lifetime cap will replace the current annual cap of $180,000 or $540,000 3 year brought forward provisions. This will apply from the time the budget was handed down, that is 3 May 2016 and will include all non-concessional contributions made from 1 July 2007.
From 1 July 2017, the new cap will allow members up to age 74 to make non-concessional contributions.
SW view: While we welcome the ability for those up to 74 years of age to contribute to superannuation without needing to satisfy a work test, the $500,000 lifetime cap is low. When you consider many Australians do not have the ability to make a substantial non-concessional super contribution until their later years, there may not be sufficient time to generate earnings to reach the $1.6m pension cap.
Reducing the concessional contribution cap to $25,000 for all Australians and removal of the ‘10% rule’
From 1 July 2017, the government wants to lower the concessional contributions cap to $25,000. For those with superannuation balances below $500,000, the government has proposed allowing the carry forward of unused concessional contributions cap for a rolling five year period from 1 July 2017.
The removal of the 10% rule essentially means you can make a contribution to super and claim a personal tax deduction for it (up to the cap) as long as you are under 75 years of age.
The existing caps of $30,000 for those under 50, and $35,000 for those over 50 years of age will be retained for 2016/2017.
SW view: It’s important that those who are in a position to maximize these contributions for the 2015/2016 and 2016/2017 financial years do so. This, coupled with the $500,000 non-concessional caps, means it is increasingly important to start a superannuation contribution plan as early as you can.
The removal of the ‘10% rule’ simplifies the system somewhat. This is particularly so for those who will not know how much they have contributed until late in the financial year.
Taxation of concessional superannuation contributions for those earning more than $250,000.
Currently, those who earn over $300,000 in taxable income plus superannuation contribution are required to pay an additional 15% contribution tax on their concessional super contributions, taking the total rate to 30%. From 1 July 2017, that income threshold will be reduced to $250,000.
SW view: Given the caps on concessional contributions have been reduced, this looks like a bit of a double whammy for higher income earners. However, we don’t expect this to reduce the level of concessional contributions made by those affected.
Transition to Retirement income streams will no longer receive tax free earnings
From 1 July 2017, it is proposed the tax exempt status of assets supporting a transition to retirement (TTR) pension will be removed. These assets will be taxed at the superannuation accumulation rate of 15%. This will apply to all TTR pensions, regardless of when they commenced.
SW view: The removal of the tax free status on earnings had been flagged, so it comes as no surprise. While TTR pensions will continue to exist, depending on an individual’s cash flow situation, they may become less popular going forward.
Anti-detriment payments will be abolished.
From 1 July 2017, the anti-detriment provision will be removed.