On Thursday 15 September 2016, Treasurer Scott Morrison announced the government had modified the proposed superannuation changes originally put forward in the May budget. The government hopes to have these new changes passed into legislation by the end of the year, to come into force on 1 July 2017.
Whilst the maximum tax-free pension amount in a superfund will remain $1.6m, the most significant change is that the government dropped its controversial lifetime $500,000 non-concessional contribution (NCC) restriction, which are those contributions paid out of after tax money. Instead, in order to give people a better shot at reaching the tax-free limit you will be able to contribute $100,000 each year until you hit a super balance of $1.6m. You will also still be able to bring forward three years’ worth of NCC’s in one hit.
That’s all pretty favourable stuff, but the compromise is that anyone aged 65-74 years old will still have to meet the work test (40 hours of work in 30 consecutive days) to able to contribute to their superfund.
Just to reiterate, if you have a Self Managed Super Fund (SMSF), the $1.6m tax-free limit applies to each member. So for example a husband and wife can have a combined tax free limit of $3.2m. And if you are fortunate enough to have more than the tax-free limit you can keep the excess money in super, but (just) the earnings from those excess funds will be taxed at 15%. Plus, that $1.6m is free to grow: so if you invest it wisely and it grows to $3m, all the earnings from those funds will still be tax-free.
So what do you do now?
Despite the proposed changes, it is clear that superannuation will still be the most tax effective investment environment. So with the lower annual cap of $100,000 on NCC’s. as well as the bring forward amount of $300,000, applying from 1 July 2017, those who have the capacity should consider utilising the current $540,000 cap before the end of the financial year to maximise the amount held in super.
Also, if your superfund balance is approaching the $1.6m limit, this is another reason to maximize the NCC contribution prior to the new provisions coming into effect.
By way of summary, the major points in the government’s newly proposed superannuation reforms include:
- NCC cap reduced from $180,000 to $100,000 from 1 July 2017
- three year bring forward rules still apply
- No NCC allowed once $1.6m transfer cap reached.
- Work test for over 65s will remain.
- $1.6m lifetime cap on tax free income stream transfers.
- Reduced threshold for the additional 15% contribution tax to $250,000 p.a. (from $300,000)
- Reduced concessional contribution caps to $25,000 from 1 July 2017.
- Removal of the 10% rule for deductible contributions.
- Removal of the tax free status of transition to retirement pensions.
- Increase of the income threshold for low income spouse contributions.
- Introduction of a low income superannuation tax offset.
- Abolition of the anti-detriment payments.