Technical

Super reforms will hit from July 2017

December 2016

Significant contribution limits to super could be a challenge for the wealthy, writes Anna Kennedy.

From July 2017 your clients will be limited to transferring up to $1.6 million of super retirement savings into a tax-free environment, contributing $100,000 a year of after-tax super contributions, and $25,000 a year of before-tax contributions (including compulsory super from employers).

While some Australians will be affected by these limitations, industry groups have pointed out that the self-employed could benefit from tax-concession measures, as could those who’ve had a break from the workforce, often women acting as carers, through catch-up concessional super contributions.

The changes to super and tax laws proposed in this year’s federal budget, then revised and adjusted by the government in September, have been passed through Parliament and are mostly due to take effect from July 1, 2017.

That means that your clients have until July to consider if there is any action they should take to make the most of current super rules or to comply with the upcoming changes.

In September, federal Treasurer Scott Morrison said the measures were about making sure super tax concessions are not used for “tax-incentivised estate-planning”, while helping Australians maximise their retirement balances.

While industry has welcomed the changes they don’t want to see any more, with The Association of Superannuation Funds of Australia calling “for no further changes to the tax treatment of super”.

“ASFA advocated for a ceiling on the amount of superannuation that is tax free in retirement and this policy has landed at the right point,” said ASFA chief executive officer Martin Fahy. “The greater flexibility in the system that the package will provide, including allowing people to make catch up concessional contributions, is particularly positive because it gives women who spend time out of the work force the opportunity to make greater contributions.”

Key changes to note

  • Only up to $1.6 million of super retirement savings can be moved into a tax-free environment. This is a significant curtailment on high-net worth retirees. People already retired with income-stream balances above $1.6 million after July 1, 2017 will face penalties. 
  • While pre-tax contributions are capped at $25,000 a year, clients are able to “catch-up” by rolling over any unused amount from one year to the next (for up to five years). To be eligible their super balance must be less than $500,000 just before the start of the financial year (this rollover feature begins July 2018).
  • From after-tax earnings clients can only contribute $100,000 each year to super (down from $180,000). They may be eligible to bring forward two years of contributions allowing $300,000 of after-tax contributions. While this limitation won’t be an issue for many Australians, it is on retirement savings for the wealthy, supporting the Treasurer’s point about limiting “tax-incentivised estate-planning”. (Currently, people under age 65 from the beginning of July 2016 can bring forward two years of non-concessional contributions, meaning they may be able to contribute up to $540,000 before June 30, 2017.)

Significant super reforms

Now

New*

No limit on funds moved into tax-free pension phase.

$1.6 million transfer balance cap for what can be transferred to the tax-free retirement income phase.

Clients can contribute $180,000 of their after-tax earnings to super each year (or $540,000 for those eligible to bring forward two years of contributions).

Reduction in annual after-tax contributions cap to $100,000 (or $300,000 if bringing two years of contributions forward, if eligible).

Pre-tax yearly contribution limit of $30,000 (or $35,000 if aged 50 or over  by June 30, 2017).

Reduction in the annual concessional (before–tax) contributions cap to $25,000. This applies regardless of age.

Unused concessional superannuation contributions are lost.

Catch-up concessional contributions available for those with balances less than $500,000 just before the start of the financial year.

If income from employment is less than 10% of total income, client can claim a deduction for personal super contributions.

Anyone can claim a tax deduction for personal super contributions.

15% tax on concessionally taxed super contributions if adjusted income is less than $300,000; 30% on certain contributions if adjusted income exceeds this.

30% tax on certain concessionally taxed super contributions, if your adjusted income exceeds $250,000 (including employer compulsory contributions and any salary sacrifice).

Earnings on transition-to-retirement super pensions are tax free.

No earnings tax exemption on transition-to-retirement super pensions.

Anti-detriment payments may apply on certain lump death benefits (generally a notional refund of contribution tax to be paid on death).

No anti-detriment payments on lump-sum super death benefits (no refund of contribution tax paid on death).

Offset for contributions to spouse’s super (if spouse earns under $13,800).

Offset for contributions to spouse’s super (if spouse earns under $40,000).

The ‘low-income super contribution’ refunds tax (up to $500) on contributions for those earning $37,000 or less.

Introduction to the low-income super tax offset (effectively a continuation of the low income super contribution).

*These measures start July 1, 2017, except for the catch-up concessional contribution measure which starts July 1, 2018.