2016-17 Federal Budget Superannuation Reforms

From 1 July 2017, the government introduces a $1.6 million cap on the total amount that can be transferred into the tax-free retirement phase for simple account based pensions. This is known as the general transfer balance cap. The general transfer balance cap will be indexed in $100,000 increments in line with CPI.

Superannuation benefits accumulated in excess of the cap can remain in the accumulation account, where the earnings will be taxed at up to 15%.

Where an individual has not used the full amount of the general transfer balance cap, their personal cap is subject to the proportional indexation. For example, if an individual has previously used up 75% of their cap they will have access to 25% of the current (indexed) cap.

Individuals who breach the cap will be required to remove the excess amount from the simple account based pension and will be liable to pay penalty tax on the notional earnings attributable to the excess capital. Notional earnings compound daily (based on general interest charges) until the breach is rectified or an excess transfer balance determination is issued by the ATO.

These amounts can be transferred back into an accumulation account, where the earnings on the excess will be taxed at up to 15%. Alternatively, the excess can be withdrawn from superannuation.

Temporary CGT relief is provided for accumulated capital gains on assets which would have been exempt but for the introduction of the $1.6 million pension cap. The trustee can elect to reset the asset’s cost base to its current market value. The relief will ensure that CGT is only payable (on the sale of these assets after 1 July 2017) on capital gains accrued from 1 July 2017.

The relief only applies to assets acquired by the Fund prior to 9 November 2016 and continued to be held by the Fund until 30 June 2017. The choice needs to be made in the approved form before the 2016/17 fund tax return is lodged, and cannot be revoked.

Individuals are no longer able to use partial commutations (i.e. lump sum withdrawals) to meet the minimum pension requirement after 1 July 2017. This implies that at least the minimum pension amount must be pension withdrawals and only the amount in excess of the minimum pension amount can be either lump sum withdrawals or pension withdrawals at the Trustee’s discretion.

If an individual is aged under 60 and retired, then 2016-17 is the last financial year during which the individual may choose to treat all withdrawals as lump sums and none as pensions in order to minimise tax in their personal tax return. 

Different rules apply to other types of income stream products. Please contact your scheme provider directly in order to verify your personal circumstances.

The above information only provides a brief overview of the changes affecting Simple Account Based Pensions from 1 July 2017. Please click here for detailed explanation.

People who have reached preservation age but are under 65 and not retired can still access a Transition to Retirement Pension (TRAP).

However, from 1 July 2017 the Government removes the tax exempt status of income from assets supporting Transition to Retirement Pensions regardless of the date the TRAP commenced. The earnings on the amount supporting TRAPs are taxed at up to 15% (i.e. same tax rate applying to accumulation earnings).

The intent of this change is to ensure that TRAPs are not accessed primarily for tax minimisation purposes but for the purpose of supporting individuals who remain in the workforce with reduced working hours.

Temporary CGT relief is provided for accumulated capital gains on assets which would have been exempt but for the introduction of the TRAP earnings taxation measure. The trustee can elect to reset the asset’s cost base to its current market value. The relief will ensure that CGT is only payable (on the sale of these assets after 1 July 2017) on capital gains accrued from 1 July 2017.

The relief only applies to assets acquired by the Fund prior to 9 November 2016 and continued to be held by the Fund until 30 June 2017. The choice needs to be made in the approved form before the 2016/17 fund tax return is lodged, and cannot be revoked. 

If you do not need to access your super benefits to supplement your personal expenses, you may choose to commute (i.e. cease) the TRAP on 30 June 2017.

If you wish to commute the TRAP, please inform ESUPERFUND of your commutation request in writing.

The above information only provides a brief overview of the changes affecting Transition to Retirement Pensions from 1 July 2017. Please click here for detailed explanation.

In the 2016/2017 Financial Year, individuals can make concessional (pre-tax) contributions up to $30,000 for those aged under 49 at 30 June of the previous financial year and $35,000 otherwise.

From 1 July 2017, the Government lowers the annual concessional contributions cap to $25,000 for all individuals aged under 75. The cap will be indexed in $2,500 increments (instead of the current $5,000 increase) in line with wages growth.

Prior to 01 July 2017, individuals are only allowed to claim a tax deduction in the personal tax return for personal contributions if they meet the 10% rule (i.e. employment income divided by your assessable income is less than 10%).

From 1 July 2017, all individuals aged under 75 are allowed to make concessional superannuation contributions up to the concessional cap (including those aged 65 to 74 who meet the work test) regardless of their employment situations.

This change will benefit individuals who are partly self-employed and partly salary earners, and individuals whose employers do not offer salary sacrifice.

Prior to 01 July 2017, individuals with income and concessional super contributions in excess of $300,000 are required to pay 30% tax on their concessional superannuation contributions - commonly referred to as the Division 293 threshold.

From 1 July 2017, the government reduces the income threshold, above which individuals are required to pay an additional 15% tax on their concessional contributions, from $300,000 to $250,000 per annum.

The additional tax is imposed on the whole amount of the contributions, up to the concessional contributions cap, if your salary and wages are above the threshold. Otherwise, the additional tax is only imposed on the portion of the contribution that takes you over the threshold.

The intent of this change is to better target tax concessions to ensure the superannuation system is equitable and sustainable.

The government introduces a Low Income Superannuation Tax Offset (LISTO), which replaces the Low Income Superannuation Contribution (LISC) policy that has been repealed from 1 July 2017.

From 1 July 2017, eligible individuals with an adjusted taxable income up to $37,000 receive a LISTO contribution equal to 15% of their total concessional (pre-tax) super contributions for an income year, capped at $500.

The Australian Taxation Office will determine a person’s eligibility for the Low Income Superannuation Tax Offset and this will be paid into the person’s superannuation account.

From 1 July 2018, individuals will be able to make 'carry-forward' concessional super contributions if they have a total superannuation balance of less than $500,000 at 30 June of the previous financial year. Individuals aged 65 to 74 also need to meet the work test in order to access these arrangements.

Eligible individuals will be able to access their unused concessional contributions cap space on a rolling basis for five years. Amounts carried forward that have not been used after five years will expire.

Only unused amounts accrued from 1 July 2018 can be carried forward. This means the first year in which you can access unused concessional contributions is the 2019-20 financial year.

This increased flexibility will make it easier for people with varying capacity to save and for those with interrupted work patterns, to save for retirement and benefit from the tax concessions to the same extent as those with regular income.

From 1 July 2017, the Government reduces the annual non-concessional (after tax) contribution cap from $180,000 to $100,000 per year, which is four times the annual concessional contributions cap. The cap will be indexed in line with the concessional contributions caps.

In addition, the Government introduces a new constraint such that individuals with a total superannuation balance of $1.6 million or more at 30 June of the previous financial year will no longer be eligible to make non-concessional contributions.

The above two changes will affect the individual’s ability to bring forward non-concessional contributions.

The Government extends the current spouse tax offset to assist more couples to support each other in saving for retirement.

From 1 July 2017, the income threshold for the low income spouse tax offset is increased from $10,800 to $37,000. As is currently the case, the offset is gradually reduced for income above this level and completely phases out at income above $40,000.

No tax offset will be available when the spouse receiving the contribution has exceeded their non-concessional contributions cap or their balance at 30 June of the previous financial year is $1.6 million or more.

There are no changes to the current aged based contribution rules. The spouse receiving the contribution must be under age 70, and meet a work test if aged 65 to 69.

You may find some useful information from the following official sources:

• Australian Taxation Office website: click here to check updates on the ATO website.
• Australian Treasury Government website: click here to view a series of fact sheets (including FAQ) relating to the Superannuation Reforms.

ESUPERFUND is a no advice model and does not provide financial advice to clients. We recommend that you seek professional advice from a financial adviser. A licensed financial adviser will consider your personal situation and make a recommendation suitable to your particular financial needs.

It should always be remembered that Trustees are legally responsible for all the decisions made even if you obtain advice from a Financial Planner. Whilst a Financial Professional can provide advice and assistance you are ultimately responsible for the Fund.