In the 2016-17 Federal Budget the Australian Government announced wide-ranging reforms to superannuation to improve the fairness and sustainability of the superannuation system. Most of these changes will take effect from 1 July 2017 with the exception of being able to carry forward any unused concessional contribution cap, which will commence from 1 July 2018.
Objective of superannuation
The Government is legislating to define the objective of superannuation as ‘to provide income in retirement to substitute or supplement the Age Pension’.
A number of subsidiary objectives will be prescribed in Regulations, such as facilitating consumption smoothing, managing risk in retirement, to be invested in the best interest of superannuation fund members, to alleviate fiscal pressures on Government, and to be simple and efficient, and to provide safeguards.
A statement of compatibility with the objectives will have to be prepared for any legislative change relating to superannuation.
The concessional contribution cap will be reduced to $25,000 p.a. The cap is currently $30,000 or $35,000 for people aged 50 years or older.
The high income Division 293 threshold will be reduced from $300,000 to $250,000. An individual with income and concessional contributions above this threshold pays an additional 15 per cent tax on their concessional contributions.
From 1 July 2018, individuals will be able to carry forward any unused concessional contribution cap on a rolling five year basis if they have a total superannuation balance of less than $500,000.
The non-concessional contribution cap will be reduced to $100,000 p.a. It is currently $180,000 p.a. The ability to make non-concessional contributions will be limited to a threshold equivalent to the general transfer balance cap ($1.6 million for 2017-18).
The three-year bring forward provision remains although the maximum will be reduced to $300,000 over a three year period with transitional arrangements applying from 1 July 2017.
Deductibility of contributions
The ’10 per cent’ rule will be abolished. Individuals under age 75 will be able to claim a tax deduction on any personal superannuation contributions subject to the $25,000 concessional contribution cap.
Low-income superannuation tax offset
The low-income superannuation contribution will be replaced by a 15 per cent low-income superannuation tax offset from 1 July 2017. The adjusted taxable income threshold remains $37,000 and the rebate is capped at $500.
Spouse tax offset
The income threshold for the spouse tax offset will increase to $37,000 (from $10,800) and phases out $40,000. The offset remains at 18 per cent and is capped at $540.
Defined benefit contributions
Notional employer contributions exceeding the $25,000 concessional contribution cap are not treated as excess contributions. However, they will now be counted towards an individual’s concessional contribution cap and will limit contributions being made to other superannuation funds.
Transfer balance cap
From 1 July 2017, a $1.6 million transfer balance cap will be introduced on the total amount that can be transferred into the tax-free retirement pension phase from the accumulation. Superannuation balances in excess of the transfer balance cap can remain in the accumulation phase.
Individuals in excess of the transfer balance cap before 1 July 2017 will have to transfer the excess back to their accumulation phase or remove it from their superannuation before 1 July. Any excess after 30 June 2017 will have to be removed with notional earnings on the excess taxed at 15 per cent.
Self-managed superannuation funds with at least one member exceeding their transfer balance cap will no longer be able to segregate their assets for tax purposes to calculate exempt current pension income and will have to apply the proportioning method instead. Capital Gains Tax relief is available for SMSFs that reduce the amounts supporting superannuation income streams before 1 July 2017.
Transition to retirement income streams
From 1 July 2017, the tax exempt status of earnings from assets supporting transition to retirement income streams (TRIS) will be removed. Earnings from assets supporting a TRIS will be taxed at a maximum 15 per cent regardless of when the TRIS commenced.
Members will also no longer be able to treat superannuation income stream payments as lump sums for taxation purposes.
Defined benefit pensions
A defined benefit income cap of $100,000 p.a. (i.e. 1/16th of the transfer balance cap) will be introduced.
For pensions from a taxed (i.e. funded) source in excess of the defined benefit income cap, 50 per cent of the excess will be included in the individual’s assessable income.
For pensions from an untaxed (i.e. unfunded) source in excess of the defined benefit income cap, the 10 per cent tax rebate will not be applied and they will be taxed at the individual’s marginal taxation rate.
A defined benefit pension in excess of the defined benefit income cap will also exhaust an individual’s transfer balance cap. Any other retirement phase amounts in other superannuation funds will be in excess of the transfer balance cap and will have to be transferred to accumulation phase or removed.
From 1 July 2017, the anti-detriment provision will be removed. Superannuation funds will no longer be able to claim a tax deduction for a portion of a death benefit paid to an eligible dependent, which represented a refund of the 15 per cent contributions tax that had been paid.
Detailed information regarding the changes can be obtained from the Australian Taxation Office and Treasury websites.