Super Reform Changes for 2017
There are a number of changes to superannuation which were announced as part of the 2016 Federal Budget. Many key changes come into effect on 1 July 2017. Accordingly, taxpayers have an opportunity to take advantage of the current rules prior to 30 June when the new regime comes into force.
There are two key changes with respect to non-concessional (after tax) contributions. These are:
- A reduction in the yearly cap from $180,000 to $100,000. This also applies to the bring forward provision which will reduce from $540,000 to $300,000
- Taxpayers with a superannuation account balance of over $1.6million will be unable to make ANY non-concessional contributions after 30 June 2017
These two changes present opportunities for taxpayers who will be affected by these new rules to act prior to 30 June. For example, it may be appropriate to make larger non-concessional contributions now to boost the value of your Fund, if you will be unable to do so after 30 June. If you are in a pension phase of your superannuation, you may consider a re-contribution strategy for either yourself, or your spouse.
There are many ways to take advantage of the current rules before the changes come into effect and you should contact your finance professional to assist in making the right decision for your individual circumstances.
The current caps for concessional contributions are $30,000pa if you are under 49 years of age and $35,000 if you are older. From 1 July 2017, these caps will reduce to $25,000 regardless of age.
It may be appropriate to ensure you take advantage of the higher cap while it is in place. This could be achieved via salary sacrifice arrangement if you are an employee, alternatively, you may consider making a deductible super contribution if you are self-employed or in business.
Deducting Personal Super Contributions
Prior to 1 July 2017, you are only able to claim a personal income tax deduction for a superannuation contribution if you were a sole trader or your income from employment was equal to 10% or less of your assessable income.
From 1 July 2017, you are able to claim a personal income tax deduction for a superannuation contribution regardless of your employment status.
If you are aged between 65 and 74, you will still need to meet the work test (gainfully employed on a part-time basis for at least 40 hours in a period of 30 consecutive days) in order to be eligible to make a concessional contribution and claim an income tax deduction.
To enable the deduction, you will need to notify your superannuation fund that you intend to claim a deduction. Each fund will have a standard form and if you wish to claim a deduction, it is important that you contact your fund to ensure it is recorded appropriately in the Fund records.
It is important to note that personal superannuation contributions that you claim as a tax deduction contribute to your concessional contribution cap. Accordingly, it is important to be aware of your cap and your concessional contribution level prior to making a contribution.
From 1 July 2017, the tax paid on earnings from investments held in TTR pensions will increase from 0% to a maximum of 15%, regardless of the pension start date. Everyone who has implemented the TTR strategy should review it to determine if it is still worthwhile from 1 July 2017. While it’s anticipated this strategy will remain effective for some people, in many case, the net benefit will be significantly lower under the new rules.
$1.6 Million Transfer Cap
The total amount of super monies that can be transferred to pension phase will be capped at $1.6 million. The cap will be indexed in $100,000 increments in line with CPI. People who will exceed the transfer balance cap on 1 July 2017 will need to reduce their total pension interest below $1.6 million prior to 1 July 2017, otherwise they may be required to pay excess transfer balance tax.
The legislation allows CGT relief when assets are moved out of the pension phase to satisfy the transfer balance cap requirement. The purpose is to provide tax relief for super funds from capital gains accumulation before 1 July 2017, where the gains would have been exempt if realised in pension phase prior to this date.
Commutations must be made before 1 July 2017 to obtain the relief. Commutations and other adjustments made from this date won’t qualify for the concessions.
The $1.6 million pension transfer cap will also apply to death benefit pensions. People who have a total of more than $1.6 million in pensions (i.e. this could comprise a death benefit pension only or a combination of a death benefit & pension commenced from the members accumulation account) will need to identify how they are going to deal with the excess before 1 July 2017.
SMSF Trust Deed Amendments
If you have a self-managed superannuation fund, the changes to the legislation may require an amendment to your Trust Deed.
The impending changes to the superannuation space will have a large impact to all taxpayers, both in the short term, and for the purposes of longer term planning.
If you would like further information on how these changes will affect your circumstances, contact your financial adviser or tax professional.
Source: Written by Roger Potter, Director of Wybenga & Partners Pty Limited, Chartered Accountants, Sydney