Nina Kazmierczak, Partner
(Sovereign Wealth Partners)
Following extensive consultation, on 15 September 2016 the Federal Government released an amended superannuation package with a reworking of some of the more controversial elements. Reflecting the complexity of some of these measures, on 21 September 2016 the Federal Government provided further clarification of the proposed bring forward rule and the $1.6 million eligibility threshold.
Of the measures announced during Budget night, the impact of the amended package is as follows:
- $500,000 non-concessional lifetime cap proposed on Budget night
This measure has been scrapped altogether. Although, from 1 July 2017, the annual non-concessional contributions (NCC) cap will be reduced from $180,000 pa to $100,000 pa. Consequently, individuals under the age of 65 will still be able to utilise the “3 year bring forward” rule and contribute up to $300,000. On the flipside, individuals with a total superannuation balance of more than $1.6million will be unable to make NCC’s.
Bring-forward NCCs – transitional arrangements
Where an individual has triggered the bring forward in 2015/16 or 2016/17 but has not used it fully by 30 June 2017, transitional rules will apply. Please refer to the table.
Where an individual triggers the bring forward in 2016/17, the transitional cap is $380,000 (the current annual cap of $180,000 plus $100,000 annual cap in 2017/18 and 2018/19). If an individual triggers the bring forward in 2015/16, the transitional cap is $460,000 (the current annual cap of $180,000 in 2015/16 and 2016/17 plus $100,000 annual cap in 2017/18).
- The $1.6M threshold
From 1 July 2017 any balance above $1.6M in pension phase is required to be transferred to the accumulation phase or outside the superannuation system. Individuals with balances of more than $1.6M will not be able to make any further NCCs. Individuals with balances close to $1.6M will only be able to make or bring forward the annual cap amount that would take their balance to $1.6M.There will be no restriction on the subsequent earnings above the threshold. The $1.6M eligibility cap will be indexed in $100,000 increments in line with the CPI.
- Removal of the Work Test
Unfortunately this measure was scrapped in its entirety. The current work test will continue to apply for individuals aged between 65 and 74. Individuals aged between 65 and 74 will be eligible to make annual NCCs of $100,000 from 1 July 2017 if they meet the work test but cannot utilise the “bring forward” rule.
- Concessional Contributions
From 1 July 2017, the annual concessional contributions (CC) cap will reduce to $25,000 for all individuals. From 1 July 2017, all individuals under the age of 65, and for those 65-74 who meet the work test, will be eligible to claim a tax deduction for personal contributions up to the CC cap. Individuals with adjusted taxable income of $250,000 or more will incur 30% tax on their concessional contributions.The catch-up CCs measure for people with account balances of $500,000 or less was postponed to 1 July 2018.
- Spouse contribution
Individuals can only make spouse contributions where the receiving spouse is under age 65 or 65-74 and working. From 1 July 2017, the income threshold has been raised from $13,800 to $40,000 for the purposes of spouse contribution tax offsets.
- Anti-detriment Payment
From 1 July 2017, the government will remove the anti-detriment provision which allows superannuation funds to claim a tax deduction for a portion of the death benefit paid to eligible dependents.
- Transition to retirement income streams
The Government will remove the tax exempt status of income from assets supporting transition to retirement income streams. The earnings will now be taxed concessionally at 15%.
The proposals are designed to make the superannuation system more “sustainable, affordable and equitable” They are estimated to save $3.1bn over the next three years, an amount which is actually more than the estimates from the original budget proposal. The loss in tax revenue from dropping the controversial $500,000 lifetime cap on non-concessional contributions was more than offset by the combination of:
• delaying the catch up concessional contribution measure for a further year
• not dropping the work test for those looking to contribute to super after age 65
• lowering annual contribution limits
The changes are not yet legislated and still have to be introduced to and passed in parliament. We await the draft legislation for further clarity outlining the practical elements of the measures outlined above.