Posted on 1st February 2017 by Christabelle Harris

The most significant changes to superannuation for the last ten years are now law.  The changes announced in the May 2016 Budget and modified in September have finally been set out in legislation with most of the changes effective from 1 July 2017.

The changes affect how much you can contribute to super and limit the tax concessions available when you are receiving a pension from your fund.

Many of the changes are very complex.  We have only summarised the key points of the legislation changes in this article.  As always, everyone’s circumstances are different so it is important to discuss your superannuation entitlement directly with your accountant or advisor.

We are reviewing all of our self-managed super fund (SMSF) client’s accounts to consider if they are going to be affected by the changes and what steps can be taken to provide them with the best outcome.

1.6m Transfer Balance Cap

The $1.6m ‘General transfer balance cap’ applies to the total amount of superannuation that an individual can transfer into retirement phase account/s.  The cap applies to everyone from 1 July 2017 and will be indexed in $100,000 increments in line with increases in the consumer price index, the cap will be around $1.7m in 2020-2021.

If your existing pension entitlement (referred to as your transfer balance account) is $1.6m or below as at 30 June 2017, the earnings will remain 100% tax exempt.  Any subsequent earnings or growth on your transfer balance account/s will not be capped beyond the $1.6m cap and will remain tax exempt.

If you are already in pension phase you will need to either withdraw the excess balance over the $1.6m cap OR direct your superannuation fund to transfer the excess to accumulation phase for you. The earnings on this accumulation entitlement will be subject to 15% tax. Earnings includes for example income from bank interest, dividends, distributions and capital gains.

Lump sum payments can be withdrawn from your accumulation entitlement on the basis that you have either met a condition of release with reaching age 65 years or have retired and have reached your ‘preservation age’.  If you are aged 60 years or over these lump sum payments remain tax free to you.

A member can ‘top-up’ the Pension Cap after a lump sum commutation is taken.  The top-up provision does not apply to pension drawings or a fall in your pension entitlement due to a drop in the market value of the assets associated with your entitlement. Lump sums can be either retained within the accumulation account or cashed out.

For example:

A member commences a pension on 1 July 2017 with $1.6m. Healthy investment earnings and growth increase this entitlement to $1.7m as at 1 June 2018.  No tax is payable on the earnings associated with the $1.7m pension entitlement. The member fully commutes the pension back to accumulation phase on 1 June 2018 resulting in a debit to their transfer balance account of $100k.  The member is entitled to commence a new pension of up to $1.7m without breaching the transfer balance cap of $1.6m.

As mentioned above, the transfer balance cap will be indexed and will grow in line with CPI, meaning the cap will be around $1.7 million in 2020‑21. Proportional indexation means an individual’s personal transfer balance account is only indexed by an individual’s unused cap percentage. For example, if a person has used 75% of their $1.6m cap, indexation will only apply to the unused 25% component.

The changes also impact members in receipt of a pension with reversionary beneficiary nominations in place.  That is, the pension does not cease on the death of the original member but instead immediately continues on to the reversionary beneficiary. The recipient (often the spouse), will be credited with the value of the deceased member’s pension as at the member’s death.  The credit to the reversionary beneficiary’s transfer cap balance will be delayed until 12 months after the primary beneficiary’s death to allow time for the reversionary beneficiary to ‘adjust their affairs’ and not breach the transfer cap balance.

Penalties apply if you exceed the transfer balance cap although transitional provisions are applicable during the period from 1 July 2017 to 31 December 2017.

Capital Gains Tax Relief – Transition measures applicable only to 30 June 2017

For those who are currently in pension phase or transition to retirement (TTR) mode, there are transitional rules which have been introduced to provide relief against capital gains in the future that might arise as a result of the $1.6m transfer balance cap being introduced from 1 July 2017.  The opportunity to reset the cost base on assets expires on 30 June 2017.

For the majority of super funds with unsegregated assets, the fund is deemed to sell the asset/s on 30 June 2017 and repurchase the asset/s at the market value that applies on 1 July 2017. The choice can be made on an asset-by-asset basis allowing trustees to choose which assets the CGT relief applies to.

CGT relief is not automatic. SMSF trustees must make an election to reset an asset’s cost base to the market value as at 30 June 2017.  Each election is irrevocable and must be made before a trustee is required to lodged the funds 2017 income tax return (generally 15 May 2018).

The CGT relief will not apply to the proportion associated with the member’s accumulation account/s.

For example:

Sue and Bill are members of their SMSF with unsegregated assets and a combined superannuation entitlement of $2m. Sue is in pension mode with an entitlement of $1m whilst Bill is still in accumulation mode with an entitlement of $1m.  If they choose to apply the CGT relief to some of the parcels of shares held in their fund or a commercial property also held in the fund, a capital gain arises on the 50% associated with Bill’s accumulation entitlement. Options apply to defer any capital gain applicable.Sue and Bill may choose not to use the CGT relief given Sue’s pension entitlement is under the $1.6m and potentially so will Bill’s entitlement be when he commences pension mode so any capital gains in the future should be 100% tax free.

The deemed repurchase of the assets results in the fund becoming the owner of the asset ‘again’ at the re-purchase date (generally 1 July 2017 for unsegregated funds). To qualify for the CGT discount on the eventual sale of the asset, a fund will need to hold the asset for at least another 12 months from the reset date.

Transition to Retirement Changes

The tax exempt status of income from assets supporting Transition to Retirement (TTR) Income Streams will be removed. As TTR will no longer be considered a ‘retirement phase’ from 1 July 2017, the entitlement does not count towards the transfer balance cap of $1.6m.

The earnings associated with a member’s TTR account were previously tax exempt, from 1 July 2017 the earning will now be taxed at 15 per cent.

If you are currently drawing a transition to retirement income stream and you meet a condition of release with retirement or reaching age 65 years, the TTR can be transferred to a retirement phase pension and will count towards the transfer balance cap on commencement. The earning on the pension will be exempt to the extent that the $1.6m transfer cap balance is not exceeded on commencement.

Non-concessional contributions

You can only make non-concessional contributions from 1 July 2017 if your TOTAL superannuation entitlement is less than $1.6m.

If your TOTAL superannuation entitlement/s are close to $1.6 million, you will only be able to access the number of years using the bring forward provisions to take your balance up to $1.6 million.

Example: The bring forward rule for a member with a balance of $1.55m

Tom is 63 years of age and has a total super balance of $1.55m on 30 June 2017. As the difference between the general transfer balance cap of $1.6m and Thomas’ total super balance of $1.55m is $45k which is less than the general non-concessional contribution cap of $100k, Tom is not eligible to use the bring forward rule in the 2018 financial year.  He can however make a non-concessional contribution of up to $100k.

If Tom’s superannuation balance falls below the $1.6m cap, non-concessional contributions can be made depending his age and whether he meets the work test after age 65.

If you are aged between 65 and 74, you will be eligible to make annual non‑concessional contributions of $100,000 on the basis that you meet the work test and your TOTAL superannuation entitlement is less than $1.6m immediately before the commencement of the income year.  To satisfy the work test a person must be gainfully employed for 40 hours within a 30 day period for each income year.

For the current 2017 financial year, the $180k or up to $540k using the three year bring forward provisions apply up until 30 June 2017. 

Whether you are eligible to make non concessional contributions into super this financial year will depend on your age, whether you meet the work test and whether you have previously used any portion of the $540k within the previous 2 financial years. If you would like further clarification please contact our office.

Concessional Contributions – Employer and salary sacrifice contributions

There is a reduction to the annual cap on concessional superannuation contributions to $25,000 from 1 July 2017 for everyone.  Currently $30,000 cap applies to those under age 50 and $35,000 for ages 50 and over.

Concessional contributions include personal concessional contributions (eg. Self-employed), employer and salary sacrifice amounts.

For those over age 65 the work test must be met. Contributions cannot be made once you reach age 75 years unless the contributions are mandated employer contributions.

The $1.6m cap does not affect concessional contributions.

Improving access to concessional contributions

If you are under the age of 65, or aged 65 to 74 and meet the work test, you will be able to claim a tax deduction for personal contributions made to your super fund up to the $25k cap from 1 July 2017. Currently individuals must satisfy the 10% rule in order to claim a personal deduction for superannuation contributions made. This is designed to benefit those who are partially self-employed and partially wage or salary earners and those whose employers do not offer salary sacrifice arrangements.

Being able to claim superannuation personally will mean that an employee can circumvent salary sacrifice requirements that may apply.  In many cases, salary sacrificing counts towards an employer’s superannuation guarantee obligations and an employee may be out of pocket if the employer does not contribute ‘make-up’ superannuation guarantee contributions for the employee.

The $25,000 cap applies to all superannuation contributions including employer and any personal contributions that you make to your super fund that you claim as a tax deduction.  A deduction for personal superannuation contribution cannot create a loss situation in your personal taxable income.

Lump Sum Payments

Individuals will also no longer be allowed to treat superannuation income stream payments as a lump sum for tax purposes from 1 July 2017.  This will impact in particular members below age 60 who are currently drawing income stream payments as lump sums and counting the lump sums towards their minimum pension amount.  The lump sum payments can be tax free to the individual.

Division 293 Threshold reduced

From 1 July 2017 the ‘division 293’ threshold will reduce from $300,000 to $250,000 per year meaning individuals earning over this amount will have to pay an additional 15% tax on concessional contributions.

Extending the Spouse Tax Offset

More taxpayers may also be able to access the 18% tax offset up to $540 if they make a contribution on behalf of their low-income spouse following a lift in the current $10,800 spouse income threshold to $40,000. The offset is gradually reduced for income above $37,000 and completely phases out at income above $40,000. The spouse receiving the contribution must be under age 70 and meet a work test if they are aged between 65 to 69.

No tax offset is available when the spouse receiving the contribution has exceeded the non-concessional contributions cap or their balance is $1.6m or more.

Please don’t hesitate to contact our office should you require any additional information or have any queries concerning the changes.

Any information provided in this article is purely factual in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial product advice under the Corporations Act 2001.

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