Commentary on Australian Federal Budget 2016 – for Individuals

In his budget delivery speech, the Treasurer announced that the reforms are intended to improve the fairness of the superannuation system for women and lower income earners, while reducing the extent to which super is used by the wealthy for tax-minimisation or estate planning purposes.

According to the Treasurer:

• 96% of people will be unaffected by changes to superannuation tax concessions for higher income earners
• More than 4% of people will benefit from changes intended to improve the equity of the superannuation system for women and lower income earners.

Need to know

While some of the changes impacting higher income earners are effective immediately, most will start from 1 July 2017.

It’s important to remember that these reforms are still proposals. They’re not yet law, and may be withdrawn if there is a change of Government.

What do the changes actually mean for you? Read more about our Budget highlights:

• Changes to super contribution limits

• Before-tax contributions
– reduction in before-tax super contribution caps to $25,000 per annum
– introduction of a “catch-up” on before-tax super contributions. This allows any unused contributions to carry forward for up to 5 years.
• After-tax contributions
– introduction of a lifetime limit of $500,000, effective immediately
• Contribution limit snapshot

• Access to tax deductions for voluntary contributions
• Introduction of a $1.6 million superannuation cap on the amount you can transfer into a pension account
• Increasing access to the low income spouse tax offset
• Lowering of the threshold of Division 293 tax from $300,000 to $250,000
• Removal of the work test for contributions made by members aged 65 – 74
• Removal of tax exempt status for Transition to Retirement pension earnings.

Changes to super contribution limits

Before-tax contributions

From 1 July 2017, the before-tax contributions cap will reduce from $30,000 to $25,000. The higher cap of $35,000 for those aged 50 years and over will also reduce to $25,000.

Government figures say this will affect around 3% of superannuation fund members.

Account balance of $500,000 or less? From 1 July 2017, the Government will allow you to make ‘catch-up’ superannuation contributions. This means that any of your unused before-tax contributions cap can be carried forward over a rolling five year period.

Amounts carried forward that have not been used after five years will expire.

CASE STUDY: Meet Amy1 Amy is 40 years old and earns $100,000 per year. She has a super balance of $400,000. In the 2017-18 financial year, Amy has total before-tax contributions of $10,000. In 2018-19, Amy can contribute $40,000 into her super. $25,000 of this is the amount allowed under the annual cap and $15,000 is her unused amount from 2017-18. The full $40,000 is taxed at 15 per cent.

After-tax contributions

As of today (3 May 2016), the after-tax contributions cap is set at a lifetime limit of $500,000. This cap takes into account all after-tax contributions made since 1 July 2007. It applies to individuals aged up to 75 years.

If you make a contribution over your lifetime cap the Australian Tax Office will ask you to withdraw the excess. If you choose not to withdraw the excess you will be subject to penalty tax.

Already exceeded the lifetime cap? Don’t worry, your existing contributions will not be subject to any penalty. Just remember, you will not be able to make further after-tax contributions without penalty.

Contribution limit snapshot

In summary, the caps applying over the current and future financial years are:

	Concessional cap		Non-concessional Cap
	Age 49 and under	Age 50 and over	Under 65	65-75
2015-16 year	$30,000	$35,000	$180,000 (and up to 3x$180,000 subject to three-year bring forward rule)	$180,000 subject to work test
2016-17 year	$30,000	$35,000	$180,000 (and up to 3x$180,000 subject to three-year bring forward rule)	$180,000 subject to work test
From 3 May 2016			$500,000 lifetime cap
2017-18 year	$25,000		$500,000 lifetime cap
From 1 July 2018	Indexed in line with wages ($5,000 increments) Catch-up contributions available to those who have not used the full limit from 1 July 2017 (super account balance less than $500,000).		Indexed in line with wages ($50,000 increments)

Access to tax deductions for voluntary contributions

Currently self-employed people can claim a tax deduction for their personal super contributions made to their super fund.

From 1 July 2017, the rules will be relaxed and the Government will allow all Australians under age 75 to claim a tax deduction for any after-tax contribution made to an eligible fund. These contributions will then count towards your before-tax concessional contribution limit.

CASE STUDY: Meet Chris2 Chris is 31 and decides to start his own online cricket merchandise business. While he gets his business up and running he continues working part-time in an accounting firm where he earns $10,000. In his first year his business earns him $80,000.Of his $90,000 income he would like to contribute $15,000 to his superannuation account.Under current arrangements, Chris would not be eligible to claim a tax deduction for any personal contributions. While his employer allows him to salary sacrifice into superannuation, he is limited to the $10,000 he earns in salary and wages. Under the new arrangement, Chris will qualify for a tax deduction for any personal contributions that he makes (up to his concessional cap). Chris makes a $15,000 personal contribution and notifies his superannuation fund that he intends to claim a deduction. He includes the tax deduction as part of his tax return.

Capping transfers into pension accounts at $1.6 million

Currently there is no limit on the amount of assets that can be transferred from the pre-retirement phase (where investment income is taxed) to the retirement phase (where investment income is tax free). From 1 July 2017, the Government will introduce a $1.6 million cap on the total amount of your superannuation that can be transferred into a tax free retirement account.

Members already in the retirement phase, with balances above $1.6 million, will be required to reduce their retirement balance to $1.6 million by 1 July 2017 by transferring the excess back into an accumulation superannuation account and/or by withdrawing the excess amount.

Superannuation savings accumulated in excess of the cap can remain in an accumulation superannuation account, where the earnings will continue to be taxed at 15 per cent.

The measure is aimed at reducing the opportunities for using superannuation as a concessionally taxed estate planning tool.

The Government will consult with the superannuation industry before finalising further details of this new “transfer balance cap”.

CASE STUDY: Meet Agnes3 Agnes, 62, retires on 1 November 2017. Her accumulated superannuation balance is $2 million.Agnes can transfer $1.6 million into a retirement income account. The remaining $400,000 can remain in an accumulation account where earnings will be taxed at 15 per cent. Alternatively, Agnes may choose to remove this excess amount from superannuation.While Agnes will not have the ability to make additional contributions into her retirement account, her balance will be allowed to fluctuate due to earnings growth or drawdown of pension payments.

Increasing access to the low income spouse tax offset

Currently a tax offset of up to $540 is available to income earners who make super contributions for a low income earning spouse. The current tax offset starts to reduce when your spouse earns more than $10,800 and cuts out completely once their income reaches $13,800.

From 1 July 2017, the Government will extend the eligibility for the $540 tax offset in respect of recipient spouses earning $37,000, cutting out completely at $40,000.

CASE STUDY: Meet Anne and Terry4 Anne earns $37,500 per year. Her husband Terry wishes to make a superannuation contribution on Anne’s behalf.Under the current arrangements, Terry would not be eligible for a tax offset as Anne’s income is too high. There is no incentive for Terry to make a contribution on behalf of Anne.Under the new arrangements, Terry would be eligible to receive a tax offset. As Anne earns more than $37,000 per year, Terry will not receive the maximum tax offset of $540. Instead, the offset is calculated as 18 per cent of the lesser of $3,000 reduced by every dollar over $37,000 that Anne earns, or the value of spouse contributions. For example, Terry makes $3,000 of contributions and Anne earns $500 over the $37,000 threshold. Terry receives a tax offset of $450: 18 per cent of $2,500, as this is less than the value of the spouse contributions ($3,000). If Anne were to earn more than $40,000 there would be no tax offset.

Lowering the threshold for Division 293 tax to $250,000

From 1 July 2017, the threshold at which the Division 293 tax will apply on concessional contributions will reduce to $250,000.

You’re liable for Division 293 tax if, in a year, your adjusted income plus low-tax contributions are greater than $250,000.Adjusted income includes taxable income plus adjustments for some fringe benefits, rental property and investment losses and some other tax free items. Low-tax contributions are concessional contributions which are within the concessional contributions cap.

Division 293 tax is charged at 15% of your taxable concessional contributions above the $250,000 threshold.

Removal of the work test for contributions

Currently people aged 65 to 74 must meet a work test if they are to make voluntary or non-concessional contributions into their super account.

From 1 July 2017, these work test restrictions will be lifted, allowing increased flexibility in making contributions between ages 65 and 75.

Removal of tax exempt status for Transition to Retirement pension earnings

Currently earnings on assets supporting “transition to retirement” income streams (typically account based pensions) are tax exempt. This tax exempt status will be removed from 1 July 2017 and earnings will be taxed at the usual concessional rate of 15%. This change will apply regardless of when the transition to retirement allocated pension commenced.

Transition to retirement allocated pensions were designed to provide limited access to superannuation when a member is over their preservation age (currently 56) but not retired. In practice, recipients have also been able to reduce their tax liability by salary sacrificing their income into superannuation and instead taking a superannuation income stream at a concessional tax rate.

The increased tax on earnings together with the lower concessional contribution caps will reduce the tax advantages of a transition to retirement pension. However, the extent of the impact will depend on individual circumstances. Of course individuals who no longer benefit from a transition to retirement pension can transfer their pension back to an accumulation phase superannuation account.

CASE STUDY: Meet Sebastian5 Sebastian is 57 years old, earns $80,000 and has $500,000 in his superannuation account. He pays income tax on his salary and his fund pays $4,500 tax on his $30,000 earnings.Sebastian decides to reduce his work hours to spend more time with his grandchildren. He reduces his working hours by 25 per cent and has a corresponding reduction in his earnings to $60,000.He commences a transition to retirement income stream worth $20,000 per year so that he can maintain his lifestyle while working reduced hours. Currently, Sebastian pays income tax but his fund pays nothing on the earnings from his pool of superannuation savings. Under the Government’s changes, while the earnings on Sebastian’s superannuation assets will no longer be tax free they will still be taxed concessionally (at 15 per cent). He will still have more disposable income than without a transition to retirement income stream. This ensures he has sufficient money to maintain his lifestyle, even with reduced work hours.

1. BUDGET 2016, SUPERANNUATION FACT SHEET 08, Superannuation Reform: Allowing catch‑up concessional contributions

2. BUDGET 2016, SUPERANNUATION FACT SHEET 07, Superannuation Reform: Improving access to concessional contributions

3. BUDGET 2016, SUPERANNUATION FACT SHEET 02, Superannuation Reform: Introducing a $1.6 million transfer balance cap

4. BUDGET 2016, SUPERANNUATION FACT SHEET 02, Superannuation Reform: Extending the spouse tax offset

5. BUDGET 2016, SUPERANNUATION FACT SHEET 02, Superannuation Reform: Improve integrity of transition to retirement income streams