Get ready for 1 July 2017
Following extensive debate and conjecture, the 2016 Budget announcements making widespread changes to the superannuation system have been passed. Most of these changes commence from 1 July 2017 but may require a great deal of planning, and like most things, the real trick is in the detail. Now is the time for you to prepare.
Ensure that you have a roadmap in place to navigate the major changes ahead and avoid any traps. Learn more about the five new super rules below.
Superannuation Rule number one: Concessional Contribution Cap
The Old Rule: Individuals aged 49 or over on 1 July were eligible to contribute up to $35,000pa as a concessional contribution, or $30,000pa for members under 49.
The New Rule: All individuals, regardless of age will be limited to a concessional contribution of $25,000pa.
The Detail: The change, which applies from 1 July 2017, includes employer contributions, salary sacrifice contributions, and personal concessional contributions
TRAP: Beware of the changes to the rules of making contributions to constitutionally protected funds – these are now included in your cap.
Superannuation Rule number two: Division 293 Tax
The Old Rule: Individuals who have income (including superannuation contributions) of $300,000 or more pay an additional 15% tax on their superannuation contributions
The New Rule: The threshold on which individuals will pay the additional tax is reduced to $250,000pa.
The Detail: The reduction applies from 1 July 2017.
Superannuation Rule number three: Concessional Contribution Bring Forward
The Old Rule: Any unused concessional contributions were lost.
The New Rule: Individuals with a balance less than $500,000 just before the start of the financial year may be able to make additional concessional contributions, by accessing any unused concessional contributions from the previous 5 years.
The Detail: The unused contribution cap applies from the 2018/2019 year moving forward. Any contributions not used after 5 years are lost, and cannot be carried forward.
Superannuation Rule number four: Non-Concessional Contributions
The Old Rule: Individuals were able to contribute up to $180,000pa as a non-concessional contribution. If under 65 on 1 July, they were also able to ‘bring forward’ three years’ worth of contributions.
The New Rule: Individuals are limited to a maximum of $100,000pa as a non-concessional contribution, or $300,000 as a bring forward limit if the member is under 65 – but only if the member balance is less than the transfer balance cap on 30 June of the previous year.
The Detail: Before making a non-concessional contribution, an individual must first test whether they are eligible. This means that if their balance is $1.6 million (the current transfer balance cap) or more, they cannot make non-concessional contributions. The ability to bring forward contributions is also now tested to a member’s balance. If under 65 on 1 July, they may be eligible to use a bring forward to a maximum of $300,000 but only to the extent it will not exceed their transfer balance cap.
Example: Mark has a transfer balance cap of $1.45 million. He wishes to contribute his maximum non-concessional contribution limit. Based on the new rules, he is able to contribute a maximum of $200,000 over two years
TRAP: If an individual has partially used their bring forward rule prior to 1 July 2017, a reduced limit may only be available.
Superannuation Rule number five: 1.6 million transfer balance cap
The Old Rule: There was no limit to the amount an individual could have in a superannuation pension.
The New Rule: Individuals are limited to a maximum cap of $1.6 million that can be transferred to a superannuation pension. The balance is indexed to CPI and increased in $100,000 increments.
The Detail: On 1 July 2017, any amounts that are in superannuation pension that exceed $1.6 million will need to be converted to the accumulation phase. The earnings on this excess will be taxed at the normal superannuation rate of 15%. If an amount exceeding the $1.6 million cap is transferred to a pension, the excess plus a calculated earnings amount will need to be transferred back to accumulation.
TRAP: Breaches of the $1.6 million cap in the 2018-2019 year onwards will attract tax at 30%, not 15%.
The cap also applies to reversionary or death benefit pensions received by a beneficiary – but not pensions received by a child, which are subject to a separate calculation. If a member is entitled to a reversionary pension which puts them over the $1.6 million cap, they will have a 6 month period to decide which pension will be commuted.
CGT Relief is also available for those superannuation funds who will need to reallocate assets from pension to accumulation phase between 9 November 2016 and 1 July 2017. This essentially allows the superannuation fund to reset the cost base of certain assets, and either pay the CGT to date in the 2017 tax return or defer it until the asset is sold. This is an incredibly complex area and advice will be necessary.
TRAP: It may not always be best to reset the cost base of the assets!
Final thoughts - how you can get ready for the new super changes?
The five new rule changes are incredibly complex and require considerable planning. Tax is not the only factor to be considered. Financial advice should be sought before you make any decisions. Get in touch with your local RSM superannuation specialist to find out more.