RSM Australia

Budget 2016 for Superannuation

Insights for Individuals

The Government took a hard, and potentially unpopular line on superannuation tax concessions in the 2016/17 Budget, with changes including:

  • The introduction of a $1.6 million pension cap;
  • Reduction in the concessional contribution cap PLUS more income earners captured under the ‘higher income earners contribution tax’;
  • The introduction of a lifetime non-concessional contribution cap; and
  • Removal of tax concessions for transition to retirement pensions.

$1.6 million Transfer Balance Cap

In a move that has been long predicted by many, a new lifetime pension commencement cap has been introduced. From 1 July 2017, an individual may not commence a pension in superannuation with a balance of more than $1.6 million. In addition, for those with existing balances exceeding $1.6 million, the excess amount will need to be commuted back to accumulation, where the earnings will attract 15% tax. For those with multiple pensions, it is unclear how it will be decided which pension is converted back to accumulation, potentially undoing years of tax and retirement planning.

Contribution Changes

Budget 2016/17 sees a return to a lower concessional contribution limit of $25,000 per member, regardless of age, effective from 1 July 2017. While the announcements also removed the draconian 10% rule and work test requirements to open up contributions to a wider group of people, it is the lowest contribution limit since the unpopular announcements in 2012/2013. In addition, for those individuals whose income (including superannuation) exceeds $250,000 an additional 15% tax will be payable on concessional contributions.

One minor positive to come from the changes is for those with superannuation balances of $500,000 or less. These members will be able to ‘catch up’ unused concessional contributions for a period of up to 5 years.

Lifetime Non-Concessional Cap

Possibly the least positive announcement to come from the Budget is the creation of a lifetime limit on non-concessional contributions. Commencing from 3 May 2016 and counting contributions back to 1 July 2007, a member is limited to a maximum of $500,000 of after tax contributions in their lifetime. Based on statistics that suggest only a very small percentage of individuals contribute amounts in excess of this, the Government believes this will prohibit high wealth individuals from investing large balances in a low tax environment.

This announcement will also limit the ability of individuals to employ the popular ‘withdrawal and re-contribution’ strategy to minimise the implication of tax on the death benefits of a member.

Transition to Retirement Income Stream & Tax

From 1 July 2017, the tax exempt status of income supporting a Transition to Retirement Income Stream (TRIS) will be removed, resulting in tax of 15% being levied on income in these funds. This is an attempt to remove the tax based strategies behind commencing a TRIS, and return it instead to a measure to help people genuinely moving toward retirement. The changes will also remove a loophole allowing members to elect to have their pension benefits taxed as a lump sum, potentially saving tax on withdrawals.

Low Income Benefits

A new Low Income Superannuation Tax Offset will be implemented to continue the proposed measures to provide greater equality in the superannuation tax system for lower income earners. Any individual who has income of less than $37,000 will be entitled to a tax offset to their superannuation fund of up to $500, meaning that most low income earners will not pay any superannuation contributions tax.

The Budget also makes available increased access to the Spouse Offset, for individuals making a superannuation contribution for their spouse.

Anti-Detriment

A somewhat obscure but potentially valuable piece of legislation, the ability to make an anti-detriment payment will be outlawed by 1 July 2017. Previously, these rules effectively refunded the 15% contributions tax paid by a member over their lifetime back into their estate. Long misunderstood and constantly considered illogical, this removal was always on the cards.

Winners

  • Low Income Earners;
  • Anyone with a superannuation balance of less than $500,000; and
  • Anyone previously limited in making contributions by the 10% rule or the work test.

Losers

  • Anyone with a pension balance exceeding $1.6 million;
  • Anyone wishing to make a concessional contribution exceeding $25,000;
  • Anyone wishing to make non-concessional contributions exceeding $500,000 in their lifetime; and
  • Anyone drawing a transition to retirement income stream post 1 July 2017.

Case study 1

Pamela, 78, has $2.5 million in superannuation – partially from her own benefits, and partially as a reversionary pension from her husband. From 1 July 2017, Pamela will need to convert $900,000 of her balance back to accumulation.

Case study 2

Cassandra, 67, is currently working part time and earning $32,000 a year. She has a superannuation balance of $385,000. Cassandra’s employer makes a $3,040 contribution to her superannuation fund. Based on the changes, Cassandra can make an additional personal concessional contribution of $21,960 without having to worry about the 10% rule.

If the contributions made to Cassandra’s fund this year only totalled $14,000, the unused cap of $11,000 would be able to be carried forward to next year, meaning total contributions of $36,000 could be made next year.

Case Study 3

Michael is 57, and received an inheritance in 2008 from his mother of $400,000. He chose to contribute this to his superannuation fund. In 2018, Michael sells an investment property and after paying capital gains tax has $350,000 in after tax income. Because he used $400,000 in 2008, he is only able to contribute an additional $100,000 of his proceeds to superannuation.