Federal Budget / SMSF

Federal budget delivers super changes!

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Wow…. did we see all that coming in this year’s Federal Budget?

Whilst we expected to see a range of measures introduced in this year’s Federal Budget, did we expect to see the Government make so many significant changes that impact not just those in accumulation, but many in post-retirement as well.

In reforms not seen in superannuation since Peter Costello handed down the Federal Budget in 2006, we have seen the Treasurer, Scott Morrison deliver measures clearly targeting sustainability of tax concessions and greater equity of these superannuation concessions across all taxpayers.  It certainly has elements of ‘Robin Hood’ in it, but in reality when listening to the superannuation debate over the past 12 months, you got a clear sense that a re-weighting of super tax concessions was always on the cards.   Just how far was the Government prepared to go in a budget that is so tightly linked to any potential re-election.

Well, read on to find out!

Contribution measures

Concessional contributions

A reduction in the concessional contribution cap

From 1 July 2017, the Government will reduce the concessional contribution cap to $25,000.  The concessional contribution cap currently sits at $30,000 for those under 49 at 1 July each year, or $35,000 for those above 49 at 1 July (temporary cap).  Just like in ‘Back to Future’, Great Scott… this change resets the contribution caps back to 2012-13.

Lowering the Div 293 threshold

It was one of the worst kept secrets… however political pressure clearly got the better of the Government deciding to settle on a reduction of the ‘income‘ threshold at $250,000.  This level matches the previously announced threshold by the Labor Government should they win the next Federal election.  This will take effect from 1 July 2017.

Allowing catch up of concessional contributions

From 1 July 2017, the Government will allow individuals with a super balance of less than $500,000 to utilise a rolling concessional contributions cap for a period of five consecutive years.  The unused portion of the concessional contribution cap can be accrued and carried forward.

The basis for this change is to allow for people with interrupted work patterns to benefit through periods of time where they may have an ability to catch up if they have a capacity to do so.

Example

Jane has had extended time out of the workforce, having accumulated approximately $150,000 in super.  During the 2017/18 and 2018/19 income years, she had concessional contributions for each year of $10,000.  For each of these completed years where she did not utilise the $25,000 concessional contribution cap, she can carry forward these amounts meaning that in the 2019/20 year her concessional contribution cap is $55,000 subject to her balance remaining under the $500,000 threshold for that income year.

Removal of ‘work test’ for 65 – 74

From 1 July 2017, the Government will remove the restriction on people between 65 to 74  to be gainfully employed for at least 40 hours within a 30 day consecutive period prior to making a contribution into super.  This applies for both concessional and non-contributions, along with extending to spouse contributions for people aged under 75.

This decision allows older Australians to consider making additional contributions into superannuation that may result from events such as downsizing the family home.  Importantly, it removes the contrived arrangements by individuals needing the find work to make contributions into super up to reaching age 75.

Tax deductions for personal super contributions

Finally…  long overdue, we finally see a level playing field for everybody to make personal contributions into super and claim a tax deduction.

From 1 July 2017, the Government will provide greater flexibility for individuals to claim a tax deduction for personal super contributions.  The current 10% rule provides a ridiculous framework that limits an individual’s ability to make additional contributions where their salary represents more than 10% of their assessable income.  This new measure will allow all individuals, regardless of their employment circumstances to make concessional contributions up to the concessional contribution cap ($25,000).  Where a person is partially self-employed and is in receipt of salary and wages, they will be eligible to make personal contributions into super and claim a tax deduction.

Low Income Super Tax Offset (LISTO)

Let’s be honest, nothing new here… With the existing low-income super contribution legislation to cease on 30 June 2017, the Coalition Government has effectively given the legislation a lifeline to ensure that low-income earners are not burdened with a 15% contributions tax rate when they would have paid a lower tax rate on these amount if they had received the amounts as assessable income.

The LISTO provides a non-refundable tax offset of up to $500 on concessional contributions where the member has adjusted taxable income of up to $37,000.

Non-concessional contributions

Introduction of a lifetime cap

The Government will introduce a $500,000 lifetime non-concessional contribution (NCC) cap that takes into account all non-concessional contributions made on or after 1 July 2007.  This measure takes effect from, 7.30pm on 3 May 2016 (Federal Budget night).  No retrospectivity will be applied to individuals who may have made non-concessional contributions in excess of the $500,000 lifetime threshold between 1/7/2007 to 3 May 2016.   However, any excess contributions made after commencement will need to be removed or else be subject to penalty tax (see – ATO timing of contributions and Liwszyc v Commissioner of Taxation [2014] FCA 112).

The lifetime NCC cap will be indexed to average weekly ordinary times earnings (AWOTE).

Note that this measure will replace the existing annual NCC cap which is current linked to the concessional contributions cap.

Example

John wishes to make a non-concessional contribution of $100,000 into his SMSF before 30 June 2016.  In reviewing his previous history of non-concessional contributions since 1 July 2007, it is noted that he has made prior non-concessional contributions of $450,000.  As a result, he can only make a further $50,000 of non-concessional contributions against his lifetime NCC cap.  If he contributes the $100,000, he will have an excess non-concessional contribution with the excess to be returned through the refunding of non-concessional contributions laws.

Increasing the low-income spouse super contribution tax offset

From 1 July 2017, the Government will increase the income threshold for the low-income spouse from $10,800 to $37,000.  This provides the contributing spouse with a tax offset of up to $540 for the first $3,000 of after-tax (non-concessional) contributions made into a complying super fund.

Payment of Income Streams

Introduction of $1.6m post retirement balance cap

It is clear that the Government is resetting the rules for paying pensions as part of their approach to setting an objective for superannuation.  They have been quite clear in their messaging that superannuation is not an estate planning tool.  In the budget, this was delivered in a loud and clear message…

From 1 July 2017, we will see an introduction of a $1.6 million transfer balance cap on amounts moving into pension phase.  Subsequent earnings on these balances will not be restricted (i.e. they can grow or reduce accordingly).  As a result of this measure, it significantly limits the extent of exempt current pension income (ECPI) applying to assets supporting the payment of pensions.  According to the Government, it better targets the sustainability and fairness of tax concessions within super.

Where a member has a balance in excess of $1.6 million, they will be able to maintain this excess within superannuation, however it cannot be transferred into the post-retirement cap.  As a result of it remaining in accumulation phase, a 15% tax rate will apply to fund earnings the accumulation benefit generates.

Importantly, this measure does not grandfather existing pensions.  For members already in retirement phase whose balance is above $1.6 million, they will be required to reduce their pension balance to $1.6 million by 1 July 2017.  Excess balances for these members may be converted back to accumulation.

Failure to comply with this balance transfer cap will mean that the member will be subject to an excess transfer amount (including on earnings), similar to how the treatment of excess non-concessional contributions tax applies.

Consultation with industry will be undertaken on these measures.

Some initial thoughts…

I can see this measure hitting on two fronts (Government wins):

  1. The Government reduces the level of tax concession being applied via exempt pension income; and
  2. The proportioning rule doesn’t apply to these amounts meaning the fund earnings are attributable to taxable component, potentially impacting the tax consequence of a death benefit

Integrity of Transition to Retirement rules

The Government has been concerned about the abuse of the transition to retirement strategy for some time.   In reality, the outcomes of the strategy have been dramatically extended beyond its original policy intent.  To address this issue, the Government from 1 July 2017 will remove the tax exemption on fund earnings from assets supporting a transition to retirement income stream (TRIS).  In addition to this change, it will also remove the ability for a member to elect under Regulation 995-1.03 of the ITAR to have the payment treated as a lump sum for tax purposes.

Some initial thoughts…

The change is significant with no grandfathering.  However, this effectively acknowledges that the Reg. 995-1.03 TRIS election strategy is a viable option for the 2015-16 and 2016-17 income years.

Removal of anti-detriment payments

When it comes to fairness of the system, I’m all for the removal of anti-detriment.  Inconsistently applied across super funds, there was a myth that it was a strategy more heavily used in SMSFs rather than APRA-regulated funds.  This couldn’t be further from the truth.  In reality, the funding requirement needed to make an anti-detriment payment was far more difficult to achieve in an SMSF than APRA-regulated fund.

The removal of this tax saving amount provision from 1 July 2017 will mean that death benefit payments will be better aligned across all super funds, along with bequests made outside of super.

So, did the Treasurer get it right?

Scott Morrison has been faced with some of the most difficult portfolio positions in Government – as Immigration Minister he helped stop the boats, as Minister for Social Services he helped negotiate a reduction around the Age Pension tests, and now as Treasurer he’s delivering a budget that needs fiscal responsibility given we have an economy in clear transition.

It would be very easy to argue that detrimental changes mean he got it wrong.  No one likes retrospective rule changes.  However, one could argue that the Treasurer might have found a balance that shows superannuation is an important retirement tool, but also as an economy facing strong headwinds, we have to live within our means…  Sure, would I have preferred various super rules to not have changed? Absolutely, but let’s measure these legislative outcomes on where we sit today.  We might not like it, but in reality the balance wasn’t that far off in my view.

What do you think?

Comments

comments

21 thoughts on “Federal budget delivers super changes!

  1. Well certainly didn’t see or expect some of this, especially the lifetime cap, and ECPI changes.
    Will we see more related party LRBA’s now?
    Will more superannuants seek to trigger a nil cashing condition of release after age 60?
    Can’t help but feel a bit cheated when Scott Morrison said at the SMSFA conference in Feb this year there would not be any retrospective changes to super….

  2. I agree on being cheated by the Treasurer’s comments at the SMSFA conference, both from his comments on not touching pension phase and no retrospectivity. There was good and bad in the measures, but ultimately, the devil is in the detail.

    I suspect SMSF specialists will be very busy in the coming 12 months.

  3. A field day for planners with clients over the $1.6 ‘cap’ 🙂

    Most SMSF would have a mix of high growth, income, and cash components. Will be interesting to see how these assets can be split up into the Pension / Accumulation funds.

    • Colin, you are correct are the level of planning that is going to be required with assets beyond the pension transfer cap of $1.6m. I suspect we will see a greater focus on asset segregation and potentially the use of investment reserves. THe devil will be in details of course.

  4. Hi Aaron,

    Somewhat confused with my situation.

    Proposed Pension Limit:
    1. I’m 56 and “retired” having reached preservation age at 55.
    2. Currently receiving a small PSS indexed pension from my days in the Public Service which commenced around 18 years ago when I took a redundancy package.
    3. SMSF is paying me an Account Based pension (not TTR) on modest amount greater than $1.6 million.

    By 1 July 2017 wIll my $1.6 Million limit in my SMSF have to be reduced further by an amount equivalent to what my PSS pension is based on?

    Plus my SMSF pension has a tax free component of around 50%. Will the proportioning rules still apply to the taxation of my reduced $1.6 million AB Pension as they do now for those of us “under 60” years of age?

    Some of the budget proposals look like an administrative nightmare to me!

    Cheers – Gordon

    PS: as stated previously I see a steady decline in SMSFs going forward. Two of my well off friends in their 40’s recently closed down their SMSFs with both moving to Industry fund Australian Super. If anything happens to me I’ve told my wife to do the same as she would hate the hassle of an SMSF regardless of the financial consequences of switching.

  5. I’m not so sure about the statement that ‘For members already in retirement phase whose balance is above $1.6 million, they will be required to reduce their pension balance to $1.6 million by 1 July 2017’. According to the relevant budget fact sheet, it is the amount transferred into retirement accounts that matters, and ‘Subsequent fluctuations in retirement accounts due to earnings growth or pension payments are not considered when calculating cap space’. I interpreted that as meaning that if your retirement account(s) started with less than $1.6m, it doesn’t matter if the account balance goes over at a subsequent time, including 30/6/17. I’m wondering what happens to someone who may have started a retirement account with (say) $2m some years ago and whose balance at 30/6/17 is (say) $2.6m. Is the amount they have to transfer back to accumulation mode $400,000, or $1m, or what?

    • Thanks for drawing that sentence to my attention. By comparison, prior sentences in the paper state that ‘From 1 July 2017, the Government will introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the retirement phase. Subsequent earnings on these balances will not be restricted’. It seems a retirement account of $1.6m on 1/7/17 will be allowed to grow above the limit due to earnings. Why, then, should an account that began with less than $1.6m prior to 1/7/17 be required to commute earnings that push the balance above the limit on 1/7/17?

      • I suspect 1/7/17 is going to be the start of a new reportable system for pension accounts. All existing pensions will have to report their commencing transfer value at 1/7/17, with a cap limit of $1.6m. What happens thereafter to that pension by way of value is somewhat irrelevant (i.e. earnings and growth not a factor moving forward). However, if the pension stops, this must be reported and then assessed in future against the $1.6m cap (or whatever it may be indexed to).

        For someone that starts a pension at this time with say $1m, I would assume that they could in the future start another pension with a further $600k – e.g. via non-concessional contributions?

        It is somewhat ‘theory’ at the moment until we get the Bills and explanatory memorandum to analyse further.

        It’s fair to say there are more questions than answers at the moment.

        Cheers,
        Aaron

  6. Arron – good session today – thanks.
    I have to assume that someone who has used their $1.6m, and then transfers it back to an accumulation phase, could not then re-contribute back to a pension phase? Or could they up to the value transferred out. subject of course to the $1.6m limit.

    • Hi Colin,

      This is the reason why I think pensions will become a reportable function again as it will allow for the ATO to track against member’s $1.6m transfer cap amount. I would be logical to allow for a member to be able to commute a pension, with the transfer cap being reduced through this cessation of the pension. However, you would then expect any new pension to be determined on its future restart value, not original value.

      All food for thought at this stage.

      Regards,
      Aaron

  7. Arron- one to think about.
    If I have $3m in pension phase in one share holding, with a cost base of $300k, then when I’m forced to transfer $1.4m to an accumulation fund, do the shares retain the original cost base or the price at the time of transfer?

    My thinking is that if the original cost base were to be used then the total fund would be valued at $300k. I guess I could sell them in the pension phase, transfer the funds and then repurchase but I see issues with that and the 45 day rule. Plus two lots of broker fees and the hassle of unloading and buying a reasonable quantity of stock

    Of course my preference would be that the cost base is reset to the price at the time of transfer.

    We are going to need some very smart planners to work all of this out, over the next 6 months,

    • I think you’re looking at two different issues here. The rollback to the $1.6m transfer cap amount is a reduction within the member’s superannuation interest(s). This does not necessarily trigger any CGT as the assets may remain pooled (unsegregated) across various members and their interests.

      The trustees may dispose of the asset and subsequently repurchase but this is different to the make up of the member’s components. The CGT wash sale rules are the most likely thing the ATO may target with resetting of cost bases for fund investments that may support rolled back accumulation interests.

  8. Wouldn’t it be simpler to cap the pension balances at 30/6/16 at $1.6m (leaving retrospectivity behind) and move forward from there with max $500k NCC rule. Current interpretations of budget measures are that administrative nightmares will prevail. I for one do not have records of NCC’s going back to 2007 (moved accountants/auditors twice) …. Hope the ATO can help me. Yuk.

    • Steve – you should have the records as you MUST keep them!! You will find the amounts in your tax returns.

  9. There will be many SMSF’s that took on a LRBA to buy assets that were relying on making substantial non concessional contributions ( ie > $500 k cap) to discharge their LRBA obligation. They will now be faced with disposing of the asset (invariably a residential property) or having a very unbalanced portfolio with only 1 substantial asset.

  10. I am unsure whether these amounts such as $1.6M in Super apply on a “per fund” basis or an individual basis. Eg: If a person and his wife have worked for 50 years and created a SMSF that included them both, does the $1.6M cap become $3.2M cap?

    • $1.6M per member. The ATO will aggregate this total against any other super holdings externally. i.e. one cap only per individual regardless of number of super fund accounts.

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