Under the current rules you can contribute up to $35,000 to superannuation each year, depending on your age. However, from 1 July 2017 this contributions cap will be reduced to $25,000 for contributions on which you, or your employer, are claiming a tax deduction.
This change will:
- impact you if you are currently maximising your contributions limit. You will need to adjust your contributions strategy to avoid breaching the new lower limit; and
- make it harder to boost retirement savings late in your working life by way of concessional super contributions.
If you are making contributions on which you are not claiming a tax deduction, the current rules may enable you to contribute up to $180,000 a year if you are age 50 or over. This annual cap will also be will be cut, to $100,000, from 1 July 2017.
However, it may be cut to zero depending on your total superannuation balance. This is dealt with below.
You can still contribute $180,000, and potentially up to $540,000 using a bring-forward strategy, before 1 July 2017, subject to the impact this would have on your overall pension balance at 30 June 2017. Although not an insignificant amount, a $100,000 annual limit may significantly affect your ability to contribute sufficient capital to your superannuation throughout your working life to meet your pension requirements. For example, if you were to receive an inheritance or sell an investment property and want to contribute the equity into superannuation you will have a reduced capacity to do so – particularly if you are approaching age 65 and in the latter stages of your working life.
Amount that can be held in a pension account
The introduction of a limit on how much an individual can hold within a pension account, will have what is arguably the biggest impact as a result of these changes will be. This limit will be initially $1.60 million and will be indexed over time.
However, if and to the extent, your pension balance would be above this amount at 30 June 2017, you will need to either: • transfer the excess amount (in cash or assets) back into your accumulation account (where earnings are taxed at 15 per cent, compared to tax free within a pension); or • withdrawn the excess from super by 1 July 2017.
In addition, if your total superannuation balance is $1.60 million or more, you will no longer be able to make personal (non-concessional) superannuation contributions from 1 July 2017.
As a result wealthy Australian’s will be prevented from making additional non-concessional contributions into superannuation, where earnings are taxed at a maximum of 15 per cent (rather than up to 49 percent outside of super).
Transfer to retirement income streams (TRIS)
The strategy of converting superannuation into a transition to retirement pension, particularly from age 60 when pension payments are tax free, has been a popular strategy in recent years. However, from 1 July 2017 the tax concessions within the superannuation pension account will be removed. Tax of 15 per cent tax will therefore be incurred on the income, which was previously tax-free.
While, for some people a TRIS strategy may remain appropriate, albeit not so tax-effective as the current arrangements, in some instances this may result in the transition to retirement pension strategy no longer being viable.
Section 293 tax
Section 293 tax, which effectively taxes concessional super contributions at 30 per cent (rather than 15 per cent), will apply to you for an income year if the total of your combined income for surcharge purposes and concessionally taxed contributions exceeds $250,000 (reduced from the current threshold of $300,000).
Who will benefit under the new arrangements?
Australians contributing into a spouse’s superannuation fund will benefit under the new arrangement due to changes in the spouse tax offset. From 1 July 2017, the spouse’s income threshold will be increased from $13,800 to $40,000. The current 18% tax offset of up to $540 will remain as is and will be available for any member, whether married or de facto, contributing to a recipient spouse whose income is up to $37,000.
As is currently the case, the offset is gradually reduced for income above this level and completely phases out at income above $40,000.
This is intended to extend the current spouse tax offset to assist more couples to support each other in saving for retirement.
It is intended this will better target super tax concessions to low-income earners and people with interrupted work patterns.
However, members will not be entitled to the tax offset when the spouse receiving the contribution has exceeded their non-concessional contributions cap for the relevant year, or has a total superannuation balance equal to or exceeding the transfer balance cap immediately before the start of the financial year in which the contribution was made.
If you are making concessional contributions you will be able to deduct these contributions, regardless of whether you earn 10 per cent or more of your total income from employment or related activities. If your total superannuation balance is less than $500,000 just before the start of a financial year you can increase their concessional contributions cap in the financial year by applying previously unapplied unused concessional contributions cap amounts from one or more of the previous five financial years. You can carry forward unused concessional contributions cap amounts accrued from the 2018/19 financial year onwards.
Speak to an advisor
As everyone’s circumstances are different, you should speak to an adviser well in advance of 1 July 2017 if you are determined to fund your retirement plans we recommend. You should do so if you wish to discuss the potential impact of the changes further and certainly before you take any action to amend your current arrangements.
The sooner you take action the more opportunity you have to ensure you get the greatest benefit from your superannuation in the long term.