On 23 November 2016, Parliament passed legislation which significantly overhauled the retirement system. The Government hopes the reforms, due to commence on 1 July 2017, will improve the “sustainability, flexibility and integrity” of superannuation. Outlined below are some of the key changes and their potential impact.
Concessional contributions (before-tax)
“Concessional contributions” are the contributions employers make on your behalf or that you salary sacrifice; or in the case of self-employed Australians, personal contributions (that you claim a tax deduction on). They are known as ‘concessional’ because you pay a concessional tax rate on these contributions, rather than your marginal tax rate (which is often higher). The concessional tax rate is 15% if your income is under $250,000, and 30% if your income is over this amount.
From 1 July 2017, the annual maximum cap will be reduced to $25,000. This reduces the current limit by either $5,000 or $10,000 per year (depending on your age.)
Balancing this negative change, a positive change is the ability to “catch-up” on missed concessional contributions for the previous five years, for those with balances of less than $500,000 in super. This is due to come into effect from 1 July 2018. This enhancement to the superannuation system can potentially save clients thousands of dollars in tax and we are developing a number of strategies for our clients to take advantage of this.
Non-concessional contributions (after-tax)
Prior to the reform, working Australians were allowed to contribute up to $180,000 per year in non-concessional (or after-tax) super contributions – or, in special circumstances $540,000, by triggering a 3-year ‘bring forward’ rule. The reforms have reduced the annual cap to $100,000 per year, but leave intact the ability to ‘bring forward’ 3 years’ worth of contributions.
Spouse superannuation tax offset
Another noteworthy change is the improved spouse tax offset. This lifts the income limit to qualify for the maximum benefit, from 1 July 2017. You will be able to receive an 18% tax offset (worth up to $540) for contributing to your spouse’s super, if your spouse earns less than $40,000 (previously $13,800) per year. The increased earning cut-off limit should help over 5,000 Australian families take advantage of this benefit to increase their retirement savings.
Earnings tax on pension accounts
By far the greatest area affected by the super reforms relates to pension accounts. Prior to the reforms, there was no limit to the size of a super balance. However from 1 July 2017, a “transfer balance cap” will be imposed, which caps the amount of money clients can move to the pension (or tax free) phase to $1.6 million (this amount will be indexed in $100,000 increments).
If you think this change may impact you, it’s important to act soon. There are strategies that a financial planner can help you with to reduce the impact (such as equalising a couple’s total super balance), however planning ahead is critical to ensure you allow enough time to manage the impact.
Transition to retirement
This was one of the more unfavourable super reforms, and it applies to those under the age of 65 and still working. The Transition to Retirement Pension strategy allows Australians who have reached Preservation Age (55-60 years of age depending on their date of birth) and who are still working, to access their superannuation. These were treated as Pension accounts and previously received the same favourable tax treatment as a normal pension account with 0% tax. However the reforms have removed the favourable tax treatment for Transition to Retirement Pensions so that they are subject to the same tax rates as accumulation accounts (a maximum of 15% tax on income and 10% of capital gains).
These changes affect many professionals and we strongly recommend you speak to your financial planner soon regarding how they may affect you, and ask what strategies are available to you to reduce the impact going forward.