By TWD Australia

January 23, 2017 | News

Time to Get Ready for Changes to Superannuation

With Christmas and New Year now behind us we thought it was timely to revisit the superannuation changes that were originally announced in the 2016 Federal Budget.

As you may recall these changes were passed by Parliament and made law on 23 November 2016. There was a lot of media coverage at the time about how the changes may affect SMSF members, some of which was misleading.  The new laws are quite complex and it’s important that you understand how the new rules apply specifically to your circumstances before you make any changes to your Superannuation strategies.

While most of these changes don’t apply until 1 July 2017, some action may be required prior to this date, particularly if you have more than $1.6M in your member account and are in pension phase.  There are also some planning opportunities that could be available to you between now and 30 June 2017.

An overview of the key items and what action may be available to you are as follows.

Changes to contribution limits

What can I do?

  • People could maximise the current contribution caps for 2016-17 which are:
  • $30,000 for people aged under 49 on 30 June 2016, and
  • $35,000 for people aged 49 and over on 30 June 2016.
  • The change in the non-concessional limit means that for the current 2016-17 financial year people can still make non-concessional contributions of up to $180,000 and where eligible bring forward $540,000 of contributions to 2016-17.
  • You should also review any superannuation salary sacrifice arrangement that you have in place to determine if these need to be reduced from 1 July 2017 to ensure you don’t breach the new $25,000 per annum cap.

The new $1.6 million transfer balance cap

What’s the change?

  • From 1 July 2017 there will be a new lifetime $1.6 million transfer balance cap which places a limit on the amount an individual can hold in the tax-free retirement or pension phase.
  • Amounts above the $1.6 million cap can be held in the “accumulation phase” of superannuation where earnings on assets are taxed at 15%.
  • If too much money is used to start a pension causing you to exceed the $1.6 million cap, then extra tax will be payable and the money will need to be taken out of pension phase but can remain in your superannuation fund
  • There is also capital gains tax relief for SMSFs that are required to alter their asset holdings to meet the new requirements.

What can I do?

  • This is the most complex element of the changes so we urge you to seek appropriate professional advice before making any decisions as to whether it will be applicable to you.
  • As mentioned above, if your superannuation member account balance is in excess of, or close to, $1.6M and it is in pension phase, it is absolutely vital that some action be taken prior to 30 June 2017 to avoid being hit with any excess taxation liabilities.
  • If your SMSF holds real property as part of its investment strategy there may also be an opportunity to formally revalue the asset to use your transfer balance cap more efficiently.

Lower threshold for increased contributions tax

What’s the change?

  • From 1 July 2017, people who have income of $250,000 and over will need to pay an extra 15% tax on their concessional contributions.  The previous income threshold for this tax was $300,000.

What can I do?

  • There may not be much scope to minimise the impact of this change but if your annual taxable income is close to the new threshold there could be opportunities during 2017/18 financial year to bring forward deductions or defer income as part of a prudent tax planning approach.

Changes to transition to retirement pensions

What’s the change?

  • This change will see that tax-exempt treatment of earnings on assets supporting a transition to retirement (TTR) pension cease as of 30 June 2017.
  • From 1 July 2017, you can still start or maintain an existing TTR pension but without the tax-exempt treatment for earnings.

What can I do?

  • If you have already started a TTR pension, and would like to continue it for cash flow reasons, there is no need to make any changes.
  • If, however, tax effectiveness was a key factor in your decision to commence this arrangement you may want to consider ceasing it as at 30 June 2017.

Impact on GESB West State & Gold State Funds

  • All of the above changes will be applicable to members of these funds but there is some additional complexity in relation to contributions.
  • Concessional contributions to West State Super and Gold State Super are not limited by the annual concessional contributions cap and this remains unchanged. However, concessional contributions made to these funds will be included in the annual contributions cap for the purposes of determining the remaining annual cap available to a member in any other super fund they may operate.
  • Personal deductible contributions to these funds will be limited to State Government employees only from 1 July 2017.

Not all of the changes are negative and there are two that will come into effect in the future that will help you grow your superannuation balance for retirement by making contributions to superannuation more flexible. These changes are;

  • The Government will allow individuals with a superannuation balance of less than $500,000 to make catch-up concessional contributions to their superannuation from 1 July 2018 where they have not used up all of their previous annual concessional contribution caps.
  • Removing the “10% rule” for deductible contributions to superannuation from 1 July 2017.  The 10% rule stops most employees from making a contribution to superannuation and then claiming a tax deduction for it.  This change will allow taxpayers to make a contribution from their after-tax income during an income year and then claim a tax deduction for the contribution.

We will be reviewing our clients affairs over the next few months and will be in communication with those where we identify a need or opportunity to take action prior to 30 June 2017.  If you have any concerns or questions about the changes in the meantime, please do not hesitate to contact your TWD advisers or contact our office to arrange a time to speak with us.

 


The information contained in this document is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to in this document are of a general nature only and are based on TWD’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

 

Words by TWD Australia.