Superannuation changes back in the spotlight
By Dr Suzanne Doyle, Head of Advice
In May of this year, the federal government caused a stir on both sides of politics when it announced a number of changes it would like to make to superannuation. The Labor party was unhappy about the changes being applied retrospectively. Whilst some within the Liberal party itself felt the changes are at odds with their principles and the preferences of liberal supporters.
Now with the federal election out of the way and the Liberal National Party in for another term, the spotlight is back on super.
A recap on the major changes
The changes are aimed at ensuring Australia’s super system can continue to provide people with a reasonable level of income in retirement. Many of the changes impact the tax benefits available to wealthy retirees and high-income earners.
- Non-concessional (post-tax) contributions: A new lifetime non-concessional contributions (NCCs) cap of $500,000 will be established, replacing the existing cap of $180,000 a year. Available to all Australians up to age 74, it will provide more flexibility around when you choose to contribute to your super. The lifetime cap will start counting for any NCCs made from July 2007.
- Concessional (pre-tax) contributions: The annual cap on concessional super contributions – such as those made through salary sacrifice – will be reduced to $25,000 a year from 1 July 2017. Previously it was $35,000 a year for over 50s and $30,000 for everyone else. For members of a defined benefit scheme, the unfunded portion of funds will now have a notional amount that will count towards this cap.
- Contributions catch up: If your super balance is under $500,000 you will be able to make ‘catch-up’ contributions if you don’t use up your $25,000 allowance from previous years. The cap can rollover for up to five years, commencing from 1 July 2017, allowing you to contribute up to $125,000 over five years. The government has designed this measure to help people who have career breaks catch up on their super balance.
- Transfer balance cap: To reduce tax-free benefits for wealthy individuals, a new measure will place a $1.6 million cap on the total amount of super you can transfer into a pension phase account. From 1 July 2017, if you have more transferred more than $1.6 million in your account you will need to transfer it back to an accumulation account with earnings taxed at up to 15%, or withdraw it and invest it elsewhere. The $1.6 million transferred in the original account can continue to grow tax-free. An equivalent measure to limit tax concessions will also apply to individuals with defined benefit pensions.
- Work test abolished: The work test for those aged 65 to 74 will be abolished from 1 July 2017. It means you no longer need to work 40 hours over a consecutive 30-day period to make contributions, making it easier for older Australians to grow their super.
- Tax on Transition to Retirement (TTR): From 1 July 2017, earnings from a TTR pension will be taxed at up to 15%, the same as if they were in accumulation phase.
- Contributions to spouse accounts: From July 1 2017, you can contribute up to $3,000 into the super account of a lower earning spouse who earns less than $37,000. Previously the threshold was $10,800. Plus, the higher-earner receives a rebate, which is worth $540 on a $3,000 contribution.
- Personal Concessional Contributions (PCCs): From 1 July 2017, the Government will improve flexibility and choice in superannuation by allowing all individuals up to age 74 to claim an income tax deduction for personal superannuation contributions.
Getting the changes passed
The government shouldn’t face any difficulties getting the changes through the lower house, however the senate could prove harder. Without a majority in the upper house, it will need the support of others to pass the legislation.
Labor is therefore key to these proposed changes to super and in principle they support many of the changes, having proposed similar measures in the past.
However Labor is concerned about some of the measures being retrospectively applied. This includes the $500,000 non-concessional cap and the $1.6 million transfer cap on tax-free retirement phase accounts. Unable to get comfortable on this point, Labor is seeking an independent, expert review.
If the government cannot secure Labor’s support, it will need the support of others including the Greens, Xenophon senators, Hanson senators, Jacqui Lambie, and Derryn Hinch.
If approved, the changes will have a number of impacts on Australians both positive and negative. For example, you may find you have more flexibility to add to your super when it suits you thanks to the lifetime cap on non-concessional contributions and the removal of the work test. Or, if you take a career break, the rollover feature will mean your super doesn’t have to suffer.
If you’re a high-income earner or you have a large amount of money in super, you will likely need to revisit your strategy to ensure you get the best financial outcomes and avoid any potential penalties by exceeding the proposed thresholds.
Some of the measures being proposed will apply to members of defined benefits funds, such as the reduced concessional cap and lifetime non-concessional cap, however administration and finer details are yet to be finalised.
Whatever your circumstances, it is a good idea to speak with your financial planner to find out if there is any action you need to take both before and after the changes take place.
This information is of a general nature only, is not comprehensive, and is not specific to your personal circumstances or needs. It is published for your interest. Before making any decisions based on this information you should consider its appropriateness to you. Every effort has been made to ensure the information contained in it is accurate. We strongly recommend that you consult a Financial Planner before taking action based on this information.