Superannuation reforms

Transcription

1 Federal Budget 2016 Superannuation reforms What s happening and what you need to know. May 2016 As part of the 2016 Federal Budget, Treasurer Scott Morrison presented the Government s Superannuation Reform Package. The reforms centre on supporting the official objective of superannuation, to provide income in retirement to substitute or supplement the Age Pension. In his budget delivery speech, the Treasurer announced that the reforms are intended to improve the fairness of the superannuation system for women and lower income earners, while reducing the extent to which super is used by the wealthy for tax-minimisation or estate planning purposes. According to the Treasurer: 96% of people will be unaffected by changes to superannuation tax concessions for higher income earners More than 4% of people will benefit from changes intended to improve the equity of the superannuation system for women and lower income earners. Need to know While some of the changes impacting higher income earners are effective immediately, most will start from 1 July It s important to remember that these reforms are still proposals. They re not yet law, and may be withdrawn if there is a change of Government. What do the changes actually mean for you? Read more about our budget highlights.

2 Changes to super contribution limits Before-tax contributions From 1 July 2017, the before-tax contributions cap will reduce from $30,000 to $25,000. The higher cap of $35,000 for those aged 50 years and over will also reduce to $25,000. Government figures say this will affect around 3% of superannuation fund members. Account balance of $500,000 or less? From 1 July 2017, the Government will allow you to make catch-up superannuation contributions. This means that any of your unused before-tax contributions cap can be carried forward over a rolling five year period. Amounts carried forward that have not been used after five years will expire. CASE STUDY: Meet Amy 1 Amy is 40 years old and earns $100,000 per year. She has a super balance of $400,000. In the financial year, Amy has total before-tax contributions of $10,000. In , Amy can contribute $40,000 into her super. $25,000 of this is the amount allowed under the annual cap and $15,000 is her unused amount from The full $40,000 is taxed at 15 per cent. After-tax contributions As of today (3 May 2016), the after-tax contributions cap is set at a lifetime limit of $500,000. This cap takes into account all after-tax contributions made since 1 July It applies to individuals aged up to 75 years. If you make a contribution over your lifetime cap the Australian Tax Office will ask you to withdraw the excess. If you choose not to withdraw the excess you will be subject to penalty tax. Already exceeded the lifetime cap? Don't worry, your existing contributions will not be subject to any penalty. Just remember, you will not be able to make further after-tax contributions without penalty. Contribution limit snapshot In summary, the caps applying over the current and future financial years are: Concessional Cap (before-tax) Non-concessional Cap (after-tax) Age 49 and Age 50 and over Under under year $30,000 $35,000 $180,000 (and up to 3x$180,000 subject to $180,000 subject to work test year $30,000 $35,000 three-year bring forward rule) $180,000 subject to work test From 3 May $500,000 lifetime cap year $25,000 $500,000 lifetime cap From 1 July 2018 Indexed in line with wages ($5,000 increments) Catch-up contributions available to those who have not used the full limit from 1 July 2017 (super account balance less than $500,000). Indexed in line with wages ($50,000 increments)

3 Access to tax deductions for voluntary contributions Currently self-employed people can claim a tax deduction for their personal super contributions made to their super fund. From 1 July 2017, the rules will be relaxed and the Government will allow all Australians under age 75 to claim a tax deduction for any after-tax contribution made to an eligible fund. These contributions will then count towards your beforetax concessional contribution limit. CASE STUDY: Meet Chris 2 Chris is 31 and decides to start his own online cricket merchandise business. While he gets his business up and running he continues working part-time in an accounting firm where he earns $10,000. In his first year his business earns him $80,000. Of his $90,000 income he would like to contribute $15,000 to his superannuation account. Under current arrangements, Chris would not be eligible to claim a tax deduction for any personal contributions. While his employer allows him to salary sacrifice into superannuation, he is limited to the $10,000 he earns in salary and wages. Under the new arrangement, Chris will qualify for a tax deduction for any personal contributions that he makes (up to his concessional cap). Chris makes a $15,000 personal contribution and notifies his superannuation fund that he intends to claim a deduction. He includes the tax deduction as part of his tax return. Capping transfers into pension accounts at $1.6 million Currently there is no limit on the amount of assets that can be transferred from the pre-retirement phase (where investment income is taxed) to the retirement phase (where investment income is tax free). From 1 July 2017, the Government will introduce a $1.6 million cap on the total amount of your superannuation that can be transferred into a tax free retirement account. Members already in the retirement phase, with balances above $1.6 million, will be required to reduce their retirement balance to $1.6 million by 1 July 2017 by transferring the excess back into an accumulation superannuation account and/or by withdrawing the excess amount. Superannuation savings accumulated in excess of the cap can remain in an accumulation superannuation account, where the earnings will continue to be taxed at 15 per cent. The measure is aimed at reducing the opportunities for using superannuation as a concessionally taxed estate planning tool. The Government will consult with the superannuation industry before finalising further details of this new transfer balance cap. CASE STUDY: Meet Agnes 3 Agnes, 62, retires on 1 November Her accumulated superannuation balance is $2 million.

4 Agnes can transfer $1.6 million into a retirement income account. The remaining $400,000 can remain in an accumulation account where earnings will be taxed at 15 per cent. Alternatively, Agnes may choose to remove this excess amount from superannuation. While Agnes will not have the ability to make additional contributions into her retirement account, her balance will be allowed to fluctuate due to earnings growth or drawdown of pension payments. Increasing access to the low income spouse tax offset Currently a tax offset of up to $540 is available to income earners who make super contributions for a low income earning spouse. The current tax offset starts to reduce when your spouse earns more than $10,800 and cuts out completely once their income reaches $13,800. From 1 July 2017, the Government will extend the eligibility for the $540 tax offset in respect of recipient spouses earning $37,000, cutting out completely at $40,000. CASE STUDY: Meet Anne and Terry 4 Anne earns $37,500 per year. Her husband Terry wishes to make a superannuation contribution on Anne s behalf. Under the current arrangements, Terry would not be eligible for a tax offset as Anne s income is too high. There is no incentive for Terry to make a contribution on behalf of Anne. Under the new arrangements, Terry would be eligible to receive a tax offset. As Anne earns more than $37,000 per year, Terry will not receive the maximum tax offset of $540. Instead, the offset is calculated as 18 per cent of the lesser of $3,000 reduced by every dollar over $37,000 that Anne earns, or the value of spouse contributions. For example, Terry makes $3,000 of contributions and Anne earns $500 over the $37,000 threshold. Terry receives a tax offset of $450: 18 per cent of $2,500, as this is less than the value of the spouse contributions ($3,000). If Anne were to earn more than $40,000 there would be no tax offset. Lowering the threshold for Division 293 tax to $250,000 From 1 July 2017, the threshold at which the Division 293 tax will apply on concessional contributions will reduce to $250,000. You re liable for Division 293 tax if, in a year, your adjusted income plus low-tax contributions are greater than $250,000.Adjusted income includes taxable income plus adjustments for some fringe benefits, rental property and investment losses and some other tax free items. Low-tax contributions are concessional contributions which are within the concessional contributions cap. Division 293 tax is charged at 15% of your taxable concessional contributions above the $250,000 threshold.

5 Removal of the work test for contributions Currently people aged 65 to 74 must meet a work test if they are to make voluntary or non-concessional contributions into their super account. From 1 July 2017, these work test restrictions will be lifted, allowing increased flexibility in making contributions between ages 65 and 75. Removal of tax exempt status for Transition to Retirement pension earnings Currently earnings on assets supporting transition to retirement income streams (typically account based pensions) are tax exempt. This tax exempt status will be removed from 1 July 2017 and earnings will be taxed at the usual concessional rate of 15%. This change will apply regardless of when the transition to retirement allocated pension commenced. Transition to retirement allocated pensions were designed to provide limited access to superannuation when a member is over their preservation age (currently 56) but not retired. In practice, recipients have also been able to reduce their tax liability by salary sacrificing their income into superannuation and instead taking a superannuation income stream at a concessional tax rate. The increased tax on earnings together with the lower concessional contribution caps will reduce the tax advantages of a transition to retirement pension. However, the extent of the impact will depend on individual circumstances. Of course individuals who no longer benefit from a transition to retirement pension can transfer their pension back to an accumulation phase superannuation account. CASE STUDY: Meet Sebastian 5 Sebastian is 57 years old, earns $80,000 and has $500,000 in his superannuation account. He pays income tax on his salary and his fund pays $4,500 tax on his $30,000 earnings. Sebastian decides to reduce his work hours to spend more time with his grandchildren. He reduces his working hours by 25 per cent and has a corresponding reduction in his earnings to $60,000. He commences a transition to retirement income stream worth $20,000 per year so that he can maintain his lifestyle while working reduced hours. Currently, Sebastian pays income tax but his fund pays nothing on the earnings from his pool of superannuation savings. Under the Government s changes, while the earnings on Sebastian s superannuation assets will no longer be tax free they will still be taxed concessionally (at 15 per cent). He will still have more disposable income than without a transition to retirement income stream. This ensures he has sufficient money to maintain his lifestyle, even with reduced work hours.

6 Take advantage of today s rules If you ve been thinking about topping up your super or setting up a transition to retirement strategy, now might be a good time to put your plans into place. Rules affecting transition to retirement and contributions are set to change on 1 July While the super reforms announced in the Federal Budget aren t yet law, they may limit the tax-effectiveness of large pre-retirement super contributions and transition to retirement strategies. Everyone s circumstances are different, so we encourage you to talk to your financial planner today. FOOTNOTE REFERENCES 1. Budget 2016, superannuation fact sheet 08, Superannuation Reform: Allowing catch-up concessional contributions 2. Budget 2016, superannuation fact sheet 07, Superannuation Reform: Improving access to concessional contributions 3 budget 2016, superannuation fact sheet 02, Superannuation Reform: Introducing a $1.6 million transfer balance cap 4. Budget 2016, superannuation fact sheet 02, Superannuation Reform: Extending the spouse tax offset 5. Budget 2016, superannuation fact sheet 02, Superannuation Reform: Improve integrity of transition to retirement income streams This document provides general information only and has not prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation or needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. Copyright 2016 Russell Investments. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments.