Super Changes 1 July 2017

 In News, Retirement, Superannuation

The annual Federal Budget is an exciting time for most financial advisers. Yes, we know. We have heard all the jokes. But we still get excited! Sometimes, this excitement gets a little bit too much. The Federal Budget is handed down on the second Tuesday of May, and there is often a race amongst financial advisers to get the news of the budget onto their websites as early as possible on the Wednesday. We prefer a different course. The media is saturated with what the budget contained. There is no need for us to simply repeat what is being discussed on another website. Instead, we prefer to take our time and really digest the implications of the budget. Then we can bring you our considered opinion about the changes and what they mean for you. So, we make early June our deadline for discussing budget changes. This usually still gives people plenty of time to act before June 30, which is often a key date in terms of the changes announced in the budget. That was our plan again this year. That is, until Scott Morrison handed down a budget that contained very little of relevance to most of our clients and that contained almost nothing that needs to be actioned before 30 June. So, this year, we will delay discussing the 2017 Budget changes for another week or two. In this article, we are going to revisit an area of major change from the 2016 Budget. This makes sense, because the date of introduction of most of the changes is 1 July 2017 – which is still a few weeks away. If these changes affect you, we urge you to get in touch as soon as possible. There is still time to act before 30 June.

Concessional contributions – from July 1, you can’t make as many of ‘em!

Concessional contributions are taxed as income when they arrive into a superannuation fund. On the flipside, the person making the contribution can claim a tax deduction for the amount contributed. Most commonly, concessional contributions take the form of mandated contributions made by employers on behalf of their employees. At the moment, there are two annual limits on the total amount of concessional contributions that can be made in a given year. For people aged 50 and over, the annual limit is $35,000 per year. For people aged under 50, the annual limit is $30,000. As of 1 July 2017, the limit for all people will fall to $25,000 per year. At the same time, it will now be possible for people with a super balance below $500,000 to ‘smooth out’ their concessional contributions over a five-year period. Basically, the limit is actually $125,000 in a five-year cycle, although the average contribution can never exceed $25,000. This basically means that people who have contributed less than $25,000 in one or more of the previous four years can make an additional ‘top-up’ contribution to bring the average annual contribution over the previous five years up to $25,000. This ability to ‘catch up’ will be particularly useful for people who take time out of the paid workforce, such as parents taking parental leave or people moving between part-time and fulltime work. Business owners whose income fluctuates from year-to-year should also be able to benefit. Basically, if a good year follows a not so good year, more superannuation can be contributed in the good year. From 1 July 2017, people aged up to 75 will be able to make what are known as ‘personal contributions’ into superannuation. These personal contributions form part of the person’s concessional contributions. All the individual needs to do is notify the superannuation fund that they will be claiming a tax deduction for the contributions. This flags to the fund that the contributions need to be taxed within the fund.

Non-concessional contributions – you can’t make as many of them, either!

A non-concessional contribution is not taxed when it arrives in the superannuation fund. In this case, the flipside is that the person making the contribution cannot claim a tax deduction for a non-concessional contribution. Non-concessional contributions are typically made using lump sums or ‘after-tax’ money. People make them so that they can invest in the relatively low taxed superannuation environment – earnings within a superannuation fund are taxed at no more than 15%, and in many cases taxed at a lower rate than this. At the moment, the annual limit for non-concessional contributions is $180,000 per year. This is averaged out, so that the effective limit is actually $540,000 in a three-year period. From 1 July 2017, the annual limit will fall to $100,000 per year, or $300,000 across a three-year period. Not everybody can make a non-concessional contribution. People aged 75 or over cannot make them. People aged between 65 and 74 can only make them if they satisfy a work test. No one can make them if their superannuation balance is greater than $1.6 million. From 1 July 2018 (that is, next year), people aged over 65 will be able to make non-concessional contributions regardless of their work status in one particular set of circumstances. People who sell their family home can make a non-concessional contribution of up to $300,000 (per person, making $600,000 per couple). This is an incentive for older people to downsize their family home. Because capital gains on a family home are tax-free, the family home is actually a fantastic place to store wealth and this discourages people from swapping a more valuable home for a less valuable one. The government hopes that allowing people to swap $300,000 worth of taxfree home for $300,000 worth of tax-free superannuation will encourage them to sell their family home. The theory is that this will boost supply in the family home market, which should reduce prices. We say theory because it would actually take a substantial increase in supply to really affect prices. If you are thinking of downsizing, it may make sense to hold off on that decision so as to be able to best time the sale from a tax point of view. Please contact us if you would like to discuss how this change may affect you. Similarly, if you are considering making a non-concessional contribution, you should get in touch with us as soon as possible. The rules change on 30 June, but there is still time to make use of the current rules. If you act fast.

Superannuation pensions

There are two ways for people to withdraw money from superannuation (at least, while they are still alive!) Where a person chooses to retain most of their benefits within superannuation, and draw a relatively small amount from their superannuation fund each year, that is known as a ‘pension’ or ‘income stream.’

The alternative to an income stream is a lump sum withdrawal. The government tends to dislike lump-sum withdrawals, given people’s propensity to spend what they have withdrawn from their superannuation. Superannuation is intended to reduce people’s reliance on government benefits such as the Centrelink aged pension, and for that reason, there are generally incentives for retaining benefits within superannuation and withdrawing only a relatively small amount as an income stream each year.

Transition to retirement pensions

A transition to retirement pension allows a person who has reached ‘preservation age’ to start drawing income from their superannuation benefits while still working. The original preservation age was 55, but this is increasing gradually and by 2024 it will have increased to 60.

The idea of a transition to retirement pension is to discourage people from completely leaving the workforce. As an incentive to stay in work, when transition to retirement pensions were first introduced, they came with a real kicker: earnings on assets used to finance the pension would not be taxed. Super funds basically became tax-free investment machines for anyone who had reached preservation age.

This was a generous incentive and in the 2016 budget it was decided that it was too generous! As of 1 July 2017, earnings and capital gains on assets used to finance a transition to retirement pension will no longer be tax-free. They will be taxed in the same way that earnings and capital gains are taxed prior to the commencement of a pension  – 15% on earnings, and 10% on capital gains for assets that were held for more than 12 months. (Capital gains on assets held for less than 12 months are also taxed at 15%.)

These changes will reduce the appeal of a transition to retirement pension for a lot of people. Basically, the only people for whom such a pension will still appeal are people who really need the money  – for example, people working on a very part-time basis.

The changes mean a loss of a tax advantage for many people. But it is difficult to argue that the change is not fair: many, indeed most, people still working beyond their preservation age were simply establishing a transition to retirement pension for the sole purpose of negating tax within the super fund. Indeed, in many cases, the amounts withdrawn from superannuation were simply re-contributed back in in what is called a ‘re-contribution strategy.’

So, transition to retirement pensions will become much less popular from 1 July. However, as we say above, they still do suit certain people. If you are aged 55 or over, or will be soon, and think that a transition to retirement pension may suit your circumstances, please get in touch with us as soon as possible.

Retirement pensions

People aged over 60 who have fully retired, and people aged over 65 regardless of their employment status, can create a pension from their superannuation fund. Earnings on the assets used to finance that pension, including capital gains, are tax-free.

However, from 1 July 2017 this tax-free status will be subject to a limit of $1.6 million worth of assets. People may still retain more than $1.6 million in superannuation, but they can only access the tax exemption on that level of assets. Earnings on assets in excess of $1.6 million are taxed at the standard superannuation rates (15% for income, 10% for capital gains on assets held for longer than 12 months).

To give a simple example, if you have $2 million invested and you generate a 5% income return, then that is a $100,000 return altogether. The return on the first 80% (or $80,000) will not be taxed ($1.6 million is 80% of the total $2 million).  The remaining $20,000 will be taxed at the standard super tax rate of 15%, or $3,000. (We have simplified this example to highlight the tax treatment. The two amounts of $1.6 million and $400,000 actually need to be kept within separate accounts within the super fund).

For people whose superannuation benefits are less than $1.6 million, the change has no real effect. For the relatively few people with assets above this threshold, they may now have to pay tax where previously they did not (depending on whether they earn an investment return on the excess amount).

The tax rates that apply to superannuation earnings are still relatively light – but they may exceed tax that would be payable on earnings generated outside of superannuation. If so, it may make sense to remove some money from superannuation.

Much depends on your personal circumstances, so once again, we encourage you to get in touch with us as soon as you can so that we can help you have things in place before the changes take effect on 1 July.

 

 

 

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