Upcoming Superannuation Changes: Are you ready?

super-penison-changes-2017-hero-wyza-com-au

Most the superannuation reforms announced in the 2016 Federal Budget will take effect on 1 July 2017. These reforms have significant implications for some of you and you might seek advice leading up to and beyond this date. This article outlines the key decisions and actions that may need to be taken prior to 30 June 2017 to ensure you take advantage of opportunities and/or avoid adverse outcomes. To do that you need to know about the new changes to superannuation in the federal budget.

What are the changes to superannuation (Super changes in budget)

The after-tax super contributions cap will reduce

Initially, the government planned to introduce a $500,000 lifetime cap on after-tax (non-concessional) super contributions, which it will no longer be implementing. Instead, an annual after-tax contributions cap of $100,000 will be put in place, replacing the current cap of $180,000. If you are under age 65, you still can bring forward three years’ worth of after-tax super contributions, with a maximum of $300,000 under the bring-forward rules.

A person who is eligible to trigger the bring-forward in 2016/17, or who triggered it in the 2015/16 financial year, can contribute up to the full $540,000 by 30 June 2017. However, a person who does not fully utilize their available balance of $540,000 by this date, will be constrained from 1 July 2017 in respect of their ability to make further after-tax contributions, by the new ‘transitional’ Non-Concessional Contribution rules.

The before-tax super contributions cap will be lowered

The before-tax (concessional) contributions cap will decrease from $30,000 to $25,000 per year for everyone, irrespective of age. For the 2016/2017 year, the concessional contributions caps have not changed. If you’re aged 48 years or under on 30 June 2016, then your concessional cap is $30,000 for the 2016/2017 year. If you’re aged 49 years or over on 30 June 2016, your cap is $35,000 for the financial year. From 1 July 2017, the Coalition government has cut the concessional cap to $25,000 for all age groups. Even from July 2017, voluntary concessional contributions will still be possible, subject of course to the lower cap.

A pension transfer cap of $1.6m will be introduced

If you’re converting your super into a pension to derive an income in retirement you’ll be restricted to a limit of $1.6 million in your tax-free pension account, not including subsequent earnings. If you already have a balance above that, the excess will need to be placed back into the super accumulation phase, where earnings will be taxed at the concessional rate of 15%, or taken out of super completely.

What is the change in transition to retirement

Transition to retirement pensions will lose their tax exemption. Investment earnings on super fund assets that support a pension are currently tax free. However, this will no longer apply to transition to retirement (TTR) income streams. Earnings on fund assets supporting a TTR income stream will be subject to the same maximum 15% tax rate that applies to accumulation funds.

What to Do Now

You must be thinking how you can maximize your super benefits under all these legislation. A window of opportunity exists to make larger NCCs before the caps are reduced from 1 July 2017. This window will be particularly important for clients who will be unable to make any NCCs after this date, either because they will have more than $1.6 million in super, or they are turning 65 and won’t meet the work test.

How to make non concessional contributions

Maximizing the current year NCC cap may be relatively straight-forward if the money is readily accessible (e.g. it is currently sitting in a bank account). However, if clients don’t expect to receive proceeds from the sale of an investment property or other ‘illiquid’ asset until after 30 June 2017, they may want to: 

  • Take out a short-term interest-only loan
  • Make an NCC of up to $540,000 before the end of this financial year, and
  • Repay the loan when the sale is completed.

You also need to know about non concessional contribution bring forward rule and superannuation spouse contribution can be made.

Transition to Retirement (TTR) Pensions

Despite this change, TTR pensions may still be attractive where used for their intended purpose, which is to help people approaching retirement to maintain their lifestyle when cutting back their working hours.

However, in the clear majority of cases, TTR pensions have been commenced to help people build a larger retirement nest egg without scaling back their work. This has generally been achieved by using the income payments from the TTR pension to fund additional salary sacrifice or personal deductible contributions.

Re-Contribution Strategies

The re-contribution strategy has been popular to manage tax from both a retirement and estate planning perspective. The net benefit of re-contribution has generally been determined considering any value that could otherwise be derived from a possible anti-detriment payment to eligible beneficiaries. The benefit of the re-contribution strategy should be re considered because of the following reforms which take effect on1 July 2017:

  • Lowering of the NCC cap
  • Introduction of a ‘total super balance’ condition to determine eligibility to make NCCs
  • The abolition of anti-detriment payment, and
  • Introduction of the $1.6m transfer cap applicable to pensions.

How Re-Contribution Works

The re-contribution strategy involves cashing out an amount from an individual’s super benefit and making an after-tax contribution back in to super. This effectively enables any taxable component of the lump sum withdrawn to be converted into tax-free component.

Megan (aged 55) has $600,000 in superannuation. The tax components are split 50:50, meaning that $300,000 of the interest is taxable and $300,000 is tax-free. She is retired and therefore has complete access to her super benefits.

For a person who is between preservation age to age 59, withdrawals from the tax-free component are tax free, while any taxable component within the low rate cap (LRC) is effectively taxed at 0%. Amounts above the LRC are taxed at 15% plus Medicare Levy. These tax concessions are integral to the overall dollar benefit of the strategy.

The re-contribution strategy can help you to:

  • Generate a more tax-effective retirement income stream under upto age 60, by increasing the tax-free component of superannuation pension payments, and/or
  • Reduce the tax to be paid by non-tax dependent beneficiaries (usually financially independent adult children) on any death benefit lump sum after someone passes away.

Purchase Insurance through your Superannuation Fund and Save

You may be able to purchase life and total and permanent disability (TPD) insurance with before-tax dollars through your superannuation fund, by using salary sacrifice. This will enable you to increase the amount you are covered for, at the same cost. However, if you purchase insurance via your superannuation fund, the same tax concessions for superannuation contributions apply.

Delay Withdrawing Superannuation Benefits to Save Lump Sum Tax

Generally, your superannuation is made up of two components; tax free and taxable.    

Between preservation age (currently 55 for people born before 1 July, 1960) and age 60 there will be tax payable (15% plus Medicare Levy) once the amount of taxable contributions you withdraw exceeds $195,000. As the name suggests, the tax-free amount will be withdrawn tax free regardless of the amount.

From age 60 there will be no tax payable on these funds, regardless of component when withdrawn. For this reason, you may want to consider deferring taking money out of superannuation if you are under the age of 60.

Finally, here are the opportunities you can and should utilize in this financial year.

Super opportunities for this financial year

  • You can contribute $80,000 more in after-tax super contributions than what will be possible from 1 July 2017, as the after-tax contributions cap will be reduced from $180,000 to $100,000 per year. 
  • If you’re under age 65, you can also bring forward three years’ worth of after-tax super contributions up to a maximum of $540,000. This is significantly higher than the $300,000 limit that will apply from 1 July 2017. 
  • The before-tax contributions limit will remain at $30,000 (or $35,000 if you’re turning 50 years of age or older this financial year) until 1 July 2017. This means you can contribute $5,000 or $10,000 more in before-tax contributions respectively before the limit is reduced to $25,000 per year for everyone.

Looks like useful info? If you’d like to share perspectives or discuss how it relates to you and your family, call us on (03) 8658-8875 or email us at support@iadvice.freshdesk.com. You can also click the button below to set an obligation free appointment with your expert financial adviser.

 [maxbutton id=”8″]

 

References:

https://www.ato.gov.au/individuals/super/super-changes/

https://www.amp.com.au/news/2016/december/proposed-changes-to-super-pass-through-parliament

 

Copyright

This site contains a variety of copyright material. Some of this is the intellectual property of individuals (as named), some is owned by the IAdvice Pty Ltd itself. Some material is owned by others (clearly indicated) and yet other material is in the public domain. Except for material which is unambiguously and unarguably in the public domain, only material owned by the IAdvice Pty Ltd and so indicated, may be copied, provided that textual and graphical content are not altered and that the source is acknowledged. The IAdvice Pty Ltd reserves the right to revoke that permission at any time. Permission is not given for any commercial use or sale of this material.

No other material anywhere on this website may be copied (except as legally allowed for private use and study) or further disseminated without the express and written permission of the legal holder of that copyright.

Copyright © IAdvice Pty Ltd

 Disclaimers

While the IAdvice Pty Ltd has attempted to make the information on this server as accurate as possible, the information on this Web server is for personal and/or educational use only and is provided in good faith without any express or implied warranty. This information is not advice and you should seek the advice of a professional who can take your personal circumstances into account and offer you personal advice. There is no guarantee given as to the accuracy or currency of any individual item on the website. The IAdvice Pty Ltd does not accept responsibility for any loss or damage occasioned by use of the information contained on the website nor from any access to the iadvice server. While the IAdvice will make every effort to ensure the availability and integrity of its resources, it cannot guarantee that these will always be available, and/or free of any defects, including viruses. Users should take this into account when accessing the resources. All access and use is at the risk of the user.

The IAdvice Pty Ltd has provided hypertext links to a number of other web sites as a service to users of this Web server. This service does not mean that the IAdvice Pty Ltd endorses those sites or material on them in any way. The IAdvice Pty Ltd is not responsible for the use of a hypertext link for which a commercial charge applies. Individual users are responsible for any charges that their use may include.