iAdvice Financial Services | Upcoming Superannuation Changes: Are you ready?
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Upcoming Superannuation Changes: Are you ready?

Upcoming Superannuation Changes: Are you ready?


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.

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