There are many opinions, analyses and editorials that have been written on the Government’s proposed superannuation changes. Understanding with certainty what these changes mean has kept us all busy in 2016. The countdown for the new rules to take effect culminates on 30 June 2017. If you have a superannuation account, you will definitely be impacted; and I have developed some essential guidelines to manage 7 of the biggest changes.
The caveat: these changes are not fully cast in stone – the ATO is still working through implementation details. In addition, there might be unexpected developments resulting from the next Federal Budget. Now, on to the tips:
1. Tax -free pensions now limited to $1.6m. This will impact those with balances of more than $1.6m in their fund. It will also affect those who have insurance in their superannuation or are beneficiaries of a reversionary pension.
TIP: Balances exceeding $1.6m must be reduced by 30 June 2017. Options include either withdrawing the funds, or moving them into an accumulation account. Depending on the age of the members, look to withdrawing and re-contributing to a spouse with a lower balance. Tax penalties may apply on funds in excess of $1.6m if you delay.
2. After-tax (non-concessional) contribution limits reduced. Currently this entails $180,000 each year, or up to $540,000 if bringing forward 3 years of contributions. This will change to $100,000 each year or up to $300,000 respectively. Furthermore, individuals with a super balance exceeding $1.6m are prevented from making further contributions.
TIP: Consider taking advantage of the higher contribution caps before they disappear. Even if you have your cash tied up in assets, there are mechanisms to move these into a self-managed super fund (SMSF).
3. Pre-tax (concessional) contributions limits reduced. Currently $30,000 each year ($35,000 if over 50), this will reduce to a $25,000 per year limit that will apply to all. However, you will be able to roll up to 5 years of contributions that are accrued from the 2018/19 financial year.
TIP: Maximise your concessional contributions this year before the reduction. The rolling up of up to 5 years of unused caps in future years will be helpful. This is particularly so for years of high taxable income e.g. from the sale of an asset that attracts capital gains tax (CGT).
4. Tax deductions for pre-tax (concessional) contributions. The rule restricting direct concessional contributions has been removed. Previously, tax deductions were only allowed to those whose employment income was less than 10% of total income. However, the work test still applies to those over the age of 65.
TIP: Topping up your super with direct concessional contributions after 1 July 2017 could be advantageous. It will also make it easier to maximise your caps without having to rely on salary sacrifice.
5. Concessional contributions tax rates to increase for high income earners. A 15% tax applies to all concessional contributions. However, the threshold for an additional 15% tax has been lowered from $300,000 to $250,000.
TIP: Consider taking advantage of the higher contribution threshold while the lower tax rate applies.
6. Transition to retirement pensions will be taxed inside super. Previously, earnings on transition to retirement pensions were tax-free, but will now be taxed at 15%. This is the same as accumulation funds and removes one of the key benefits of starting a pension early.
TIP: Review your transition to retirement pension to see if it is still right for you, consider switching it off or converting it to an account-based pension if you meet the criteria.
7. SMSF members with balances exceeding $1.6m will no longer be able to segregate pension assets that are tax-exempt. As of 1 July, assets cannot be segregated for tax purposes to prevent the cycling of assets to avoid paying CGT under the new tax free pension limits.
TIP: Utilise the CGT relief options with a one-off opportunity to reset the cost base of assets held inside an SMSF. This allows you to manage CGT on gains that have been accumulated in the fund up to 1 July 2017.
There is plenty to think about, and it’s important to understand the rules and plan well before the end of this financial year on 30 June 2017. I’m happy to further discuss these impacts with you if you have any questions.
Rob Gilmour is the Managing Principal of Wealth Simplicity. The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.