I am breaking the Budget down into bite size chunks with strategies to consider going forward for SMSF Trustees. The first part which dealt with pension strategies is available here . This second part deals with changes to contribution options, methods and caps.
Before I go into detail here is a summary of the changes that are relevant to SMSF members (No coverage of Defined Benefit Schemes in this article):
Concessional (Pre-Tax Contributions like employer superannuation guarantee (SGC), salary sacrifice and those contributions where you claim a tax deduction).
– Reduction in the concessional contribution cap to $25,000 regardless of age
– Carried forward concessional cap for account balances below $500,000
– Removal of the work test for those aged 65 -74
– All individuals under 75 will be eligible to claim a tax deduction for personal contributions
– Reduction in income threshold to $250,000 where additional super contribution tax applies
– Reduction in tax for people earning less than $37,000
– Extension of low-income spouse contribution tax offset
Non-Concessional (Post Tax Contribution like personal after tax contributions and Government co-contributions).
– Lifetime non-concessional contribution cap limit of $500,000
– Removal of existing annual non-concessional cap and bring forward provisions
– Removal of work test requirements for contributions made between the ages of 65 and 74
Now the detail:
Reduction in the concessional contribution cap to $25,000 regardless of age
The concessional contribution cap will be reduced from the current level of $30,000 to $25,000 from 1 July 2017, irrespective of the age of the individual. The higher cap of $35,000 that currently applies to individuals over age 50 will be abolished. The reduced cap will continue to be indexed in future years in line with wages growth.
Carried Forward or Catch-up concessional contributions
From 1 July 2017 individuals will be able to make additional concessional contributions where they have not reached their concessional contributions cap in previous years. Access to these unused cap amounts will be limited to those individuals with a superannuation balance less than $500,000. Unused amounts accrued from 1 July 2017 will be able to be carried forward on a rolling basis for a period of five consecutive years.
This measure allows some additional flexibility in the timing of your contributions like making $125,000 for a tax deduction on the sale of a property or share portfolio if you did not make contributions in the previous 4 years. Your ability to save may vary throughout your career and this measure will assist to some extent, but falls well short of my preferred option for a lifetime cap on concessional contributions. The restriction based on size of account balance will add complication to the administration of this measure when multiple funds are involved.
Removal of Work Test for 65-74 year olds, which may allow additional contributions for many in this age group
The current rules, including the work test, restricting the payment of contributions to superannuation by individuals between ages 65 and 74 will be abolished from 1 July 2017. From that date, individuals under age 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouses. This change will considerably simplify the administration of the contribution rules and so will be welcomed by superannuation funds and SMSF administrators and trustees.
All individuals under 75 will be eligible to claim a tax deduction for personal contributions
From 1 July 2017, all superannuation fund members up to age 75 will be able to claim an income tax deduction for personal superannuation contributions up to the concessional contribution cap ($25,000), regardless of their employment circumstances. This is good news for people who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements, as they will benefit from this proposal. Personal contributions for which a tax deduction is claimed will count towards the concessional, rather than the non-concessional cap.
While I accept the government’s intention is to increase flexibility for more people to access the concessional contribution cap if they are able to do so, the mechanism requiring individuals to notify their fund of their intention to claim a tax deduction for their personal contributions will add considerable complexity to fund administration. the “she’ll be right” and “I’ll do it later factor” will lead to many missing opportunities.
Reduction in income threshold to $250,000 where additional super contribution tax applies
From 1 July 2017, individuals with “relevant income” greater than $250,000 will pay an additional 15 per cent tax on their concessional contributions, down from $300,000. The additional tax, referred to as “Division 293 tax” after the section of the tax legislation which governs the tax, will be payable where the individual’s taxable income (including reportable fringe benefits and certain other amounts) plus concessional contributions (excluding those that exceed the concessional contributions cap) is greater than the $250,000 threshold.
Superannuation still remains attractive despite this change, the 30% tax applied to concessional contributions is still less than the marginal tax rate on earnings so contributing to super remains attractive. But with the lower $25,000 concessional contribution there will be limited scope for you to make optional concessional contributions. For example, if you earn $250,000 and your employer pays the 9.5% SG on your full salary this is an annual employer contribution of $23,750 which has almost fully utilised the new lower cap. If you are on a higher income with disposable income you may look for alternatives outside superannuation or top up your partner/spouse’s superannuation (and potentially receive a tax offset if they earn less than $37,000).
After earlier reports that the threshold would be reduced to $180,000, the proposed threshold of $250,000 means the tax will apply to only around 1 per cent of superannuation fund members. Retention of the existing mechanism which minimises the administrative costs to superannuation funds associated with this tax is welcome.
Reduction in tax for people earning less than $37,000
From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce the tax on superannuation contributions for low-income earners. The measure will apply to individuals with taxable income less than $37,000, and will effectively refund the tax on concessional contributions up to an annual cap of $500. This measure will replace the Low Income Superannuation Contribution (LISC) which was scheduled to be abolished from 1 July 2017, however, the mechanism will be slightly different. Rather than the government making a direct
contribution to the individual’s superannuation account, the offset will apply to the contribution tax deducted by the superannuation fund. The Australian Taxation Office will determine an individual’s eligibility for the LISTO and advise their superannuation fund annually. The fund will then contribute the LISTO to the individual’s account. The government will consult on the implementation of this scheme.
Extension of low-income spouse contribution tax offset
The government will increase access to the low-income spouse superannuation tax offset by raising the income threshold for the low-income spouse from $10,800 to $37,000. This arrangement provides a tax offset of 18 per cent of contributions made by the contributing spouse, up to a maximum offset of $540 per annum.
Combined with the increased ability to make contributions up to age 75 and the ability for everyone to claim tax deductions for contributions, this may encourage SMSF members on lower incomes including retirees under age 75 to top up super for them selves or their partners.
Lifetime non-concessional contribution cap limit of $500,000 – Removal of existing annual non-concessional cap and bring forward provisions
The existing non-concessional contribution cap (NCC) arrangements of $180,000 per year or $540,000 with 3 year bring forward rule for those under 65 will be abolished, to be replaced by a lifetime non-concessional cap of $500,000. The new cap will take into account all non-concessional contributions made on or after 1 July 2007, and will commence at 7.30 pm (AEST) on 3 May 2016. The lifetime cap will be indexed annually in line with wages growth.
However, you will not be penalised or forced to withdraw amounts from super if you had exceeded this new cap as a result of non-concessional contributions. For those that exceed the cap from 7:30pm AEST 3 May 2016, excess contributions will need to be removed or will be subject to penalty tax.
Those on higher incomes may wish to consider other tax-effective investment options such as insurance investment bonds or negative gearing once they have reached the $500,000 lifetime cap. The lifetime limit creates greater flexibility to choose when and how much to contribute but it will add administrative complexity for SMSF Trustees and their advisers. Before making or accepting NCC contributions you will need to check the available limit for the member.
The lifetime cap now limits the ability to use the cash-out and recontribution strategy for members who have triggered a condition of release. We normally used this between age 60 -65 to reduce the taxable component of your account balance. Before considering this strategy you should check the available lifetime cap with your administrator / advisor including all retail / industry funds you have been a member of at any time since 01 July 2007. Many SMSF members took annual pensions and simply recontributed the payments as NCC every year. DO NOT DO THIS! check lifetime cap first PLEASE!
Removal of work test requirements for non-concessional contributions made between the ages of 65 and 74
Consistent with changes that apply for concessional contributions between the ages of 65 and 74, from 1 July 2017 there will no longer be a requirement to meet a work test in order to make additional non-concessional contribution to super between these ages. This change is significant as many people are often only able to make large voluntary contributions around retirement age and may not have been able (or willing) to find employment to make the contribution previously.
This will also allow those who are preparing for retirement to consider downsizing their home and contributing surplus amounts into super or if you receive an inheritance to use super (subject to the limits imposed by contribution caps, particularly the new $500,000 non-concessional lifetime limit).
Phew! that was a lot!
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
If you have any questions, feel free to ask them in the comments section. We will be happy to answer all your queries
Disclaimer : All the content (including Blogs, newsletters, Fact sheets, calculators etc.) provided on this website is general information only and is neither intended to nor be considered personal financial or taxation advice. The content has been prepared without taking into account your personal circumstances, financial situation or objectives. In making any financial, investment or taxation decision, information provided on this website should not be relied upon and you should seek personal advice. AVS Business Services Pty Ltd disclaims any responsibility for any decision that you make, based on the information provided on this website.All the information provided on this website is prepared in good faith and based on AVS’s knowledge and understanding of superannuation, taxation and other relevant laws and is believed to be correct at the time of writing the information. However as the laws, being dynamic by nature, keeps on changing, you should not rely on the information provided on this website without first obtaining advice from qualified professional.