Super reform: the latest legislative changes
Legislation has been introduced into parliament to enact the super reforms announced in the 2016/17 Federal Budget.
The legislation is mainly in line with drafts released in September and October, with the main reforms as follows:
- Legislating the objective of superannuation
- Introducing a $1.6m cap on amounts transferred to commence pensions, except for transition to retirement pensions
- Reforming the taxation of concessional contributions
- Lowering the annual non-concessional contributions cap from $180,000 to $100,000
- Introducing the low income superannuation tax offset
- Allowing tax deductions for personal contributions
- Allowing catch-up concessional contributions where a person has a balance under $500,000
- Extending the spouse contribution tax offset by increasing the income threshold
- Removing barriers to innovation in retirement income stream products
- Improving the integrity of transition to retirement income streams
- Abolishing the anti-detriment rule in relation to death benefit lump sums
- Streamlining administrative processes for excess amounts
What's changed since earlier legislative drafts?
Since the draft legislation was initially tabled, changes have been made, the most important of which are summarised below.
$1.6 million transfer balance cap
|Change in transitional arrangements for members with pension balances under $1.7 million as at 30 June 2017.||Where a member as at 30 June 2017 has a pension balance between $1.6 and $1.7 million, the ATO will issue a warning letter advising the member they have six months from 1 July to remedy the breach.|
|Investments in retirement phase that may have lost value in view significant macroeconomic changes.||The operation of the transfer balance cap will be reviewed by the government to take into account reductions in the value of investments that have been impacted by macroeconomic shocks.|
|Increase the time for assessment of a reversionary pension against the reversionary beneficiary’s transfer balance cap from 6 to 12 months.||If a beneficiary becomes entitled to a reversionary pension, the balance of the reversion is counted against the reversionary’s transfer balance cap.
A modification applies to defer the time the credit arises in the beneficiary’s transfer balance account for reversionary income streams.
The deferred time is 12 months after the income stream benefits first become payable to the beneficiary.
This gives the new beneficiary sufficient time to adjust their affairs following the death of the member before any consequences arise.
|Roll-over of death benefits.||To facilitate the payment and roll-over of death benefit income streams for eligible beneficiaries, the taxation definition of a “roll-over superannuation benefit” will be amended to allow a superannuation lump sum death benefit to be rolled over.
This will ensure that a death benefit that is rolled over will receive taxation treatment consistent with that of member benefits that are rolled over. In particular, it is not treated as a superannuation contribution and it is considered non-assessable non-exempt income.
|Clarification that amounts that cannot be used to pay a death benefit income stream in the retirement phase (for example because the amount exceeds the beneficiary’s transfer balance cap) must be cashed out.||As death benefits cannot remain in the accumulation phase, any amount that cannot be used to pay a death benefit income stream in the retirement phase must be cashed out as a death benefit lump sum.
This ensures that the superannuation income stream provider does not contravene the compulsory cashing regulatory rules.
This effectively limits the value of a death benefit income stream to the amount available under the beneficiary’s transfer balance cap.
Transitional CGT relief
|Further clarification has been provided and minor adjustments made to the transitional CGT relief provisions.||The object of the provisions is to provide relief for super funds from the tax consequences for capital gains accumulated before 1 July 2017, where these gains would have been exempt income if realised prior to a commutation being made to comply with the transfer balance cap or the change to the treatment of TRISs.|
|Indefinite use of the reset cost base for assets transferred to accumulation phase as at 30 June 2017.||Assets that are transferred to accumulation phase to comply with the transfer balance cap, or the change of the treatment of TRISs, can have their cost base reset as at the time of the transfer.
Under the draft legislation, this reset cost base was only to apply if the asset was disposed of within ten years, otherwise the cost base would revert to the original cost base of the asset.
The legislation before parliament removes this ten year disposal requirement.
|Application of the 1/3rd CGT discount.||In situations where the CGT cost base has been reset, if the asset is disposed of within 12 months of the cost base being reset, the 1/3rd discount applying to the taxable capital gain will not apply. The taxable capital gain will be fully assessable in this situation.|
|Quantifying the deferred notional gain.||Super funds applying the unsegregated method have an additional choice to defer a capital gain that arises from the fund choosing to apply CGT relief. The choice to defer does not arise in relation to a capital loss.
The deferred notional gain will be calculated by reference to the net capital gain of the fund (rather than the capital gain on the relevant asset), and incorporates any CGT discount that applied to the gain.
In calculating the hypothetical net capital gain of the fund, other capital gains and losses that arose during the income year, and prior year unapplied net capital losses, are disregarded.
Capital losses are not taken into account in calculating the deferred notional gain but may be applied against the amount when it is brought to account in a later income year.
Payment of death benefits to children who are tax dependants
|Clarification that only death benefit amounts that are sourced as reversions from income streams payable to the deceased prior to death will come within the child’s transfer balance cap.||Where a death benefit is payable to a dependent child as defined for taxation purposes, only the reversion from an income stream payable to the deceased will be included in the $1.6 million transfer balance cap. Any other amounts payable to the child should be cashed as lump sums otherwise they will be treated as being in excess of the cap and taxed at penalty rates.|
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