On 7 September 2016 the Government released the first instalment of draft legislation for its Federal Budget superannuation reforms. This was the subject of another recent Newsflash.
Days later, on 15 September, further changes were announced.
Key among these changes is the scrapping of the $500,000 non-concessional contributions cap that was originally proposed in the Budget.
It is important to note that legislation for the Government’s package of superannuation reforms, including the recently announced amendments, is yet to be introduced to parliament.
The major amendments to the Government's super reforms, announced on 15 September 2016, are detailed below.
Replace the proposed $500,000 lifetime cap on non-concessional contributions with lower annual caps for non-concessional contributions – and only allow members with superannuation balances less than $1.6m to make non-concessional contributions.
From 1 July 2017, the Government will lower the annual non-concessional contributions cap to $100,000, which is four times the annual concessional contribution cap. The three year bring forward amount will be reduced to $300,000 (three times the annual non-concessional cap) for individuals under 65.
The $1.6 million eligibility threshold will be based on an individual’s balance as at 30 June the previous year. If the member’s balance at the start of the financial year (the contribution year) is more than $1.6 million, they will not be able to make any further non concessional contributions.
Individuals with balances close to $1.6 million will only be able to bring-forward the annual cap amount for the number of years that would take their balance to $1.6m.
Where an individual has not fully used their non concessional bring-forward before 1 July 2017, the remaining bring-forward amount will be reassessed on 1 July 2017 to reflect the new annual caps.
The removal of a lifetime cap for non-concessional contributions will be a simpler and more efficient approach for everyone.
However, there is a potential limitation for the SMSF sector. The $1.6m balance threshold will be assessed as at 30 June prior to the year a contribution is made; yet valuations for some assets held by SMSFs are not readily available, and may not be known until well after the new financial year has begun. The delay in not knowing whether an SMSF investor can make a non-concessional contribution is, from a planning perspective, not ideal. However, this should only impact a small group of people.
As a lower annual cap and bring forward amount will apply from 1 July 2017, individuals who have the capacity to do so should consider utilising the $540,000 bring forward amount before 1 July 2017.
Post 1 July 2017, individuals with superannuation balances approaching $1.4m, $1.5m or $1.6m should consider triggering the three year bring-forward amount prior to their balance exceeding those thresholds. While we will need to wait for the legislation to be finalised before confirming the merits of this strategy, based on the fact sheets released with the Government announcement, it appears triggering the three year bring-forward period just prior to a member’s balance surpassing the $1.4m, $1.5m or $1.6m threshold, will maximise the total amount of non-concessional contributions that can be made.
No changes have been announced to the rules which currently exclude certain contributions from being counted against the non-concessional contributions cap. For example, contributions made from certain personal injury payments and contributions arising from the small business CGT concessions will continue to be excluded from the non-concessional contributions cap.
Defer commencement of carry-forward arrangements for concessional contributions.
The proposed start date for this measure has now been pushed back 12 months to 1 July 2018.
From 1 July 2018, the Government will help people ‘catch up’ their superannuation contributions by allowing individuals with account balances of $500,000 or less to rollover their unused concessional caps (for up to 5 years) to use if they have the capacity and choose to do so.
For the same reasons mentioned above, the requirement for the member’s balance to be less than $500,000 may create some difficulties for the SMSF sector.
With a revised start date of 1 July 2018, it appears the first opportunity to make a catch-up contribution will be in the 2019/20 financial year.
Overall, this is a very positive measure which is expected to assist around 230,000 Australians who take time out of work, or who find their circumstances have changed, and are in a position to increase their contributions to superannuation.
Retain the work test for members aged 65 to 74.
As per the current rules, individuals aged between 65 and 74 will only be eligible to make personal super contributions if they meet the work test (that is, they work 40 hours within a 30 consecutive day period in the financial year the contribution is made).
As per the current rules, spouse contributions will only be permitted if the spouse receiving the contribution is under age 70, and if aged between 65 to 69 they and meet the work test.
Assuming the eligibility criteria is satisfied, an individual will be entitled to the spouse contribution tax offset when contributing for a spouse whose non-concessional contributions exceed the cap.
The first tranche of the draft legislation, which has now partly been superseded by the Government’s 15 September announcement, proposed an amendment to the eligibility rules. This would have disallowed the tax offset where the spouse’s annual non-concessional contributions exceeded the cap.
No changes have been announced to the other superannuation reforms tabled as part of the 2016 Federal Budget. These reforms, including the proposed introduction of a $1.6m transfer balance cap and removing the tax exempt status of income from assets supporting a transition to retirement income stream, remain as originally announced.
