As was anticipated, the federal budget contained various measures which impact those looking to save for their retirement through superannuation. Some of the key changes include:
- Fixing the concessional contributions cap to $25,000 a year for all individuals regardless of age
- Reducing non-concessional contributions cap from $180,000 per year to a lifetime cap of $500,000
- Removing the work test for those making voluntary contributions aged between 65 and 74
- Removal of the tax exempt status of transition to retirement income streams, regardless of when they commenced
- A cap of $1.6m on the balance that can be transferred to a tax exempt pension.
- Expanding the additional 15% Div 293 tax on contributions to those earning $250,000 and above
Fixing the concessional contributions cap to $25,000 a year for all individuals regardless of age
From 1 July 2017, the cap on concessional contributions will reduce to $25,000 a year for everyone, regardless of age. Currently the concessional contributions cap is $30,000 under age 50 and $35,000 for ages 50 and over.
Individuals with super balances under $500,000 who don’t reach their concessional cap in a given year will be able to carry forward their unused cap amounts on a rolling basis over five consecutive years.
Reducing non-concessional contributions cap from $180,000 per year to a lifetime cap of $500,000
A lifetime cap of $500,000 for non-concessional contributions has been introduced, effective immediately. This replaces the existing annual cap of $180,000 (or $540,000 every three years under the bring-forward rule).
The lifetime cap takes into account all non-concessional contributions made from 1 July 2007. Contributions made after the Budget announcement that exceed the cap (taking into account all previous non-concessional contributions) will need to be removed or will be subject to the current penalty tax arrangements. However, there will be no penalties if the cap has been reached or exceeded prior to the Budget announcement (7.30pm AEST, 3 May 2016).
Removing the work test for those making voluntary contributions aged between 65 and 74
The current work test that applies for people making voluntary contributions between age 65 and 74 will be removed as of 1 July 2017. This will make it easier for older Australians to contribute to super.
Individuals will also be able to make contributions for a spouse aged under 75 without requiring the spouse to satisfy a work test.
Removal of the tax exempt status of transition to retirement income streams, regardless of when they commenced
The tax exempt status of income from assets supporting transition to retirement (TTR) income streams will be removed from 1 July 2017, with earnings to be taxed at 15%. This change will apply regardless of when the TTR income stream commenced.
Further, individuals will no longer be able to treat certain income stream payments as lump sums for tax purposes, which currently makes them tax-free up to the low rate cap of $195,000.
A cap of $1.6m on the balance that can be transferred to a tax exempt pension.
On 1 July 2017, a transfer balance cap of $1.6 million will be introduced to restrict the total amount of super that can be transferred to the pension phase. If an individual accumulates more than $1.6 million, they will be able to maintain the excess in the accumulation phase (where earnings will be taxed at 15%).
Those already in the pension phase on 1 July 2017 and whose balances exceed $1.6 million will need to either withdraw the excess or transfer it back into the accumulation phase.
Individuals who breach the cap will be subject to a tax on both the excess amount and the earnings on the excess amount —similar to the tax treatment for excess non-concessional contributions.
Expanding the additional 15% Div 293 tax on contributions to those earning $250,000 and above
Division 293 tax — an additional 15% contributions tax payable by high income earners with earnings over $300,000 — will also apply to those with incomes above $250,000 from 1 July 2017.
For Division 293 purposes, the definition of ‘income’ includes:
- taxable income (including the net amount on which family trust distribution tax has been paid)reportable fringe benefits;
- total net investment loss (including net financial investment loss and net rental property loss);
- low tax contributions (non-excessive concessional contributions) including super guarantee, salary sacrifice and personal concessional contributions.
Division 293 tax will apply to any low tax contributions that exceed the $250,000 threshold, assuming they form the top slice of income.