Significant super changes from 1 July: Are you ready?

By Andrew Hayes, Director, Westlawn Business Services
30 March 2017

On November last year, Federal Parliament passed a raft of changes to the superannuation system announced in the May 2016 Federal Budget. Treasurer Scott Morrison described the super reforms as “the most significant change to protect the flexibility and ensure the sustainability of superannuation in more than a decade”.

Some of the key super changes that will come into effect on 1 July 2017 include:

  • The introduction of a lifetime balance capped at $1.6 million for funds held in pension phase.
  • A reduction in the annual amount that can be contributed to super to a maximum of $25,000 for concessional contributions and $100,000 for non-concessional contributions.
  • Removal of the tax-exempt status of transition to retirement pensions (TTRs) on earnings on fund investments. Assets supporting a TTR will generally be taxed at 15% from 1 July 2017.

Lifetime pension balance cap of $1.6 million

From 1 July 2017, the maximum balance that can be held in the tax-free pension phase is $1.6 million. Amounts above the $1.6 million lifetime balance cap can still remain in the superannuation system, but they must be held in the accumulation phase where earnings are taxed at 15%.

Alternatively, excess funds can be withdrawn if a condition of release is met. For most lump sum withdrawals, the tax rate is 15% plus Medicare levy.

For married couples where one spouse’s balance is above the threshold and the other spouse’s balance is below, it may be advantageous to balance the respective pension accounts to maximise funds under the $1.6 million balance cap.

If a member’s pension accounts in total across all super funds are not reduced to $1.6 million by 1 July 2017, there will be a number of adverse tax consequences. If you may be affected by the $1.6 million pension balance cap, contact your Westlawn Business Services Accountant.

Maximum annual super contributions

Concessional super contributions

Concessional contributions are before-tax super contributions such as employer Superannuation Guarantee (SG) contributions, salary sacrifice contributions and tax-deductible super contributions by the self-employed.

The concessional contribution limit reduces from $30,000 (for under 50s) and $35,000 (for over 50s) to $25,000 for everyone from 1 July 2017.

The annual $25,000 concessional cap will be indexed periodically in $2,500 increments. Indexing will be in line with the annual increase in full-time average weekly ordinary time earnings (AWOTE).

Non-concessional super contributions

From 1 July, the limit on non-concessional (after tax) contributions reduces from $180,000 pa to $100,000 pa. The maximum bring-forward cap reduces by $240,000 (currently $540,000) to $300,000.
The annual non-concessional contributions cap will always be 4 times the concessional (before-tax) contributions cap. The new $100,000 non-concessional contribution cap will be indexed in $10,000 increments in line with the $25,000 concessional (before-tax) cap.

Also from 1 July 2017, individuals with a total superannuation balance of more than $1.6 million will no longer be eligible to make non-concessional contributions.

If you wish to make super contributions prior to 30 June while more favourable contribution rules remain in place, contact your Westlawn Business Services Accountant.

Transition to retirement pensions

One of the most significant changes of the super reforms is the removal of tax concessions for transition to retirement pensions (TTRs).

The new rules will remove the tax-exempt status of TTRs on earnings on fund investments. Assets supporting a TTR will generally be taxed at 15% from 1 July 2017.

For anyone working and in the transition-to-retirement (TTR) phase, it may be worth considering rolling their TTR pension back into the accumulation phase if the additional income from the TTR pension is not required to supplement living expenses.

In some situations, TTRs may still be useful to help recipients:

  • Cut back on work hours and supplement income with pension payments when moving towards retirement.
  • Increase income with pension payments while continuing in the workforce until a full condition of release is met.
  • Reduce taxable income and increase their superannuation balance without affecting take home pay through a salary sacrifice arrangement.

Transition to retirement pensions must still meet the current pension minimum standards beyond 1 July 2017. This means a minimum pension withdrawal of 4% and a maximum pension withdrawal of 10% of your TTR balance.

Transition to retirement pensions will also potentially have access to the transitional capital gains tax relief for superannuation assets affected by the new rules starting on 1 July 2017. This capital gains relief will ensure that any capital gain on affected superannuation assets will be disregarded or deferred to a later time when the asset is sold.

Contact Westlawn Business Services

The super reforms coming into effect on 1 July 2017 are complex. We encourage you to contact your Westlawn Business Services Accountant to discuss how you may be affected and how you may be able to take advantage of the current rules prior to 30 June.

Copyright © 2017

Westlawn Business Services Pty Ltd provides this information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.