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The government has announced the biggest set of changes to superannuation legislation since the Simpler Super measures introduced in 2007 by the Howard/Costello government. The effect of these changes is to make superannuation more attractive to low income earners and less attractive to high income earners.

A Lifetime Cap on Non-Concessional Superannuation Contributions

From the time the budget was announced on 3 May 2016 individuals may contribute a lifetime limit of $500,000 into superannuation as non-concessional contributions (contributions for which no tax-deduction is claimed). The lifetime limit counts non-concessional contributions made since 1 July 2007, and replaces the existing $180,000 per year limit (or $540,000 every three years for those under 65). This lifetime cap provides greater flexibility for most Australians and is available up to age 74.

One effect of the lifetime cap will be to limit the use of recontribution strategies, where persons over age 60 draw funds out of superannuation tax free and recontribute the money as non-concessional contributions to minimise tax payable on death benefits paid to their heirs.

All the other changes to superannuation take effect from 1 July 2017.

Increased Flexibility

Catch-up Concessional Superannuation Contributions

Individuals with superannuation balances under $500,000 will be able to carry forward unused annual contribution limits from 1 July 2017 for up to five years. This is more flexible than fixed annual limits, especially for individuals with fluctuating income, such as mothers or small business owners, who can catch up years with little or no provision for superannuation.

Relaxed Contribution Rules

From 1 July 2017 all individuals under age 75 will be able to make tax deductible contributions to superannuation. At present only persons who receive less than 10% of their income from employment may claim tax deductions for personal contributions, and persons over 65 have to satisfy a work test in order to make contributions into super.

This change means that it is no longer necessary for employees to enter into salary sacrifice arrangements in order to make before-tax contributions in addition to the compulsory superannuation guarantee contributions. Coupled with the carried forward unused annual contribution limits, this change provides tax planning opportunities to many more taxpayers. For example it will now be possible to offset a taxable capital gain by making a tax-deductible contribution into superannuation.

Low Income Spouse Contributions Improved

At present a taxpayer can claim a tax offset of up to $540 for contributions up to $3000 made into their spouse’s superannuation account – if their spouse’s income is less than $10,800. From 1 July 2017 the low income spouse superannuation tax offset will be available for a spouse with income under $37,000, allowing many more couples to qualify.

Low Income Superannuation Tax Offset

From 1 July 2017 superannuation funds will be able to claim a non-refundable tax offset of up to $500 for each member with adjusted taxable income under $37,000 for whom the fund received concessional contributions during the year. This effectively cancels some or all of the tax payable by the fund on these contributions.

This will avoid the unfair situation where low income individuals may pay more tax on savings within superannuation than on income earned outside of superannuation. This replaces the Low Income Superannuation Contribution that was due to end on 30 June 2017.

The Bad News

While the Budget contained many favourable changes to the superannuation rules, there are also unfavourable rules – mainly directed at individuals with higher income and higher balances in superannuation.

Limiting Concessional Superannuation Contributions

From 1 July 2017 concessional superannuation contributions (contributions that are claimed as a tax deduction by the contributor) will be limited to $25,000 per year. This is a decrease from the current limit of $30,000 for persons under age 50 and $35,000 for those 50 and older. For persons with balances under $500,000 the carry forward of unused annual contribution limits will mitigate the effect of the lower annual limits.

Furthermore, taxpayers earning over $250,000 will pay additional contributions tax of 15%. This is a decrease from the current earning limit of $300,000.

Superannuation Transfer Balance Cap

At present there is no limit on the amount of income within super that is tax free when it is supporting a pension. From 1 July 2017 there may be no more than $1.6 million in an individual’s superannuation pension account. Any excess must be kept in the individual’s accumulation phase account where the income is subject to 15% tax.

This change will not affect most superannuation fund members.

Limiting Transition to Retirement Income Streams

From 1 July 2017 superannuation fund income that is supporting Transition to Retirement Income Streams (pensions paid to working members under age 65) will no longer be tax exempt. In addition a loophole that allows individuals to treat a partial commutation of a pension to count as part of the minimum pension payment and be taxed as a lump sum withdrawal will be removed from 1 July 2017.

Summary

The effect of these changes is to increase flexibility for persons with low superannuation balances (especially under $500,000) while making it harder to build up very large balances in superannuation. High income earners will find the tax concessions less attractive, yet still worthwhile. As the purpose of superannuation is to provide income in retirement, not as an estate planning vehicle, the changes would seem to be positive overall.

The Uncertainty

It is important to note that the Labor Party has said that they will not support the changes to superannuation, so these changes depend on the results of the upcoming federal election on 2 July 2016. The Coalition will need to retain power and be able to get the legislation through both houses of parliament.