Many of the Government’s proposed superannuation reform measures became law on 29 November 2016. There’s some good news included and a number of opportunities we thought worthwhile sharing with you.
Most of the new super rules are effective from 1 July 2017, so you have until 30 June 2017 to act on the opportunities provided by the existing super rules, which we’ve outlined below.
1. Pre-tax contributions super contributions
The pre-tax superannuation contributions (also known as concessional contributions) cap will be reduced to $25,000 from 1 July 2017. If you were 49 years of age or older on 30 June 2016, you may contribute up to $35,000 of pre-tax contributions by 30 June 2017, otherwise (if younger) your limit is $30,000.
Action item: Consider maximising your pre-tax contribution capacity by 30 June 2017.
2. After-tax super contributions
The Government has abandoned its previous plan to limit after-tax super contributions (also known as non-concessional contributions) to a lifetime limit of $500,000.
Instead, the after-tax super contribution annual cap will be reduced from $180,000 to $100,000 from 1 July 2017. If you are under 65 years of age at any time during the income year, you can ‘bring forward’ two future years of contribution capacity. Importantly, the existing threshold of $180,000 per annum (and $540,000 on a ‘bring forward’ basis) remains in place until 30 June 2017.
Action item: Consider after-tax contributions of up to $540,000 by 30 June 2017.
From 1 July 2017, if your total superannuation balances across all super funds exceed $1.6 million on 30 June 2017, you will not be able to make any after-tax contributions in 2017-18. If your total superannuation balances is less than $1.6 million but exceeds $1.4 million, you will be subject to a scaled back after-tax contribution capacity.
Action item: Consider the last chance opportunity of making after-tax super contributions by 30 June 2017 if your total superannuation balances are likely to exceed $1.6 million
3. The $1.6 million pension cap
The amount you will be able to transfer into the tax exempt pension phase of superannuation will be capped at $1.6 million from 1 July 2017. Any existing superannuation pensions will be assessed against the cap based on the 30 June 2017 balances of those accounts. Amounts assessed as being in excess of the cap will need to be transferred out of the tax exempt pension phase, either back to the accumulation phase (taxable at 15 per cent) or out of the superannuation system entirely.
Although transfers to the tax exempt pension phase will be limited to $1.6 million, there’s no restriction on how much you can continue to hold in super in accumulation phase, which is taxed at the concessional rate of 15 per cent.
As pension payments are not required from the accumulation phase, some individuals may find their post 30 June 2017 arrangement is a better long term strategy than their existing position.
Action item: Ensure your pension arrangements are compliant with the new $1.6 million cap by 30 June 2017.
4. Transition to retirement (TTR) pensions
From 1 July 2017, the investment earnings of TTR pensions will no longer be exempt from tax.
Action item: Decide whether to continue your existing TTR pension or transfer it back to accumulation phase prior to 1 July 2017.
5. Capital gains tax (CGT) relief
A CGT relief election has been introduced to alleviate the possible CGT consequences of the $1.6 million cap and taxation of TTR pensions. The CGT relief will help preserve the tax free status of capital gains accrued while supporting a pension.
Action item: Consider which assets the CGT relief can and should be applied to.
Do you need to act by 30 June 2017?
If you have any questions or need help, it is a good idea to seek advice from a financial services professional to decide on the strategies you should use before 30 June 2017.