As many of you would be aware, in May 2016, the Government announced major reforms to superannuation. With a few adjustments along the way, these reforms have now been passed through the senate.
Following is a summary of the key changes that need to be considered by SMSF trustees moving into the new year:
The concessional contribution cap will reduce to $25,000 per annum from 1 July 2017 (currently $30,000 for under 50s and $35,000 for over 50s).
The ‘10% rule’ for personal contributions will be removed from 1 July 2017 thereby allowing employees to claim the balance of their concessional contributions cap personally.
The income threshold for Division 293 tax will reduce to $250,000 from 1 July 2017 (currently $300,000). This is where additional tax is payable on concessional contributions for individuals with income greater than $250,000.
A catch up rule for concessional contributions will be introduced from 1 July 2018 allowing members with superannuation balances of $500,000 or less to carry forward any unused concessional contribution caps over a 5 year period.
Non Concessional Contributions
The proposed $500,000 lifetime non concessional contribution cap was scrapped.
The non concessional contribution cap will now reduce to $100,000 per annum from 1 July 2017 (currently $180,000pa).
Members with superannuation balances of $1.6m or above will no longer be able to make any non concessional contributions regardless of age or work status.
The three year bring forward rule will still be available for members under age 65 with superannuation balances of less than $1.6m, however implementation has increased in complexity. Two areas to note:
There are transitional measures for members who trigger/ed (but not fully utilise/d) their bring forward NCC cap in the 2016 or 2017 financial years; and
Members will have a reduced bring forward cap if their superannuation balance is over $1.4m.
$1.6m Pension Transfer Balance Cap
The government has introduced a pension Transfer Balance Cap to limit the total amount a member can transfer to a pension where the investments earnings of the pension assets are tax free.
From 1 July 2017, the transfer balance cap will be $1.6m.
A member will trigger their transfer balance cap with one of the following four events:
On 1 July 2017 for pre existing pensions.
Commencement date for all new pensions from 1 July 2017.
Conversion of a TRIS to an account based pension.
In the case of a reversionary pension, 6 months after the date of death.
If a member has more than $1.6m in superannuation, only $1.6m can be transferred to a tax free pension. The remaining balance, above $1.6, can remain in accumulation within the fund with investment earnings on these assets taxed at the usual 15%.
For members with existing pensions of over $1.6m at 30 June 2017, they must commute (reallocate) the portion of their pension over $1.6m to accumulation (or pay out the excess as a benefit payment) or they will incur tax on ATO calculated notional earnings on the excess.
Transition to Retirement Income Streams (“TRIS”)
From 1 July 2017, investment earnings from assets used to provide a TRIS will no longer be exempt from tax.
Investment earnings from assets providing a TRIS will be taxed at 15% (10% for capital gains).
Existing TRIS assets at 1 July 2017 will obtain CGT reset relief (see discussion below).
The government has removed the option to treat pension payments from TRIS as lump sums for tax purposes.
Capital Gains Tax (“CGT”) Relief For Pension Members
Under the existing law, when an asset used to provide for a pension (including a TRIS) is sold, the realised capital gain is exempt from tax.
The government has provided CGT relief for members who rollback a portion of their pension to accumulation (due to exceeding the $1.6m pension transfer balance cap) and for those who are running TRIS. As without any CGT relief, the sale of assets funding these pensions previously would have been exempt from CGT and may now be taxed. (e.g. a TRIS asset sold on 2 July 2017 would give rise to CGT whereas if the asset was sold on 29 June 2017 the capital gain would be exempt from tax).
The new legislation broadly allows trustees to elect for the cost bases of existing pension assets to be reset to market value (on an asset by asset basis) at or before 30 June 2017 to protect the gains already accumulated before the changes were introduced from tax.
For unsegregated funds (i.e. where there are both accumulation and pension accounts), cost base reset is also available, however the capital gain related to the accumulation portion of any asset is taxable with the trustees able to defer payment of the CGT until the asset is actually sold.
The original announcements proposed the removal of the work test for members over age 65.
This proposal was repealed and the existing work test requirements still apply.
The existing, and now continuing work test requires a member over age 65 to be gainfully employed on at least a part time basis in the financial year in which the contribution is made. A member is gainfully employed on at least a part time basis during a financial year if the member has worked at least 40 hours in a period of no more than 30 consecutive days in that financial year. The trustee cannot take prospective employment into account – the member must have worked at least 40 hours in the financial year before the trustee can accept the contribution.
We note, the above is simply an overview of the superannuation reforms and consider it important to engage your adviser in the new year to ensure you are fully across the changes.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.