The 2016 Budget: Changes to Superannuation

Super Contribution Changes

From July 1, 2017, personal superannuation contributions and certain super taxes will change, as well as other changes. These include:

Division 293 tax income threshold reduced

If a taxpayer’s income exceeds a certain threshold, they are required to pay an additional 15% tax on the concessional contributions they make to superannuation on top of the 15% tax payable on contributions made to superannuation (ie the tax rate applicable is 30%). The current income threshold is $300,000.

As part of the Budget announcement, this income threshold will be reduced to $250,000 from 1 July 2017.

Concessional contributions cap

Currently, the annual concessional contributions cap is $30,000 for those aged under 50 and $35,000 for those aged 50 and over.

As part of the Budget announcement, from 1 July 2017, the annual concessional contributions cap will be reduced to $25,000 for everyone regardless of age.

Transition to retirement

To improve integrity in the superannuation system, from 1 July 2017, the tax exemption on earnings from assets supporting ‘Transition to Retirement Income Streams’ will be removed. This measure will also remove a rule that allows individuals to treat certain superannuation income streams as lump sums for income tax purposes.

The change will prevent the ‘Transition to Retirement Income Streams’ from being used as an incentive to minimise tax.

Lifetime non-concessional contributions cap

From Budget night, the Government will introduce a lifetime non-concessional contributions cap of $500,000. The lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007.

This cap will replace the existing annual non-concessional contributions cap of $180,000 (or $540,000 every three years for individuals aged under 65).

The change is intended to improve sustainability in the superannuation system as well as supporting the majority of taxpayers who make non-concessional contributions to superannuation of well below $500,000. It is also intended to provide flexibility to taxpayers to allow them to choose when they may contribute to their superannuation and will be available to taxpayers up to the age of 74.

Removal of restrictions from making contributions to superannuation for people aged between 65 and 74.

The current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement will be removed from 1 July 2017.

Currently, there are minimum work requirements for people aged between 65 to 74 who want to make voluntary contributions to their superannuation. Restrictions apply to the bringing forward of non-concessional contributions and spouses over the age of 70 cannot receive contributions.

Removing these restrictions will allow people aged between 65 and 74 to increase their retirement savings, particularly from sources that may not have been available to them before retirement, including from downsizing their home.

Flexibility in super – individuals able to make personal superannuation contributions

From 1 July 2017, all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions.

Individuals who are partially self-employed and partially salary and wage earners and individuals whose employers do not offer salary sacrifice arrangements will be able to benefit from this measure.

Currently, an individual is only able to claim an income tax deduction from making personal contributions to their superannuation where less than 10% of their income earned comes from being an employee (this is known as the ‘10% rule’). Individuals who are wholly self-employed or only has investment income are not affected by the ‘10% rule’.

Allowing ‘catch-up’ concessional contributions

From 1 July 2017, individuals will be able to make additional concessional contributions to their superannuation where they have not reached their annual concessional contributions cap in previous years. Taxpayers will be able to roll-over their unused cap amount for up to five years and make a contribution up to the rolled over cap amount if their total superannuation balance is less than $500,000.

The purpose of this measure is to assist taxpayers who have interrupted work patterns (eg have certain periods of time out of the workforce for reasons such as maternity leave, other extended periods of leave) to catch up on their superannuation contributions in later years when they return to work.

Changes to superannuation for low income earners

From 1 July 2017, the Low Income Superannuation Contribution (LISC) will be replaced with a new Low Income Superannuation Tax Offset (LISTO). The LISTO will provide a non-refundable tax offset to superannuation funds based on the tax paid on concessional contributions made on behalf of low income earners up to a cap of $500. A taxpayer will be able to access the LISTO where their adjusted taxable income is less than $37,000 and a concessional contribution has been made on their behalf to a superannuation fund.

To compare, currently the LISC operates such that if you earn less than $37,000 and concessional contributions are made to a super fund for you, the Government will make a contribution to your superannuation fund on your behalf between $10 and $500. This amount is determined based on 15% of the amount of concessional contributions that have been made into a super fund for you.

Spouses and superannuation

The income threshold for the receiving spouse (whether married or de facto) of the low income spouse tax offset will be increased from $10,800 to $37,000 from 1 July 2017.

The measure will help to improve the superannuation balances of low income spouses by extending the current spouse tax offset to assist more families to support each other in accumulating superannuation.

The low income spouse tax offset provides up to $540 per annum for the contributing spouse and builds on the Government’s co-contribution and superannuation splitting policies to boost retirement savings.

Transfer balance cap

From 1 July 2017, the Government will introduce a transfer balance cap of $1.6 million on the total amount of accumulated superannuation an individual can transfer into the tax-free retirement phase. Subsequent earnings on these balances will not be restricted. This measure will limit the extent to which tax-free benefits of retirement phase accounts can be used by high-wealth individuals.

Anti-detriment rule

From 1 July 2017, the outdated anti-detriment provision in respect of death benefits from superannuation will be removed. The effect of the anti-detriment rule can result in a refund of a member’s lifetime superannuation tax payments into an estate where the beneficiary is a dependant of the member (eg spouse, former spouse or child).

The provision is applied inconsistently to funds. Removing the rule helps to better align the treatment of lump sum death benefits across all superannuation funds and the treatment of bequests outside of superannuation.

There is no change to the treatment of lump sum death benefits made to dependants which remain tax-free.

If you are unsure how you may be affected by one or more of these changes, or are seeking Tax services and advice, your local MAS Tax Accountant would be happy to help.