Changes to superannuationAs part of the 2016 Federal Budget announcement, the government proposed to make several changes to superannuation. If these proposed changes are passed by the parliament, most of them will take effect from 1 July 2017.

Briefly, here are details of the major changes:

Introduction of the non-concessional contributions lifetime cap

This is also known as a personal contribution (after-tax) where income tax has already been deducted from it.

From 3 May 2016, the maximum amount you can contribute to superannuation in your lifetime is capped at $500,000 (indexed in $50K increments in line with wages). There is no more annual non-concessional contributions cap going forward.

While the new lifetime cap started from 3 May 2016, it will retrospectively include all non-concessional contributions made (if any) since 1 July 2007. It is possible that some of you may have already breached the lifetime cap as at 3 May 2016. If you have, you’ll not be required to withdraw the excess amount but you cannot put any more non-concessional contributions into superannuation. However, if you’ve breached the $500K lifetime cap since 3 May 2016 (including amount contributed since 1 July 2007), you’ll be required to withdraw the amount above the cap.

Prior to 3 May 2016 (under the old rule), you could put in $180,000 a year and if you were under 65, you could use the ‘bring forward provision’ rule and put in $540,000 every 3 years. Going forward, you can no longer use the ‘bring forward provision’ rule.

For more information, see the fact sheet.

Reduction of concessional contributions caps

These are contributions (before-tax) where income tax has not been deducted yet and these contributions include superannuation guarantee, employer contributions & salary sacrifice.

From 1 July 2017, the government will reduce the maximum amount you can contribute from $30,000 to $25,000 a year for everybody.

Currently you can put in $30,000 p.a. if you’re under 50 and $35,000 over 50. So from 1 July 2017, everyone will only be able to put in $25,000 regardless of age.

For more information, see the fact sheet.

Introduction of the catch-up concessional contributions

From 1 July 2017, you will be able to make a catch up contribution if your account balance is under $500,000 by using any unused amount available from previous years on rolling basis for a period of 5 years.

So if you didn’t contribute the whole $25,000 in the previous year, you can use the remaining amount to contribute in the following year plus $25,000. Amounts carried forward that have not been used after 5 years will expire.

For more information, see the fact sheet.

Changes to spouse contribution for tax offset

Depending on the eligibility criteria (yours & your spouse’s), you may be able to make a contribution to your spouse’s account and claim 18% (maximum) of the contributions (up to $3,000) to offset the income tax you have to pay. The maximum tax offset available is $540 ($3,000 x 18%).

Under the current rule, if your spouse’s assessable income is less than $10,800 you will be able to claim 18% of the full amount of the spouse contributions (maximum $3000) you contributed to your spouse’s account (e.g. 18% x $3000 = $540). The offset amount available is progressively reduced if your spouse’s income is greater than $10,800 and completely reduced to $0.00 when the income reaches $13,800.

From 1 July 2017, the income threshold will be increased to $37,000 and the tax offset will be completely reduced to $0.00 when the income reaches $40,000. For example, if your spouse’s income is below $37,000 and you make $2000 spouse contributions, you will be entitled to claim $360 (18% x $2000) as a tax offset.

If your spouse’s income is between $37K and $40K, the $3000 will be reduced by the amount above $37K. For example, if your spouse’s income is $38K and you make $3000, you’ll be entitled to $350 tax offset i.e. ($3K – [$38K – $37K]) x 18%. So you take away the $1K above the lower threshold from $3K and multiply it by 18%.

For more information, see the fact sheet.

Introduction of Low Income Superannuation Tax Offset (LISTO)

This is formally known as Low Income Superannuation Contribution (LISC) which the government planned to remove it at the end of the 2016/17 financial year.  As announced in the 2016 federal budget, the government proposed to continue the LISC under LISTO from 1 July 2017. Whilst the benefit to members remains the same (maximum $500), it works slightly differently.

How it works under LISC is that if your income is $37,000 or under and your employer makes a concessional contribution on your behalf, you will be eligible to receive a contribution (LISC) from the ATO of up to $500 to be applied to your superannuation account. This is pretty much a refund of the contributions tax you paid for employer contributions. Let’s say your income is $37,000, your compulsory superannuation guarantee will be $37,000 x 9% (this measure was introduced when the SG rate was 9%) = $3330 SG contribution. The contributions tax you pay on $3330 to the ATO is $499.50 as the contributions tax rate is 15% ($3330 x 15%). So the ATO will send this amount directly to your super fund.

Now, let’s have a look at how LISTO works. As far as the eligibility criteria goes, there is no change. If your income is less than $37,000 and you have a concessional contribution made on your behalf, you will be eligible for an amount of up to $500 to be paid into your account. Where it defers is that the ATO will provide a tax offset to your super fund based on the tax they paid on all concessional contributions made for people with low income. The ATO will determine who is eligible and advise your fund accordingly and your fund is required to apply the LISTO to your account.

Either way, you don’t have to do anything to receive the refund.

For more information, see the fact sheet.

Work test abolished

From 1 July 2017, the government will abolish one of the contribution eligibility criteria called the ‘work test’.

If you’re aged between 65 and 74, to make a voluntary contribution (non-concessional, salary sacrifice & employer voluntary, excluding SG) you must meet the work test. This test requires you to work at least 40 hours over a period not more than 30 consecutive days in that financial year, to be eligible to make a voluntary contribution. At the time of making the contribution you must have already met this test, that is, you can’t make the contribution in January and try to meet the criteria in June.

For more information, see the fact sheet.

Ability to claim personal contributions as a tax deduction

From 1 July 2017, everyone under the age of 75 will be able to claim personal contributions as a tax deduction.

Currently, only those people earning less than 10% of their income from salary can claim a tax deduction. This usually means only self-employed or substantially self-employed people can claim a tax deduction for personal contributions.

If you claim the personal contribution as a tax deduction, the amount claimed will be taxed at 15% and form part of the $25,000 concessional contributions cap.

For more information, see the fact sheet.

Removal of anti-detriment benefits

From 1 July 2017, the government will abolish the anti-detriment benefit.

What is an anti-detriment benefit? It is an additional payment made by the trustee as part of the death benefit and only available if the death benefit is paid as a lump sum to the member’s spouse or child. It is basically a refund of the contributions tax the deceased member paid since 1988 when the contributions tax was first introduced. The anti-detriment benefit is approximately 15% of the taxable component of the death benefit. It is not compulsory for super funds to pay anti-detriment benefits. However, if they choose pay this benefit they will entitle to claim the amount as a tax deduction.

$1.6 million – maximum amount can be transferred from superannuation to income stream

Investment earnings you receive in your superannuation accumulation account are taxed at 15%; however, earnings from a pension account are not taxed.

When you retire, you have the options of taking the superannuation benefit in the accumulation account either as a lump sum or pension (income stream – you receive regular payments until funds run out) or both. If you decide to take it as an income stream, you do not have to pay any tax on any investment earnings.

From 1 July 2017, you‘ll only be allowed to transfer a maximum amount of $1.6 million (indexed in $100K increments in line with CPI) from your accumulation account to set up income stream. So the maximum amount from which you can receive tax-free earnings is no more than $1.6 million.

If you currently have more than $1.6 million in your income stream account, you will be required to keep it under the cap by 1 July 2017, by either transferring it back to your superannuation accumulation account or take it as a cash lump sum. An amount in excess of $1.6 million in the income stream and its earnings will subject to additional tax.

If your account is under $1.6 million as at 1 July 2017 and your earnings push the balance above this amount you are not required to withdraw it.

For more information, see the fact sheet.

Transition to retirement income stream (TTR) 

Currently, earnings from TTR are also not taxed. From 1 July 2017, earnings will be taxed at 15%.

Division 293 tax – threshold reduced

Contributions tax is a 15% tax levied on concessional contributions (e.g. SG & salary sacrifice etc). A division 293 tax is an additional contributions tax (another 15%) levied on high income earners. High income earners referred to people who earn $300,000 and above. Concessional contributions are added to the income to determine the excess amount.

For example, if you have an income of $290,000 and concessional contributions of $25,000, your division 293 tax is $2,250. This is the extra tax you have to pay on your concessional contributions.

Division 293 tax:

{($290,000 + $25,000) – $300,000} x 15% = $2,250

This amount is in addition to the 15% contributions tax that you initially paid on the $25,000 concessional contributions.

From 1 July 2017, the $300,000 threshold will be reduced to $250,000. This means more people will have to pay the division 293 tax.