Super changes - are you ready?

In the May 2016 Federal Budget, sweeping changes to the superannuation rules were announced. Many of these changes come into effect on 1 July 2017. This is a brief summary of the key announcements and how they may affect your retirement nestegg.  In addition, we have included information on the changes that apply to members of unfunded defined benefit schemes (such as the PSS) and have included some case studies to help you understand the changes.

As always, this is general information and we highly recommend that if you believe any of these changes affect your situation, you seek advice from a financial planner as soon as possible – don’t wait until 30 June as you may not have time to implement any strategies to mitigate the changes.

1. If you are making contributions

Changes to the limit on after-tax contributions made to super
Currently, there is a fairly generous limit on the amount of non-concessional contributions you can make to super. This is the limit on contributions that have already had tax paid on them and includes money you have invested outside super, money that you have been given such as an inheritance or money paid from your after-tax salary.
In the 2016/17 financial year you can contribute up to $180,000 in non-concessional contributions to super. Those aged under 65 can take advantage of the ‘bring forward rule’ and contribute up to $540,000 to cover a 3 year period.

However, from 1 July 2017 this cap will be reduced. The annual amount of non-concessional concessional contributions will be lowered to $100,000 (if your super balance is less than $1.6 million) and the bring forward amount will be $300,000.

In addition, the proposed abolishing of the work test for people over age 65 did not go ahead, so you are still required to meet the work test to contribute to superannuation if you are aged between 65 and 75 (gainfully employed for at least 40 hours within a consecutive 30 day period in the financial year).

There are opportunities for you if you do have some money you would like to invest into super. Up until 30 June 2017 you may still be able make non-concessional contributions under the higher cap (ie $180,000 or $540,000 under the bring forward rules – regardless of your existing super balance. It is important to seek advice prior to doing this, so please contact your financial planner today.

Reduction in the limit for concessional (taxable) contributions
One of the many benefits of super is the ability to make concessional contributions (ie contributions from your pre-tax income). These contributions typically include salary sacrifice contributions, personal deductible contributions – such as those made by self employed people, and Superannuation Guarantee contributions that your employer makes.
In 2016/17 if you are turning 50 or older you are able to make contributions of up to $35,000 and if you were younger than this, the limit is $30,000. However, from 1 July 2017 the cap will be reduced to $25,000 for everyone, regardless of your age or super balance. 

In addition, there are new limits on contributions to members of unfunded defined benefit funds. Click here for more information.
There is a ‘window of opportunity’ to top up your concessional contributions between now and 30 June 2017 – but you need to get in quickly! You may also be eligible to make ‘catch up’ concessional contributions from 1 July 2019 which allows you to take advantage of a five year carry-forward period for concessional contributions.

Most people will be able to claim a tax deduction for super contributions
Previously employees needed to receive less than 10% of income from one employer to be eligible to claim a tax deduction for their contributions. This requirement will be removed from 1 July 2017. This means that any employee who is eligible to contribute to super (ie is generally less than 65 unless they meet the work test) can claim a tax deduction for their personal contributions.
Please note that personal contributions made to unfunded, defined benefit, Commonwealth Public Sector Schemes will not be tax deductible. Click here for more information.

2. If you are thinking about retiring

Changes to Transition to Retirement Pensions
The Transition to Retirement Pension, which allows you to draw down some of your income as a non-commutable pension prior to retirement, had many benefits for pre-retirees. It provided a top up income if they had decided to work part time, or provided some income to offset additional tax deductible contributions made into super.  It also meant that your super benefit was transferred into the tax free pension environment.

From 1 July 2017, the tax exemption where assets are supporting a TtR pension will no longer be available and will be subject to the same 15% tax that applies to superannuation funds.

What does this mean – well obviously the tax concessions applying to the investment income earned on TtR pension will make it less attractive. However, tax is usually not the main driver behind financial strategies and you should talk to your financial planner about your goals and objectives and whether the changes will impact on what you are trying to achieve. 
New limits on assets transferred into a retirement income stream.

There are currently no limits on how much you can transfer into a retirement income stream. However, from 1 July 2017, a limit of $1.6 million (per individual) will be imposed. This means that you can still have some money over this amount for your retirement – you just wont be able to have it invested into a retirement income stream such as an Account Based Pension. Note that subsequent earnings on the amounts held in the income stream wont count towards the cap, but on the flip side, any investment losses you incur cannot be topped up.

If you have accumulated amounts in excess of the $1.6m cap, you will be able to roll this amount back into super (which effectively removes any excess from the tax free pension environment) or redeem it from super and assuming you are over 60 you wont pay tax on any redemptions. If you are already receiving a pension and have more than $1.6 million in a pension fund, you must reduce your pension balance by 1 July 2017.

3. If you have already retired

Transitional arrangements for SMSFs
Many SMSFs have direct property assets which may exceed the pension cap. In recognition of this, the super reform measures have introduced CGT relief provisions to help mitigate the CGT impact. The mechanics of this are complex and we recommend that you seek assistance from a qualified financial planner if you believe this situation may apply to you.

4. Other changes affecting super balances

Anti-detriment benefits removed from death benefits
The anti-detriment payment provides an ‘uplift’ to a lump sum benefit paid to the deceased person’s spouse or child. The amount of the payment depends on the deceased’s service date in the fund and the taxable component and is intended to represent a refund of ‘contributions tax’ paid within the fund.

This uplift can apply to:
  • A surviving spouse, as an additional lump sum amount
  • Children of any age. For adult children, the anti-detriment payment should neutralise the majority of the death benefits tax payable on the taxable component.
From 1 July 2017, the anti-detriment payments will no  longer apply where lump sum death benefits are paid to eligible beneficiaries including a spouse or child (if the member passes away after 1 July 2017, or passed away prior to 1 July 2017 but the payment was not made until after 1 July 2019).

Assuming the person passes away after 1 July 2017, death benefit pensions may become a more tax efficient way to receive a benefit. You could also speak to your adviser about a re-contribution strategy which involves redeeming the taxable component of your super benefit and recontributing these as non-concessional contributions (which results in a tax free pension income).

If you are older with adult children and have health concerns, you could speak to your adviser about cashing out your super and investing the funds outside super which will allow the adult children to receive the lump sum without any death benefit tax consequences. There are downsides and so the pros and cons should be considered with your adviser in relation to your personal situation.

The super changes are considerable and we recommend that if any of the issues noted in this article apply to you, please contact your financial adviser as soon as possible to determine the best strategy for your personal situation.

explanatory memorandum 

This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information. AMP Advice is a registered trade mark of AMP Limited, licensed to Milestone Financial. Milestone Financial Services Pty Ltd (ABN 68 100 591 508) is an authorised representative and credit representative of AMP Financial Planning, Australian Financial Services Licensee and Australian Credit Licensee.