The super shake-up

On 1 July 2017, the changes to Australian superannuation laws announced in last year’s Federal budget will start to come into effect. Here’s what to expect.

Concessional contributions cap reduced

Currently, the concessional contributions cap (pre-tax) for people up to 50 years old is $30,000 ($35,000 for those 50 years old and over) within any financial year. This cap will be reduced to $25,000 for all individuals and indexed in line with wages growth.

Non-concessional contributions cap reduced

The non-concessional (post-tax) contributions cap currently sits at $180,000 for a one-off payment, or a total of $540,000 over three years. On 1 July, these limits will be reduced to $100,000 and $300,000 respectively. If you’re planning to make a contribution within the higher limits, you’ll need to do so by 30 June.

From 1 July, there will be a new $1.6 million super balance cap. If you’ve recently sold a property or come into possession of a lump sum and wish to make a non-concessional contribution, your contribution must remain below the $1.6 million cap.

More on the $1.6 million retirement balance cap introduced

The change impacts the amount that retirees can invest in tax-free pensions, including:

• Lifetime pensions;
• Current life-expectancy pensions; and
• Current market-linked pensions.

These pensions tend to be provided by defined benefits funds, but can also be funded by Self-Managed Super Funds (SMSFs). This is something to consider if you’re thinking of setting up an SMSF.

If the fund exceeds the $1.6 million cap, any excess must be returned to an accumulation-phase account where it will be taxed at 15%, the current accumulation rate.

The Australian Government plans to index the retirement balance cap in $100,000 increments, in line with inflation, so that by 2020-21 it will have grown to $1.7 million.

Carry-forward concessional contribution caps introduced

From 1 July 2018, if you have less than a total superannuation balance of $500,000, you’ll be able to make a ‘carry-forward’ concessional super contribution.

This means if you haven’t made concessional contributions to the limit of your cap, you can use the ‘cap space’ on a rolling basis for five years. Unused amounts carried forward will expire after five years.

Income threshold reduced

Currently, super contributions from individuals whose income exceeds $300,000 are taxed at 30%. From 1 July 2017, this amount will be reduced to $250,000. For everyone else, contributions tax will remain at 15%.

Anti-detriment payment removed

Super funds making a death payment to a beneficiary’s dependant can currently claim a tax deduction on the portion of the payment that represents the 15% contributions tax paid by the member over their lifetime.

From 1 July 2017, this provision will be removed and super funds will no longer be able to claim the deduction.

Transition to retirement pensions changed

Earnings on transition to retirement (TTR) pensions currently have a tax-exempt status. This status will be removed and earnings within the fund will be taxed at 15%.

The change is retrospective, meaning asset earnings will be taxed regardless of the date on which the TTR fund commenced.

Additionally, superannuation income-stream payments will no longer be treated as lump sums for tax purposes, ensuring that TTRs are used primarily to support individuals remaining in the workforce.

Tax exemptions extended

Tax exemptions on retirement-phase products will be extended to include deferred annuities, lifetime annuities and group self-annuitisation products.

Tax deductions extended

All Australian residents under 65, or those between 65 and 74 who meet the work test, will be able to claim a tax deduction for personal superannuation contributions made after 1 July 2017.

Low-income super tax offset (LISTO) introduced

The current Low Income Superannuation Contribution (LISC) will be replaced by the LISTO.

Individuals earning up to $37,000 will receive a LISTO contribution to their super fund, equal to 15% (capped at $500) of their total concessional super contributions for an income year.

Spouse tax offset increased

Currently, individuals can claim a tax offset up to a maximum of $540 for contributions made to their spouse’s eligible super fund when that spouse earns less than $10,800. On 1 July, the threshold will be increased to $40,000.

For more information on how you may be affected, talk to a tax professional or visit ato.gov.au.