It was a week earlier than usual; the Treasurer Scott Morrison simply couldn’t wait to get his first budget out!
In line with expectations – the Federal Budget that was brought down yesterday included 11 measures specifically targeting superannuation.
Depending on your perspective the announcements were a mix of both good, and bad, news – with a couple of shocks thrown in for good measure.
Let’s look at the key ‘super’ announcements:
- Catch-up concessional contributions: For people who have not contributed their maximum allowable concessional contributions in any one year – they will now be able to catch up by contributing any unused amounts. Unused amounts can be carried forward for a period of up to five years. This will apply from 1 July 2017 and will specifically benefit those who take career breaks, but will be limited to individuals who have less than $500,000 in superannuation.
- Contributions for older Australians: Currently – people aged between 65 and 74 wishing to make contributions to their super must meet the requirements of an annual work test. The work test requirement will be removed from 1 July 2017. This will benefit those who wish to make contributions to super – even when they are not working.
- Low-income spouses: Effective from 1 July 2017, the current low-income spouse superannuation tax offset (of up to $540) will be enhanced. The income threshold for the spouse for whom a contribution is being made will go up from $10,800 to $37,000.
- Super transfer balance cap: This was one of the ‘bombshells’ of the budget last night. While there are no limits on the amount someone can have in superannuation – the government have now introduced a $1.6 million superannuation transfer balance capon the total amount of super that an individual can transfer into their retirement phase accounts. Amounts in excess of this may remain in an accumulation account; where the investment earnings will be taxed at 15 per cent. Interestingly – anyone who holds more than $1.6 million in a pension account as of 1 July 2017 will be required to reduce their pension account balance to that level by transferring the excess back into an accumulation account. Similar measures will also apply to members of defined benefit superannuation schemes.
- Non-concessional contribution lifetime limit: Yet another ‘bombshell’ announcement! Non-concessional contributions are personal contributions that come from money made after-tax. The current limit is $180,000 per annum, however, people under the age of 65 may bring forward up to three years’ worth of contributions and make a single contribution of $540,000. However they are limited in the amount they can contribute in the following two financial years. The shock announcement in this year’s budget was to impose a lifetime limit on non-concessional contributions of $500,000 per-person. This measure, subject to legislation being passed, will be effective as of the 2016-17 budget day – 3 May 2016! Non-concessional contributions made between 1 July 2007 and 3 May 2016 will be taken into account when applying the lifetime limit.
- Low income super tax offset: To be introduced from 1 July 2017. This provides a tax offset to super of up to $500 to low income earners (income of less than $37,000 per annum), and compensates them for tax paid on contributions made to super on their behalf. It replaces the former Low Income Superannuation Contribution.
- Concessional contribution cap reduction: It was expected the government would announce a reduction in the current concessional contribution cap of $30,000 ($35,000 for those aged 50 and over). Not to disappoint – a reduction was announced. From 1 July 2017 the concessional contribution cap will be reduced down to $25,000 per annum.
- Division 293 tax: This is an additional tax paid on superannuation contributions by wealthier people – those with incomes in excess of $300,000 per year. As expected – the threshold at which Division 293 tax becomes payable is to be reduced to $250,000 from 1 July 2017.
- Removal of anti-detriment payments: An anti-detriment payment is an additional benefit that may be paid when a member of a superannuation fund passes away and their super is paid to eligible beneficiaries. As expected – this benefit will be removed effective 1 July 2017.
- Transition to retirement (TTR) pensions: In the lead up to the budget there was much speculation about possible changes to TTR pensions. Whereas currently the investment earnings of a super fund that is paying a TTR pension are tax-free within the super fund; from 1 July 2017 those investment earnings will be taxed inside the super fund at a rate of 15 per cent. In addition to taxing the income of superannuation funds paying TTR pensions – a recent tax strategy that allowed superannuation fund members to elect to have their TTR income payments taxed as a lump sum, rather than as an income payment, will be removed.
- Tax deductions for personal contributions: Currently the ability to claim a tax deduction for personal superannuation contributions is limited to people who derived little, or nil, income from an employment arrangement. From 1 July 2017 anyone under the age of 75 will be able to claim a tax deduction for their personal super contributions, up to their concessional contribution cap ($25,000) – regardless of their employment situation.
The announcements last night are all subject to their successful passage of legislation. And it is fair to say we will probably have an election before any legislation is introduced to Parliament.
However – the announcements do provide valuable insight into the superannuation policies the Turnbull government will take to the election and, subsequently, introduce if re-elected.
As mentioned in the opening of today’s blog – this year’s budget held a mix of good and some not-so-good news.
But it leaves us with a lot to think about. With most of the initiatives not due to take effect until 1 July 2017 – all of us have time to digest the implications and get our strategies in place to manage our future retirement savings growth.