In our latest edition of Your Wealth (clients can login to view), our feature article is a report card on the super reforms. We look back over the past six months since the 1st of July, rating the changes from a practical perspective. A condensed version of this article follows:
Tax Deductible Super Contributions
This is a positive outcome and has been well received as it allows anyone who is eligible to contribute to super to claim a tax deduction on those contributions, if applicable. This is now irrespective of whether the person is self-employed or an employee. Having the flexibility to make contributions into super tax effectively will make a big difference to many individuals, particularly if a capital gains event has been triggered during the income year.
Spouse Super Contributions Tax Offset and Low Income Super Contribution Refunds
The $540 tax rebate for spouse super contributions is now available to more individuals. The rebate is available if the receiving spouse earns less than $37,000 up to a maximum threshold of $40,000 per year. Prior to the super reforms these thresholds were $10,800 up to $13,800, respectively.
In addition to raising the income threshold for spouse super contributions, the Federal Government also introduced the Low Income Super Contributions Refund. Under the Low Income Super Contributions Refund, if an individual's taxable income is less than $37,000 the 15% contributions tax payable on employer or personal tax deductible contributions will be refunded into their super account up to a maximum refund of $500. This means for someone who earns less than $37,000 of adjusted taxable income he or she will effectively pay no tax on SG (employer) contributions.
Catch Up Concessional Contributions
We have written about this particular measure in previous blogs as it will surely be a positive strategy for many. Effective 1 July 2018, individuals will be able to use the new 'catch up' concessional contributions provision which will allow unused concessional contributions within the cap to be carried forward on a rolling basis for up to five (5) consecutive years where an individual's total super balance is $500,000 or less.
Utilising this new provision together with the ability for individuals to claim a tax deduction on concessional contributions up to the $25,000 will prove very effective for many individuals, including those who take time out of work or small business owners where income tax year by year can be unpredictable.
The $1.6m Transfer Balance Cap
The $1.6m transfer balance cap limits the amount of capital individuals can transfer to the retirement phase to support pension income streams from 1 July 2017. An individual who breaches their transfer balance cap is required to commute (reduce) their retirement phase interests by the amount of the excess to ensure the $1.6m is adhered to at commencement of any retirement income stream.
Super fund members who had in excess of $1.6 million in total pensions (including defined benefit pensions) prior to 1 July 2017 had to decide whether to retain the excess balance in an accumulation account within super or withdraw the excess balance completely from super. The need to restructure has resulted in a greater level of administration and reporting for SMSFs, in particular, which may ultimately lead to higher costs for Trustees over time. Having to restructure retirement accounts due to the new cap can also impact other strategies such as estate plans and binding death benefit nominations.
Non-concessional Contributions and Transfer Balance Cap
Non-concessional contributions are no longer possible where an individual's total superannuation balance (which includes defined benefit funds) is $1.6 million or greater. Thankfully this restriction only applies to non-concessional contributions.
The trap is that this restriction will apply regardless of whether an individual has triggered the 3-year bring forward limit of $300,000. Usually when the bring forward limit is triggered in a financial year the individual has three years in which to contribute a total of $300,000 into super. The total amount can be contributed in the year in one contribution, or it can be spread over the three years. The bring forward limit is triggered by the individual contributing more than the annual limit of $100,000 in one year. However, if during the three year period the individual's total super balance reaches $1.6 million the individual may be restricted from making any further contributions up to the $300,000 limit. There is no "locked in" exemption to allow the full $300,000 contribution to be made.
Reduction of Concessional Contribution Cap to $25,000
Unfortunately the Government ignored pleas not to reduce the concessional contribution cap – which was $35,000. The reduction to $25,000 forced many individuals who had contribution strategies in place, such as salary sacrifice arrangements, to review their plans. The concessional cap includes employer SG contributions so, if not careful, an individual could inadvertently exceed the cap if they make additional contributions such as salary sacrifice under personal deduction contributions. Any excess contributions will be included in the individual's assessable income and an interest charge will also apply.
Transition to Retirement Pension tax changes
The tax effectiveness of transition to retirement (TRR) pensions has been reduced due to the change in the tax treatment on earnings within the TTR pension environment. From 1 July, TTR pensions are no longer an exempt tax environment. Rather, income will be taxed in the same manner as if funds were held in an accumulation account. This means the benefits of this type of pension for those under age 60 may be reduced when the strategy was to minimise tax. A TTR pension may still be effective, however, for those individuals who are genuinely reducing their working hours as they "transition" into retirement.
The Downright Ugly
Transitional capital gains tax relief provided to members who either had to restructure their pensions due to the new $1.6 million transfer balance cap or had a transition to retirement pension seemed like a good idea. It appeared to be a simple case of resetting the cost base for pension assets where applicable. However, from an implementation perspective this "relief" has been a nightmare for SMSF clients, accountants and advisers alike. The measure may have been simple in concept but has proven far more complex in practice due to the different calculations involved depending on what accounting method a fund may use i.e. segregated or unsegregated.
If you would like more information on the superannuation reforms, or you would like a copy of our latest edition of Your Wealth, please contact your nearest Morgans office or Morgans adviser.