Upcoming Superannuation Changes
With a 1 July 2017 start date, there is not much time to adjust your superannuation strategies. The 2016 Federal Budget superannuation changes have recently been legislated and are the most significant of the past 10 years. In many respects this represents a change of thinking for superannuation fund members. It is paramount that affected persons carefully consider their options to ensure that the impacts are reduced and/or their benefits are maximised. Unfortunately, as the Wealth Pipeline is designed to be a short read we have not provided the depth or breadth of these changes.
1. $1.6m transfer balance cap to retirement phase
From 1 July 2017, super fund members will be limited to a $1.6 million transfer balance cap to fund retirement phase pensions. Amounts in excess of the cap will not attract the tax exemption for earnings from assets in pension phase and will be required to be held in the accumulation phase. The earnings from assets in the accumulation phase are taxed at 15%. The cap will be indexed in line with CPI and increased in $100,000 tranches, however, individuals may only access a portion of the newly indexed amount consistent with the unused proportion of their balance cap, rather than the full $100,000 increase when it is available.
For members with superannuation pensions in excess of the $1.6 million cap, we suggest that they consider whether:
- restructuring their asset holdings to be in a position to maximise exempt earnings, particularly between spouses
- the CGT relief rules (see below for more detail)
- these changes have affected their estate plans
2. Non-concessional contribution cap reduction
The government has abandoned its proposed $500,000 lifetime cap on non-concessional contributions (NCC) and instead will reduce the annual NCC to $100,000 per annum effective 1 July 2017. Also post 1 July 2017, typically only taxpayers with a total superannuation balance of under $1.6 million on the 30th June in the financial year prior to the NCC being made will be able to make a NCC contribution.
As these changes come into effect on 1 July 2017, the 2016/17 financial year may be the last year that a superannuation member can make a NCC. It is worth noting that the $540,000 bring forward rule will apply for the remainder of the 2016/17 financial year for those eligible. If the bring forward provision is triggered in 2016/17 but the full $540,000 amount is not used, then the bring forward cap available in 2017/18 and 2018/19 will be reduced.
3. Loss of tax exempt status for Transition to Retirement Income Streams (TRIS)
This change will see the tax exempt treatment of earnings on assets supporting a TRIS cease as of 30 June 2017. From 1 July 2017, fund members can still start or maintain a TRIS but without the tax exempt treatment for earnings. Many, if not most TRISs were commenced to take advantage of their tax exempt status, so many TRISs will be ceased. Going forward, one reason to maintain or commence a TRIS will be to reduce the superannuation balance of one spouse and recontributing the pension payments to the balance of the other spouse’s super.
4. CGT relief arrangements for asset transfers
The Government has allowed CGT relief for assets that need to be transferred from retirement phase to accumulation phase due to the $1.6 million transfer cap and for assets affected by the changes to TRISs.
The CGT relief has been made available to avoid:
- the unintended consequences of tax applying to capital gains which have accrued on assets held or attributable to the exempt retirement phase; and
- the impact of the transaction costs of selling down and repurchasing assets to avoid capital gains tax.
In our opinion the planning required to maximise this relief, is the most complicated consideration of the new legislation.
In the bigger picture, these changes will force more investments in alternative structures such as family trusts and insurance bonds. In subsequent Wealth Pipelines we will comment on the pros and cons of both family trusts and insurance bonds.