Superannuation Changes : Are YOU Affected?
Are you having trouble in understanding the new “Fair and Sustainable superannuation” rules which will commence from 1st July 2017? And have you tried asking some basic questions to your advisor and have received a response “I’ll get back to you” and have not received that call?
If your answer to both questions is YES – don’t panic – you’re not alone.
There are many confusing changes : introduction to transfer balance cap, CGT relief if you are already on pension based on your assets either segregated or unsegregated, and reduced concessional superannuation contributions & non‑concessional contributions, tax offsets for spouse contributions, and innovative income streams. No wonder there is confusion!
Amongst all new changes, most damaging are for super members who are over the preservation age of 57 years, (preservation age is the age when you can access your superannuation monies) and are already on pension or about to start a pension from their superannuation balance.
As law currently stands, if you are working less than 10 hours per week (retired) and you are over the preservation age and have money in super, you can commence a pension from your superannuation balance and all the income earned by your super assets in pension are tax free. If you are 60 years or over, you can withdraw whatever you want out of super without paying any tax.
There is however a catch : you must, each year, withdraw a minimum amount from your pension account, which is 4% of the pension account balance on 1st July each year, for those who are under 65 years old and 7% for those who are between 80 and 84 old.
Tax free income inside super and no tax on withdrawal – tax heaven for retirees. The rest of the population pays tax on income over the tax free threshold which is around $18,000.
What the fairer & sustainable law does from 1st July 2017 by adding Div 294 of the Income Tax Act limits the amount of money which can earn tax free income and which will now be called Balance Transfer Cap amount and for the 2017-18 year is legislated to be $1.6 million.
In simple terms any person who wants to commence a pension after 1st July 2017 or any person with a pension on 30th June 2017 cannot have a tax free pension of more than $1.6 million from 1st July 2017.
If any person has a larger superannuation balance, that amount cannot be in the retirement phase, it must be moved to the accumulation phase where all income is taxed @ 15% along with tax on concessional contributions.
Last time these laws were changed in 2007 when super members were allowed to contribute $1 million one off and could contribute $180,000 each year from after tax money.
Ten years later, in 2017, treasury has realized that these rules were not fair and are definitely not sustainable, partly because due to our growing aged population, more are retiring and putting pressure on younger taxpayers to fund government’s spending.
Further, it is a general understanding that aged population is where most of the government spending goes like aged Centrelink pension and Medicare support. Hence the government had to re-consider the purpose and objective of the superannuation system and introduce some changes so that our superannuation system could be fairer and sustainable in the near future.
So what does this mean ?
If you put money after tax into super, it is called non-concessional contribution. From 1st July 2017 if you already have more than $1.6 million (known as transfer balance cap amount – TBC amount ) in the superannuation system – total superannuation balance, you will not be able to make any non-concessional contribution.
If your balance is below the TBC amount, the maximum amount you can contribute, each year, is $100,000 from 1st July 2017 (currently $180,000), however you can contribute next two years contribution cap amount, a maximum of $300,000 (currently $540,000) provided you don’t go over the $1.6 million total superannuation balance amount.
If you earn a lot of money, you can sacrifice your salary and ask your employer to contribute into superannuation for you. Any compulsory guarantee superannuation (9.5%) plus salary sacrifice is called concessional contribution because it is concessionally taxed at the rate of 15% inside super.
There is no maximum amount which you can contribute every year as concessional contribution in super, however any money contributed above $25,000 cap amount (currently $30,000 and for those over 49 years old $35,000) will be added in your personal taxable income and you will pay tax at your individual level.
Any amount above the concessional cap amount of $25,000 is also counted towards the non-concessional cap amount of $100,000. This means that if you have more than $1.6 million in super, the TBC cap amount – you cannot contribute more than the concessional cap amount of $25,000 from 1st July 2017.
When any employer contributes for an employee the compulsory 9.5% of wages (superannuation guarantee component) it becomes income of the fund and is taxed @ 15% along with other income of the fund.
What about Transition to retirement Income – TRIS?
There is another group of people who are above the preservation age (age 57) who work either full time (more than 37.5 hours per week) or part time (more than 10 hours per week) with superannuation balances.
These people had commenced a pension called a transition to retirement income stream (pension) aka TRIS, where the minimum amount had to be withdrawn and the pension assets did not pay tax on income.
From 1st July 2017, this group of people will have to either retire (work less than 10 hours per week) or move their TRIS to accumulation phase and pay tax @ 15% on income on assets supporting these pensions.
Another little known issue on the new law which trustees of large SMSF’s are only realizing now, as it is becoming a big thorn in their retirement plans, is the capital gain tax relief which is being offered before 30th June 2017.
This relief is for those members who are already in pension phase and can sell assets before 30th June 2017 tax free to benefit from any tax to be paid after 1st July 2017 on when TBC is limited to $1.6 million. Trustees are being asked to sign an irrevokable agreement to crystallize any growth in price of the asset from date of purchase to 30th June 2017.
This means that any asset purchased prior will be deemed to be sold and re-acquired for capital gain tax purposes.
This agreement must be signed by lodgement date of income tax return for 2017 financial year – sometime in May 2018. This can be a major issue for some funds as any decision can have a reverse outcome depending on the funds situation at the time of the ultimate sale of the asset.
One thing is for sure – whilst all should be investigating their superannuation before the end of June, if you are approaching preservation age, it is a must. Wanting assistance – contact Axis Accounting now .