From a policy perspective, the winding back of incentives to save for retirement and the retrospective nature of many of the proposals are disappointing. We are actively lobbying to have these elements reviewed by the government.
We discuss the main Budget announcements and their potential impacts on your superannuation planning in turn below.
$1.6 million cap on super transfers into retirement products (i.e. pensions)
The government announced a $1.6m cap on the total amount of superannuation an individual can transfer into retirement products, such as superannuation pensions or annuities, to limit the earnings/profits of the super fund which can qualify for the 0% fund tax rate that currently applies.
Our understanding is superannuation balances in excess of $1.6m will be able to be retained in the superannuation system, however the super fund would in essence pay more tax as future earnings/profits on assets in excess of the $1.6m cap would be taxed at the standard 15% fund tax rate instead of at 0%.
All pensions will have to comply with the new rules by 1 July 2017.
For people running pensions which are likely to exceed the $1.6m per person threshold, the matters you should be considering include:
- The potential for and appropriateness of realising profits while the 0% tax rate still applies;
- Any complexity that might exist in terms of valuing assets on introduction of the $1.6m cap and how that complexity could be overcome;
- Whether there are higher performing assets in the portfolio that may be better quarantined in the $1.6m pension pool to ensure the 0% tax rate applies on profits from those assets;
- Whether there is any opportunity to even up member balances using allowable contributions.
We recommend you discuss with us what possible options may be available in your circumstances, and when defensive actions may need to be initiated.
We are concerned with retrospective elements of the policy as announced, in particular the taxing of historical market value increases in super fund assets that could occur under the existing policy design.
$500,000 lifetime non-concessional contributions cap
The government announced a lifetime limit of $500,000 of after tax (non-concessional) contributions that will replace the current $180,000/$540,000 non-concessional limits.
The policy proposal states after tax contributions made from 1 July 2007 will be counted against this $500,000 lifetime limit. If you have exceeded the $500,000 lifetime cap at Budget night, (i.e. at 7.30pm on 3 May 2016), you will not be required to remove the excess and no penalty will apply. Any after tax contributions made after 7.30pm on 3 May 2016 that exceed the $500,000 lifetime limit however will need to be removed or a penalty tax will apply.
For people who have exceeded the $500,000 lifetime cap as announced and who may have been considering further after tax contributions, planning for the 2016 and 2017 financial years is uncertain.
We would generally recommend if there is little downside in delaying after tax contributions until it is clearer what the legislated contribution rules will be, then you should probably delay your contributions.
If you believe delaying planned contributions is not possible or advisable, the exact consequences of contributing above the $500,000 lifetime limit announced is unknown. The policy proposal states you would have to remove the excess contributions. We anticipate there may also be additional tax payable at the time of withdrawal as applies now for people who exceed current contribution limits.
We recommend if you are considering making after tax contributions above the $500,000 lifetime limit, that you discuss the possible implications with us before doing so.
Transition to retirement pensions
There were concerns before the Budget the government might remove access to transition to retirement pensions. Instead, the government took a different approach by announcing they intend to remove the tax exemption on super fund earnings/profits when the super fund is paying a transition to retirement pension from 1 July 2017.
A transition to retirement pension is generally a pension where the member has not ‘retired’ and the member is under age 65.
As the new measures are stated to apply from 1 July 2017, considering continuing your transition to retirement pension for 2016/2017 remains the right approach. If the policy is legislated, most transition pensions would probably become obsolete from 1 July 2017 because of the tax increase, except if you rely on the pension income to meet living expenses.
Applying the tax increase to all transition to retirement pensions and failing to grandfather existing pension arrangements is again disappointing and has been our main criticism of the policy announcement in discussions with Government.
There were some positive superannuation announcements in the Budget.
The intention to allow everyone up to age 75 to claim a tax deduction for personal superannuation contributions irrespective of their employment circumstances from 1 July 2017 is a welcome change. So too is the intention to remove the ‘work test’ from 1 July 2017 which will make it simpler for people aged 65 to 74 to consider contributions. Also, the intention to allow individuals with superannuation balances of less than $500,000 to use unused concessional contribution limits from the previous five years will be good for people who are not in a position to maximise concessional contributions on a year to year basis.
The reduced contribution limits and tight eligibility criteria means while the benefits of these policy changes would be positive, their practical application is likely to be limited.
The Budget signalled a substantial shift in the superannuation policy position of the government and has significantly impacted on people needing to make planning decisions today.
Given the current policy uncertainty, which is unlikely to be resolved in the immediate future, we would encourage you to discuss with us the implications of the Budget and the planning options that may be available to you in your circumstances.