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Federal Budget 2016. Superannuation

Budget 2016-17: How will the superannuation changes affect you?

JTB Studios
Private Client Adviser
4 May 2016

Last night the Treasurer Scott Morrison handed down a budget which he claimed was designed around growth and jobs.  Among the tax reform measures were some significant announcements regarding Australia’s superannuation system.

The new superannuation measures announced will affect those making additional contributions to their super, those who are already retired and drawing a pension from their superfund and will also affect the estate planning outcomes for superannuants.

Nearly all of the measures apply from 1 July 2017, giving time to review and adjust strategies as required however one measure takes place immediately – the new lifetime cap of $500,000 for non-concessional contributions.

These announcements will have an effect on the strategies commonly used by our clients.  These strategies will be reviewed by our adviser team and calibrated accordingly to comply with the new rules and also to continue to achieve our clients’ personal financial goals.

Our upcoming Hewison Investor Series event on Tuesday 24 May will focus on the budget and its implications. If you are interested in more detail we encourage you to book early by contacting Clare Blizzard via email [email protected]. If you are concerned about any of the announcements, please contact your adviser directly.

The table below provides a brief summary of the budget superannuation announcements and how it can affect you

               BUDGET FEATURE               WHAT HAS CHANGED                                RESULT
CONTRIBUTION PHASE  
Work test Removed from 1 July 2017
  • Contribution caps to be the only restriction up to age 75
Non-concessional contributions

Annual $180,000 cap to be replaced by $500,000 lifetime cap (indexed to average weekly ordinary time earnings, or AWOTE) from 3 May 2016

 

Lifetime cap to be backdated to 1 July 2007
  • Restricted ability to use super as a savings and asset protection vehicle
  • Limited ability to repay existing super gearing facilities
  • Pre-3 May 2016 contributions count towards the lifetime cap, but won’t trigger an excess contribution

Concessional contributions
Cap reduced to $25,000 from 1 July 2017 (currently $30,000 or $35,000 for those aged over 50)
  • Reduced ability to save for retirement
  • May need to reconsider salary sacrifice arrangements
  • $25,000 will be indexed to AWOTE
 

Personal super contribution deductions permitted from 1 July 2017 without restriction up to age 75
  • Self-employed not penalised for having part-time employment
  • Employees not disadvantaged if not using salary sacrifice
  • An extra 10 years of tax deductible contributions available without the work test
  Catch up contributions permitted for “unused cap amounts” accruing from 1 July 2017 if the member balance in super is less than $500,000 (calculated on a rolling, five year basis)
  • Opportunity for all people, including those with interrupted work or savings patterns, to catch up with retirement savings tax effectively where they don’t use their maximum caps
  • Salary sacrifice would be a useful tool for catch up
 

Threshold for extra 15% superannuation contributions tax reduced from $300,000 to $250,000 from 1 July 2017
  • Super not taxed as effectively for salaries from $225,000, so may need to re-consider salary sacrifice arrangements
  Current Low Income Superannuation Contributions to be replaced by Low Income Superannuation Tax Offset (LISTO)
  • LISTO to operate similarly to current system – the tax on contributions for low income earnings receives an offset
  Threshold raised for low income spouse superannuation tax offset from $10,800 to $37,000 from 1 July 2017
  • Up to $540 tax offset for those contributing for a low income earning spouse, phasing out at an income of $40,000
  • Helps boost savings for low income spouse
RETIREMENT PHASE

Transition to retirement pensions

Earnings no longer tax free from 1 July 2017

Election to treat withdrawals as a tax-free lump sums no longer available
  • Depleted earnings and growth: 15% tax on earnings and 10% tax on capital gains
Pension income streams

$1.6 million transfer balance cap for “retirement pensions” from 1 July 2017 (indexed in $100,000 CPI-based increments)
  • Tax-free earnings will only apply to the first $1.6 million capital plus growth
  • Balance can stay in super (in accumulation phase), but earnings will be taxed at 15% and capital gains at 10%
  • Need to track progressive percentage use of the new cap
  • Fluctuations after the initial measurement against the cap will be ignored
  • Incentives to pursue high growth strategies in pension accounts, including allocated high risk/return investments and limited recourse borrowing arrangements
  Existing retirement pensions must reduce their retirement account balance to $1.6 million by 1 July 2017
  • Reduced tax exemption
  • Need to consider whether it’s best to withdraw excess or leave in accumulation phase in superannuation
Recycling/re-contribution strategy $500,000 lifetime non-concessional cap restricts contributions
  • Need to consider greater accumulation of wealth outside superannuation during life
  • More tax on death benefits paid to the next generation
ESTATE PHASE
Budget Feature This deduction is removed from 1 July 2017
  • Potential reduction in death benefit payouts to survivors
  • Little impact for Self-Managed Super Funds (SMSF)
Contribution Phase

Balances above $1.6 million will not lock in tax-free component as a percentage
More tax on death benefits paid to the next generation

The information contained in this article is general advice and does not take into account your own personal circumstances.  Prior to making any changes to your financial arrangements, you should first obtain advice from one of our advisers.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email [email protected] or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.