Concessional contributions cap

Concessional superannuation contributions are contributions for which a tax deduction has been claimed.  Currently, the concessional contribution cap is $35,000 for people aged 49 and over and $30,000 for people aged 48 and under. 

From 1 July 2017, the concessional contribution cap will reduce to $25,000 to all taxpayers.

 

Unused concessional contribution cap

As outlined above, from 1 July 2017, the concessional cap for all taxpayers is $25,000.  From 1 July 2018, taxpayers with a superannuation balance of less than $500,000 can carry forward any unused concessional cap for up to 5 years.

 

10% test

Currently, in order to claim a tax deduction in their individual tax return for super contributions, an individual must be substantially self-employed (or substantially not employed).  This is determined using the 10% income test.

To satisfy the 10% rule, an individual’s employment income must be less than 10% of their total income (defined as assessable income + salary sacrificed contributions + reportable fringe benefits).

Essentially, individual super contribution deductions are currently limited to taxpayers that are self-employed or have a majority of their income from investments. 

From 1 July 2017, any individual taxpayer can claim a tax deduction for contributions to super regardless of their work circumstances (subject to the concessional contributions cap (above) and the work test (below)).

 

Work test

Currently, taxpayers aged 65 or over (but under 75) need to satisfy the work test before a contribution can be made into super on their behalf.  The work test is satisfied where a taxpayer is gainfully employed for at least 40 hours in a 30 consecutive day period in the financial year in which the contribution is made.

While there was a proposal that the work test be repealed, this proposal was not passed.  As such, the work test will remain in place.

Call us today on 56656469 if you would like to discuss how these changes may apply to you.

Currently, individual taxpayers who have more than $300,000 ‘income for surcharge purposes’ pay an additional 15% tax on concessional (deducted) superannuation contributions.  This charge is imposed by Division 293 of the Income Tax Assessment Act and is, therefore, known as Division 293 tax.

From 1 July 2017, the threshold will reduce to $250,000.

Income for surcharge purposes

In determining whether a taxpayer as exceeded the $250,000 threshold, “Income for surcharge purposes” includes:

* taxable income;

* total reportable fringe benefits;

* net financial investment loss;

* net rental property loss;

* net amount on which family trust distributions tax has been paid; and

* concessional superannuation contributions made within the concessional cap for the financial year.

Income for surcharge purposes does not include:

* super lump sum taxed elements with a zero tax rate.

 

Contributions subject to 15% tax

If a taxpayer’s income for surcharge purposes (outlined above) exceeds $250,000 for the 2018 year (which commences 1 July 2017), they will be liable to pay 15% tax on concessional super contributions above the $250,000.

For example, if the taxpayer’s income is $230,000 plus they had concessional contributions of $25,000 – the total income for Div 293 purposes is $255,000.  As this goes over the threshold, the taxpayer will be liable to Div 293 tax.  The amount of Div 293 tax is 15% of the contributions over the $250,000 threshold – so, in this case, 15% x $5,000.

If a taxpayer’s income is $260,000 plus they had concessional contributions of $25,000 – the total income for Div 293 purposes is $285,000.  Again, as this goes over the threshold, the taxpayer will be liable to Div 293 tax.  The amount of Div 293 tax is 15% of the contribution over the $250,000 threshold.  As the taxpayer’s income (without the contributions) is over the $250,000 threshold, all of the concessional contributions (that is, $25,000) will be subject to the 15% tax.

The ATO have released a video explaining the basics of the operation of Division 293 – accessible here.

 

Payment of Div 293 tax

Taxpayers can choose to pay the additional tax liability by using their personal savings or from their superannuation member balance.

 

Our comment

We recommend that all taxpayers review their potential liability to Division 293 tax.  A taxpayer may have taxable income of less than $250,000 but the additional inclusions (for example, rental property losses) may tip them over the threshold. 

Call us today on 56656469 if you would like to discuss how these changes may apply to you.

Non-concessional contributions are contributions for which no tax deduction has been claimed (that is, they are after-tax contributions).  Currently, the cap for non-concessional contributions is $180,000 per annum.  Taxpayers under 65 years of age can also access the 3 year bring forward rule which enables them to make a contribution of 3 x the cap (that is, 3 x $180,000 or $540,000) in one year (and then no further contributions for the next 2 years).

From 1 July 2017, the annual cap for non-concessional contributions will be reduced to $100,000 for taxpayers with total superannuation account balances of less than $1.6 million. 

Members with total superannuation account balances of $1.6 million or more will not be able to make any non-concessional contributions. 

 

3 year bring forward rule

Access to the 3 year bring forward provisions also depends on the total superannuation account balance of the member as at 30 June of the previous financial year:

• Taxpayers with a total superannuation account balance of less than $1.4 million – can access the full 3 year bring forward provisions and make a non-concessional contribution of $300,000 in one year and no further non-concessional contributions in the next 2 years.
  

• Taxpayers with a superannuation account balance between $1.4 million and $1.5 million – can only bring forward 2 years of non-concessional contributions ($200,000)
  

• Taxpayers with an account balance between $1.5 million and $1.6 million – can only make the annual non-concessional contribution ($100,000)
  

• Taxpayers with an account balance over $1.6 million – cannot make any non-concessional contributions.

Further, if a member has triggered the 3 year bring forward provisions during the 2015/16 or 2016/17 years and didn’t fully utilise the bring forward cap before 1 July 2017, the bring-forward cap will be subject to transitional rules.

 

Other considerations for making non-concessional contributions

If you are aged between 65 and 74, you must satisfy a work test in order to make superannuation contributions (that is, you must be gainfully employed for more than 40 hours over a 30 consecutive day period).  If you are 75 or older, you cannot make voluntary superannuation contributions.

 

Our comment

Members with an account balance in excess of $1.6 million need to be careful not to inadvertently make a non-concessional contribution.  This can occur in a number of ways, for example:

• Paying expenses on behalf of the superannuation fund with private funds;

• Exceeding the concessional contributions cap.

Members looking to make substantial non-concessional contribution will need to plan the manner in which they do this to ensure they stay within the relevant caps.  For example, taxpayers may wish to take advantage of the 3 year bring forward rules during the 2016-17 financial year which will enable them to contribute $540,000 (whereas the same cap in the 2017-18 financial year will only enable the to contribute $300,000).

Call us today on 56656469 if you would like to discuss how these changes may apply to you.

From 1 July 2017, there will be a limit to the amount a superannuation member can have in a tax-free pension account.  The limit is $1.6 million from 1 July 2017. 

If the member has a balance of more than $1.6 million in super, only $1.6 million of this balance can be held in a tax-free account-based pension account.  The balance over $1.6 million will need to remain in accumulation (or be commuted back to accumulation for existing pensions) – the earnings on which will be taxed at 15%. 

If the pension account has a balance of more than $1.6 million as at 1 July 2017, the ATO will direct the trustee of the fund to commute the excess over $1.6 million back to accumulation, together with any deemed earnings on the excess.  The individual will also be liable for excess transfer balance tax on these earnings.

Once the tax-exempt pension account has been established, subsequent earnings on this balance will not be required to be withdrawn to take the balance back to $1.6 million (similarly, if the account drops below $1.6 million, a top-up contribution cannot be made to bring the account back to $1.6 million).

The cap will apply to:

• All existing pensions at 1 July 2017

• All new pensions started on or after 1 July 2017

• Transition-to-retirement income streams converted to an account-based pension

• For reversionary pensions, 6 months after the date of death

The $1.6 million cap will be indexed in $100,000 increments in line with the Consumer Price Index (CPI).  However, if a member utilises the full $1.6 million transfer cap, they cannot take advantage of future $100,000 CPI increases.  If the $1.6 million cap is not fully utilised, the member can take advantage of the future $100,000 cap increases.

Who does this affect? 

This measure will have a direct impact on members who have a current pension balance over $1.6 million.  These members will need to take immediate action to comply with the new provisions from 1 July 2017.

This measure will also have a future impact on members that have an accumulation balance of over $1.6 million that may be looking to convert this balance to an account based pension at a later date.

Call us today on 56656469 if you would like to discuss how these changes may apply to you.

Currently, the earnings on assets used to support a transition-to-retirement pension account are tax-free.  Members who are over preservation age (but younger than 65) and have not retired may start a transition-to-retirement pension.  This enables the member to draw a pension from their superannuation account while still working.  This pension is designed to supplement the member’s income to enable them to “transition” into retirement.  The earnings on this pension account are tax-free.

From 1 July 2017, the earnings on a transition-to-retirement pension account will no longer be tax-free.  Existing capital assets that support a transition-to-retirement pension account will be eligible for capital gains tax relief.  This will be addressed in a separate article.

Call us today on 56656469 if you would like to discuss how these changes may apply to you.

The recent changes to superannuation have resulted in the earnings on some member accounts being subject to income tax (where previously they would have been tax-free).

For example, members can only have a pension account balance of $1.6 million as at 1 July 2017.  Any amount of the pension that exceeds $1.6 million will need to be commuted back to accumulation.  The excess amount commuted back to accumulation will now be taxed at 15% (whereas previously it would have been tax-free).  Under the current rules, where members dispose of capital assets and their entire account balance in pension phase, the disposal of the asset will be tax-free.  However, where there account balance exceeds $1.6 million and the excess is transferred back to accumulation, the disposal of capital assets after 1 July 2017 may result in a capital gains tax liability.

Further, there are some taxpayers that currently have a transition-to-retirement pension.  The earnings on these accounts are presently tax-free.  As such, the sale of capital assets supporting the transition-to-retirement pension account are also tax-free.  From 1 July 2017, the earnings on transition-to-retirement pension accounts will no longer be tax-free.  As such, the future sale of capital assets that support the transition-to-retirement pension account may result in a capital gains tax liability.

For funds with unsegregated assets, members have a choice to reset the cost base of their capital assets to market value as at 30 June 2017.  This choice will ensure that the gains already made on the asset are tax-free up to 30 June 2017.  The choice can be made on an asset-by-asset basis and once the choice is made, it is irrevocable.

The notional capital gain/loss on the asset will be shown on the 2017 tax return of the superfund.  If the asset makes a capital loss, the loss will be disclosed on the 2017 tax return and carried forward to offset against future capital gains.  If the asset makes a capital gain, the gain is disclosed on the 2017 tax return but will be tax-free to the extent is supports a pension account as at 30 June 2017.  Essentially, if the member makes the election to reset the cost base of the asset, there is a deemed sale and repurchase of the asset as at 30 June 2017 and the net capital gains tax implications of this deemed sale will be disclosed on the 2017 tax return.  

Superannuation funds and members will need to carefully analyse whether this election will be beneficial for their member accounts. 

Call us today on 56656469 if you would like to discuss how these changes may apply to you.