Superannuation Reform - What has changed and is there more to come?
The proposed changes to super have now been passed into law and with them the government has sought to redefine the purpose and objective of superannuation.
Until now the objective of superannuation (as definded by the sole purpose test) was: to provide a benefit to the member of the fund after their retirement
The purpose of superannuation has now been refined to be: to provide income in retirement to substitute or supplement the Age Pension.
While this may seem a subtle change in wording it shows very clearly the governments intent is to limit people ability to accumulate wealth in the concessionally taxed superannuation environment. This signals a change away from the previous position of incentivising people to save for their retirement as the government begins to hunt for more tax revenue. When looking at this change in wording there are two changes I find most interesting/concerning:
benefit is changed to income in retirement which could indicate a change in the way super is accessed and the possibility of removing or limiting lump sum benefits.
substitute or supplement the Age Pension has been introduced which may indicate the preservation ages may be increased to match the pension age (currently 65-67)
Note: this is pure speculation but while for the past decade or so superannuation reform was limited and gradual giving confidence to the system, these reforms are a big shift and by doing so the government has increased the possibility of other sweeping changes in the future.
Following the change in the defined purpose of super there have been a raft of other changes to how you can contribute and how your funds will treated once they have entered the superannuation environment.
These are contributions on which you have not personally paid income tax. This includes all employer contributions, personal contributions for which you claimed a tax deduction and salary sacrificed contributions. Concessional contribution caps were first introduced in 2006 with a limit of $50,000 if you were under 50 and $100,000 for those over 50. This has steadily decreased and in line with the new definition it has decreased further so from 1 July 2017 irrespective of your age you will be limited to contributing $25,000 before tax.
Who does this impact?
The reduced limit means anyone earning above $263,000 will exceed this with employer contributions alone.
Anyone approaching retirement who is contributing surplus cashflow
Anyone currently using a transition to retirement strategy to reduce their personal tax.
Despite reducing the cap the government has made one positive change, those with a balance less than $500,000 can catch up on any unused cap from 1 July 2018.
The government has also made it easier to contribute concessionally as moving forward anyone can claim a personal deduction for contributions to super removing the need for more complicated and inflexible arrangements like salary sacrifice agreements.
These are contribution on which personal income tax has already been paid. Prior to 2006 there was no limit on the amount you could contribute non-concessionally. There was a transitional arrangement when the cap was first introduced limiting contributions to $1m before July 2007 and after which the limit was set at $180,000 per year (with a maximum of $540,000 over a three-year period). This had remained constant until now where the government has further reduced it to $100,000 (with a maximum of $300,000 over a three-year period) unless you have a balance in excess of $1.6m in which case you will no longer be able to contribute non-concessionally.
Who does this impact?
Anyone approaching retirement that is trying to move funds into the superannuation environment.
Anyone who has previously triggered the bring forward provisions
Anyone who was planning on utilising a re-contribution strategy.
Until now if you had a spouse with an assessable income of less than $10,800 (inclusive of SG) you could receive a tax offset of up to $500 where you contributed to their fund. This has been made available to more people with the limit on spouse earnings increased to $37,000.
Abolishing the anti-detriment payments
Anti-detriment payments allowed funds to refund to a deceased member account, the contributions tax they had paid during their lifetime, so to increase the lump sum paid to certain dependants. This was inconsistently applied with some funds doing this automatically, some funds doing this if requested and some funds not doing this at all. It also meant a large amount of tax that had been collected by the government could be clawed back and so it too has been banned.
Removing tax exempt earnings for transition to retirement income streams
Until now the earnings on all superannuation assets being used to pay a pension were exempt from tax. From July 2017 only account based pension where full conditions of release have been met will retain this treatment with all earnings on assets in transition to retirement pensions being taxed at 15%. The intention behind this was to eliminate (or at least substantially reduce) the use of TTR’s to reduce income tax.
Who does this impact?
Anyone considering commencing a transition to retirement strategy
Anyone over 65 that has not converted their TTR pension to an account based pension
Lowering the income threshold for Division 293 tax to $250,000.
Div 293 increases the rate of taxation levied on contributions where the member’s income inclusive of contributions exceeds the threshold to 30% from 15%. This will hit a small number of people with incomes between $250,000-$300,000.
Where to from here?
These are arguable the largest changes in the past decade and for anyone that is currently employing superannuation strategies it is important these are reviewed before July so that you are penalised or disadvantaged as a result of these changes.
It is still worthwhile noting that even after these changes super is still an incredibly tax effective place to invest for your retirement and based on these changes, I would posit that it may only get harder to get funds into this tax effective environment moving forward.
If this has raised any questions or concerns about your current superannuation strategies please contact us for a review.