OTHER GOVERNMENT INITIATIVES


While the Opposition has at the time of writing not proposed any further changes to superannuation, the Government by contrast announced a number of changes in the Federal Budget which it intends to implement if re-elected on 2 July.  It is not yet known whether the Opposition supports these changes which are as follows:


REDUCTION OF CONCESSIONAL CONTRIBUTIONS CAP

From 1 July 2017, the annual cap on concessional contributions will be reduced to $25,000 for all taxpayers (down from the current $30,000 for taxpayers under 50, and $35,000 for older taxpayers).  This change will limit the capacity to make deductible contributions to superannuation, as well as salary sacrificed contributions.  Softening the blow however, individuals with a superannuation balance less than $500,000 will be allowed to make additional “catch-up” concessional contributions where they have not reached their concessional contributions cap in previous years, with effect from 1 July 2017.  Unused cap amounts will be carried forward on a rolling basis for a period of 5 consecutive years.  Only unused amounts accrued from 1 July 2017 will be available to be carried forward.  The Government states that this measure will make it easier for people with varying capacity to save and for those with interrupted work patterns (such as women who leave the workforce to have children) to provide for retirement.

EXAMPLE

Jake is an employee accountant whose employer contributed $15,000 in Superannuation Guarantee contributions in 2017/2018.  Jake also salary sacrificed $5,000 to superannuation.  In 2018/2019, Jake’s concessional contribution cap will effectively be $30,000 (consisting of the standard $25,000 annual cap, plus the $5,000 unused cap from 2017/2018).  This will provide Jake with a greater capacity to make concessional contributions such as salary sacrifice in 2018/2019 than would otherwise by the case.

If the concessional contributions gap is reduced, employees may need to review salary sacrifice arrangements that are in place at the end of 2016/2017 to ensure that you do not exceed the new, reduced cap from 1 July 2017.

LIFETIME NON-CONCESSIONAL CONTRIBUTIONS CAP

Effective 3 May 2016, if the Government is re-elected the non-concessional (after-tax) contributions cap will become a lifetime cap of $500,000, rather than the current annual cap of $180,000. This new cap will be retrospective by taking into account all non-concessional contributions made on or after 1 July 2007. Contributions made before the commencement date of 3 May 2016 cannot result in an excess over the lifetime cap.  However, excess non-concessional contributions made after 3 May 2016 will need to be removed or will be subject to penalty tax.  Going forward, the lifetime cap will be indexed to average weekly ordinary time earnings.

To recap, non-concessional contributions (also commonly referred to as an after-tax contribution) include:
  • Personal contributions for which an income tax deduction cannot be claimed as you fail the ‘10% rule’
  • Contributions made for you by your spouse
  • Contributions in excess of your CGT Cap Amount for small business owners
  • Amounts transferred from foreign superannuation funds, excluding amounts included in the fund’s assessable income, and
  • Contributions made for the benefit of a person under 18 years of age that are not employer contributions for that person.

IMPACT

This change limits the amount of after-tax savings that can be contributed into the concessionally taxed superannuation environment, and is retrospective in that it takes into account non-concessional amounts that have been contributed since 1 July 2007.  This reform will not only impact high income earners but also those who have significant one-off windfalls that they wish to contribute to superannuation such as the sale proceeds of capital assets, or inheritances.
This lifetime cap may also limit the ability of taxpayers to undertake re-contribution strategies, whereby you convert a superannuation interest from a taxable component to a tax-free component.  For more information on re-contribution strategies see our 2013 Superannuation Tax Savers publication available at our website www.mytaxsavers.com.au.

DEDUCTIONS FOR ALL! 

From 1 July 2017 all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions.  Currently, only those who receive little or no employer superannuation contributions can claim a deduction such as if:
  • You run your own business, but were not an employee of the business (e.g. you are a Sole Trader or a Partner in a Partnership)
  • You are under the age of 65 (that is, you are eligible to contribute to superannuation) and receiving pension or investment income only
  • You are a contractor who is not eligible for Superannuation Guarantee from the organisations that you contract to
  • You only received workers’ compensation payments during the year
  • You are a non-working spouse/individual
  • You are an employee for only a small part of the year
This change is good news for the many employees who wish to make contributions to superannuation but whose employers do not offer salary sacrifice.  By making an after-tax superannuation contribution, employees (and all individuals under the age of 75) will be able to reduce their income tax liability while providing for their retirement.

‘WORK TEST’ ABOLISHED

The current restrictions on people aged 65 to 74 from making superannuation contributions will be removed from 1 July 2017.Currently, if people in this age bracket wish to make personal contributions to superannuation they must meet a ‘work-test’ which requires them to have worked for at least 40 hours over 30 consecutive days in the financial year.  This change is therefore good news for older taxpayers who do not meet the current ‘work-test’ but who wish to inject money into the occasionally taxed superannuation environment.

LOW INCOME SUPER TAX OFFSET

From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO).  Its purpose is to reduce tax on the superannuation contributions made by or on behalf of low income earners.  The LISTO is a non-refundable tax offset provided to your superannuation account (not you personally) based on the tax paid on the concessional contributions of low income earners up to a cap of $500.The LISTO will apply to taxpayers with an adjustable taxable income of up to $37,000 that have had concessional contributions made on their behalf (i.e. Superannuation Guarantee contributions by their employer).  The LISTO will replace the current Low Income Superannuation Contribution (LISC) which is a very similar regime.  In effect, the LISTO will ensure that low income earners do not pay more tax on their superannuation contributions than on their take-home pay.  In terms of administration, the ATO will determine your eligibility for the LISTO and will advise your superannuation fund annually.

EXAMPLE

Chase is a part-time university tutor.  In 2017/2018 he earned $35,000 and his employer made contributions of $3,325 on his behalf.  Chase is eligible for the LISTO.  He will receive $498.75 of LISTO in his account.  Chase would have received the same amount under the LISC regime.

TRANSITION TO RETIREMENT CRACKDOWN

The Government intends to remove the tax exemption that currently applies on earnings on pension assets that support Transition to Retirement Income Streams/Pensions.  Earnings from assets supporting these Income Streams/Pensions will be taxed at 15% (currently they are tax-free).  This change will apply from 1 July 2017, irrespective of when your Transition to Retirement Income Stream/Pension commenced.  To be clear, for those under 60 if your pension is paid from a taxed source, you will still receive a tax offset equal to 15% of the taxable part of the income stream.  Those 60 and over will still receive their income stream tax-free.  It’s just that earnings supporting the income stream for both under 60s and over 60s will be taxed at 15%.

EXAMPLE

Ken is 58 years of age, earns $100,000 and has $440,000 in his superannuation account.  He pays income tax on his salary and his superannuation funds pays $3,750 at 15% on the superannuation earnings of $25,000.Nearing retirement, Ken wishes to reduce his working hours by 15% and has a corresponding reduction in his salary down to $85,000.  So as to have no reduction in his current lifestyle, he commences a Transition to Retirement Pension for $15,000 per year.Currently, although Ken pays income tax at his current marginal rate on the pension (less a 15% tax offset) his superannuation fund pays no tax on the earnings on his superannuation account.Under the new law from 1 July 2017, the earnings on his superannuation will be taxed at 15% as he is receiving a Transition to Retirement Pension.While this measure makes the Transition to Retirement strategy less attractive, the concessional rate of 15% tax on earnings still compares favourably to the marginal tax rates that may apply on earnings outside of superannuation.  Additionally, as stated, the 15% tax offset on Transition to Retirement amounts received by people under the age of 60 will remain, as will the tax-free treatment of those amounts for those aged 60 and over.

LOW INCOME SPOUSE SUPER CONTRIBUTION EXTENDED

From 1 July 2017, if it is re-elected the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income earning spouse to $37,000 (up from $10,800).  The offset will gradually reduce for incomes above $37,000, before phasing out completely for incomes above $40,000.
To recap, this offset provides up to $540 each year for the contributing spouse.,br>

EXAMPLE

David earns $38,000 per year.  His wife Bobby wants to make a superannuation contribution on his behalf.Under the current rules, Bobby would not be entitled to a tax offset as David’s income exceeds $10,800.  Therefore there is no tax incentive for Bobby to make a contribution on behalf of her spouse.Under the new proposed law, Bobby would be eligible for a tax offset as David’s income is below $40,000.  However, as David earns more than $37,000, Bobby will not receive the maximum $540 tax offset.  Rather, the offset will be 18% of the lesser of:
  • $3,000 reduced by every dollar over $37,000 that David earns, or
  • The value of the spouse contributions made by Bobby.

RETIREMENT INCOME PRODUCTS – TAX EXEMPTION

From 1 July 2017, if re-elected the Government will remove the tax barriers to the development of new retirement income products by extending the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self-annuitisation products.