The 2016 Budget proposes a number of changes to Australia’s superannuation system which up until now has been relatively unchanged since the 2007 Simplified Super overhaul. However, with an election likely to be held in coming months, these changes may not be legislated and even if passed, the majority of the proposed changes will not come into effect until 1 July 2017. One change does take immediate effect, however, being a new ‘lifetime limit’ on the amount of after-tax (non-concessional) super contributions members can make.
The Government’s changes to superannuation are aimed at improving the sustainability, flexibility and integrity of the superannuation system. The Government says that “the changes are anchored by the objective for superannuation, to provide income in retirement to substitute or supplement the Age Pension.” Many of the proposed changes are aimed at preventing high wealth individuals from using superannuation as a ‘tax free’ wealth creation vehicle. If these investors are unable to invest in superannuation, they will seek other tax effective investment opportunities outside of superannuation such as purchasing investment properties that they can negatively gear. Such an increase in demand for investment properties is likely to lead to property values increasing further, making the housing affordability issue which was canvassed in my blog post ‘Housing Affordability and Negative Gearing – The Homeless Generation’ an even greater concern
The following changes to superannuation have been proposed:
Introduce a $1.6 million superannuation transfer balance cap
From 1 July 2017, a balance cap of $1.6m will apply to the total amount of accumulated superannuation an individual can transfer into the tax-free retirement phase. Individuals that accumulate amounts in excess of $1.6 million, will be able to maintain this excess amount in an accumulation phase account where earnings will be taxed at the concessional rate of 15 per cent. Members already in the retirement phase with balances above $1.6 million will be required to reduce their retirement balance to $1.6 million by 1 July 2017. Excess balances for these members may be converted to superannuation accumulation phase accounts. Amounts exceeding $1.6 million that are still in pension phase after 1 July 2017 will be taxed similar to the tax treatment that applies to excess non‑concessional contributions. This measure is aimed at limiting the extent to which the tax‑free benefits of retirement phase accounts can be used by high wealth individuals.
Introduce a lifetime cap for non‑concessional superannuation contributions
A lifetime non-concessional contributions cap of $500,000 will be introduced. The lifetime cap will take into account all non‑concessional contributions made on or after 1 July 2007 and will commence on 3 May 2016. Contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed or subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings. The lifetime non‑concessional cap will replace the existing annual caps which allow annual non‑concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65) and will be available to all Australians up to age 74.
Strengthen the integrity of income streams
From 1 July 2017, the tax exemption on earnings of assets supporting Transition to Retirement Income Streams will be removed. A rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes will also be removed.
Harmonise contribution rules for those aged 65 to 74
From 1 July 2017, the current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement will be removed. People under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse. This measure is aimed at providing older Australians the opportunity to increase their retirement savings, especially from sources that may not have been available to them before retirement, including from downsizing their home.
Allow catch‑up concessional superannuation contributions
From 1 July 2017, individuals with a superannuation balance less than $500,000 will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years. Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward. This measure is aimed at people with interrupted work patterns such as women and carers to ‘catch up’ if they choose to do so that they can accumulate superannuation balances commensurate with those who do not take breaks from the workforce.
Tax deductions for personal superannuation contributions
From 1 July 2017 all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions. This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap. This change will benefit individuals who are partially self‑employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements.
Introduce a Low Income Superannuation Tax Offset (LISTO)
From 1 July 2017, a low income superannuation tax offset (LISTO) will be introduced to reduce tax on superannuation contributions for low income earners up to a cap of $500. The LISTO will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf. This will effectively avoid the situation in which low income earners would pay more tax on savings placed into superannuation than on income earned outside of superannuation.
Improve superannuation balances of low income spouses
From 1 July 2017, the income threshold for the receiving spouse (whether married or de facto) of the low income spouse tax offset will be increased to $37,000 from $10,800.
Reform the taxation of concessional superannuation contributions
From 1 July 2017, the threshold at which high income earners pay additional contributions tax will be lowered to $250,000 (currently $300,000). The annual cap on concessional superannuation contributions will also be reduced to $25,000 (currently $30,000 under age 50; $35,000 for ages 50 and over).
Remove the anti‑detriment provision in respect of death benefits from superannuation
From 1 July 2017, the anti-detriment provision in respect of death benefits from superannuation will be removed. The anti‑detriment provision can effectively result in a refund of a member’s lifetime superannuation contributions tax payments into an estate, where the beneficiary is the dependant of the member (spouse, former spouse or child).