Super changes just around the corner

For more than 20 years, superannuation has been compulsory for Australian employees. In this article we discuss the key considerations in relation to the changes foreshadowed in the 2016 Federal Budget, and enacted by legislation in November last year, which are the biggest superannuation changes that have come into play in the last 10 years.

Most of the changes will commence from 1 July 2017 and it’s important you have appropriately planned for, and taken any necessary action, in the months leading up to July.

Pension reforms

By way of background, there are two phases within the superannuation system:

  1. Accumulation (Savings Phase), subject to a 15% tax rate; and
  2. Pension (Drawdown Phase), exempt from tax.

There are two main changes to consider:

  1. A limitation on the funds that can be held in the Drawdown Phase, known as the Pension Transfer Balance Cap (PTBC), being $1.6 million. Any excess funds will have to be moved to the Savings Phase, subject to15% tax, or withdrawn.The system will be managed by the ATO through measurement of your personal transfer balance account via a series of debits and credits. Credits will be applied when you commence a pension and debits will be applied when you cease a pension.Indexation on the $1.6 million is available, however it will only be indexed in $100,000 increments and will only apply if you haven’t fully utilised your PTBC.
  1. Cessation of the tax exemption applying to the pension type known as Transition to Retirement, meaning any earnings in that pension type will be subject to 15% tax. Note, no cap applies to this type of pension.

These reforms have no impact on the taxation of benefits you receive in your own hands. If you are over 60 and receive a super benefit, no matter how you are able to access it, it is non-assessable, tax-exempt income and it won’t affect your taxable income.

One-off CGT relief

Under the PTBC, some members will be required to move funds from the Drawdown Phase to the Savings Phase. To the extent that taking that action triggers a capital gain, an unexpected but welcome one-off relief is available through what is known as the Pre-Commencement Stage, being 9 November 2016 through to immediately before 1 July 2017.

During this time, the trustee of the fund must elect to apply for that relief, however it is important to note that this election is irrevocable. If a superannuation fund is in the Drawdown Phase and another member is in the Savings Phase, the relief will apply across all assets. This may trigger a capital gain in the Savings Phase that you will never be able to unwind.

This is a tricky area and you should seek close advice from your Prosperity Adviser before electing to apply for the relief.

Amendments to contribution caps

Since 2007, contribution caps have been the main way in which super has been regulated. There are two types of contributions you can make to your superannuation fund:

  1. Concessional contributions, where a tax deduction is claimed either by yourself or your employer; and
  2. Non-concessional contributions, where no tax deduction is claimed.

Currently, the cap on concessional contributions is $35,000 for those over 49 years of age at 30 June 2016, or $30,000 for those under 49 years of age. After 1 July 2017 the cap will be $25,000, regardless of age.

The non-concessional cap is currently $180,000, and for those under 65 there is the ability to bring forward the next two years of contribution caps to make a $540,000 contribution.

From 1 July 2017, the cap will be reduced to $100,000 annually and a limit of $300,000 will be placed on the ‘bring forward’ limit for those under 65.

Apart from a reduction in the amount of money you can put into your superannuation fund, there is one other change, being a concept called Total Superannuation Balance. From 1 July 2017, balances which are close to or exceed the PTBC of $1.6 million will be assessed, and a further constraint on the money you can put into super on a non-concessional basis could be down to $0. Therefore, there may be a one-off opportunity available to some superannuants which will no longer be available after 1 July.

Time to act

While the reforms may be seen as an attack on superannuation, you should not consider superannuation as any less useful in retirement savings. Notwithstanding the reforms, superannuation remains the most effective retirement savings vehicle. However, the clock is ticking and there has never been a more important time to contact your Prosperity Adviser for a review of your arrangements.

Gavin Fernando is an Authorised Representative of Prosperity Wealth Advisers Pty Ltd (ABN 32 141 396 376) is part of the Prosperity Advisers Group and an Authorised representative of Hillross Financial Services Limited, Australian Financial Services Licensee 232705. This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. Readers need to consider their own financial situation and needs before making any decisions based on this information.

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