How will the latest changes to superannuation affect me?

How will the latest changes to superannuation affect me?

In May of 2016, the government announced arguably the most significant change to the superannuation system since it was introduced by Peter Costello in 2007. Since then, those proposals have changed shape considerably, so what do they mean for you?

The announcement effectively unwound many of the rules that afforded no tax on earnings within super or on pension income payments from superannuation.

Now, an election cycle later and after much to and fro, the government has announced the third iteration of the proposals, watering down some of the mooted changes.

 

In its current form, the proposed legislation ensures several original proposals remain, such as the $1.6 million tax-free balance. However, many changes have been removed. The most notable of these is the scrapping of the $500,000 lifetime non–concessional contributions (after tax contributions to superannuation) cap.

The most common question by far about these changes centres on an individual’s ability to deposit capital into super out of personal savings. This is known as a non-concessional contribution. In this article, I will explore the details of the changes affecting your ability to make personal (non-concessional) contributions.

From 1 July 2017, an individual will have an annual non-concessional contribution limit of $100,000, representing four times the concessional contribution limit. However, if your total superannuation balance is greater than the general transfer balance cap ($1.6 million) on 30 June of the previous financial year, you will be prohibited from making any non-concessional contributions.

The concept of ‘total superannuation balance’ is essentially an individual’s total superannuation account balance at 30 June in the financial year prior. That total superannuation balance includes any accumulation account, transition to retirement account, account-based pensions, defined benefit pensions and the amount of any rollovers in process but not otherwise reflected in the balance of the receiving fund. It excludes any personal injury or structured settlement contributed to superannuation.

The transfer balance cap of $1.6 million is to apply on those sums transferred from a superannuation accumulation account to the superannuation pension account paying a tax-free income stream in the retirement phase. Individuals who breach the transfer balance cap at 1 July 2017 will be required to have their superannuation income streams commuted back to accumulation phase and will be subject to excess transfer balance tax.

The non-concessional contribution bring-forward
The current rules allowing for the bring-forward of a cumulative three years of annual non-concessional contributions to a current financial year will be modified with effect from 1 July 2017 and will add a level of complexity to the current arrangements.

From 1 July 2017, individuals may be able to access a bring-forward period for their non-concessional contributions cap of two or three times the annual cap, depending upon their total superannuation balance.

The amount of the bring forward that can be triggered in a particular year will be determined by the difference in value between:

  • The general transfer balance cap ($1.6 million in 2017/18); and
  • The individual’s total superannuation balances at 30 June in the previous financial year to that of contribution.                                                                                                                          

In the first instance, if the difference is less than the non-concessional contributions cap (i.e. $100,000 for 2017-18), the individual will not be able to trigger the bring-forward rule in that year, but will instead be limited to the annual cap of $100,000.

Where the individual is under the age of 65 at any time in the financial year of contribution and a bring-forward period has not been previously triggered, consideration of the difference between the general transfer balance cap and the total superannuation balance will determine the sum and the number of financial years available to make that contribution as follows:

  • If the difference is more than $100,000 but less than $200,000, the amount of bring-forward available will be $200,000 (twice the annual cap) and a maximum of two financial years to utilise it;
  • If the difference is more than $200,000, the amount of bring-forward available will be $300,000 (three times the annual cap) and a maximum of three financial years in which to utilise it.

By way of example, if John has total superannuation balances of $1.45 million on 30 June 2017, he could trigger a bring-forward in 2017-18 financial year of $200,000 (as the difference at $150,000 is greater than $100,000 but less than $200,000) and would have until June 2019 financial year to utilise it.

Sue has total superannuation balances of $1.35 million on 30 June 2017 and she could trigger the bring-forward in 2017-18 of $300,000 (difference greater than $200,000) by making a non-concessional contribution of more than $100,000, and she would have until 30 June 2020 to utilise it (three financial years).

However, caution is required. Whether an individual is able to utilise any unused bring-forward in future years, within the bring-forward period, will depend upon their total superannuation balance on 30 June of the year before they intend using it.

For example, Sue decides to contribute $120,000 in 2017-18, leaving $180,000 of her bring-forward available for use in the two-year period of 1 July 2018 to 30 June 2020. On 30 June 2018, Sue’s superannuation balance has increased to $1.7 million and is now in excess of the $1.6 million transfer balance cap. This means that her remaining non-concessional contributions cap for 2018-19 is not the remaining amount of the bring-forward ($180,000) but nil. Therefore, any non-concessional contribution made in 2018-19 would be in excess of her non-concessional contributions cap and can give rise to additional tax on that sum.

Non-concessional contributions transition rules

With the current annual non-concessional contribution cap still in place, we have until 30 June 2017 to contribute $180,000, where eligible by age or trigger a bring-forward and contribute $540,000. 

Transitional rules will apply to individuals who trigger the bring-forward but fail to fully utilise the $540,000 cap prior to 1 July 2017. In these cases, an adjusted three-year cap will apply after 1 July 2017.

If you trigger the bring-forward in either 2015-16 or 2016-17, you have until 30 June 2017 to make further non-concessional contributions that total $540,000 for the period. If this does not occur, a new limit will apply to the amount of additional non-concessional contributions made after 1 July 2017.

For those who triggered the bring-forward rule in 2015-16, the maximum would be $460,000 (180,000 + 180,000 + 100,000) unless they exceed this amount before 30 June 2017. For those who triggered the bring-forward rule in 2016-17, the maximum would be $380,000 (180,000 + 100,000 + 100,000) unless they exceed this amount before 30 June 2017.

Simple? If you are still confused, make sure you seek financial advice.

Chris Smith, partner, VISIS Private Wealth

How will the latest changes to superannuation affect me?
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