On July 1 this year, a number of changes to our superannuation system are due to come into effect.
These changes are the most significant changes we have seen to our superannuation system since the simple super rules which were introduced by the Howard government nearly a decade ago.
There are 4 main changes which everyone must know, or at least be aware of, and these are:
- Changes to the amount which you can contribute to superannuation on a pre-tax basis (concessional contributions)
- Changes to the amount which you can contribute to superannuation after tax (non-concessional contributions)
- Changes to the Transition to Retirement (TTR) Pension arrangements
- The $1.6 million pension limit cap
Getting money into superannuation
From July 1 getting money into superannuation is being restricted.
Currently if you are 49 years or older you may contribute up to $35,000 of pre-tax contributions, or, if younger your limit is $30,000. From July 1, 2017 your pre-tax (concessional contributions) contributions cap will be limited to $25,000. It is important to note that your employer Superannuation Guarantee contributions are also counted towards this limit.
This means your ability to make additional Salary Sacrifice contributions has been reduced. If you are making additional contributions to superannuation by way of Salary Sacrifice then you should review these arrangements prior to 30 June 2017.
Post Tax contributions
Currently you can make after tax contributions of up to $180,000 into superannuation (provided you are under age 65 or if over, working). This amount is being reduced to $100,000 from July 1, 2017. A key component of this contribution limit was where a person was under the age of 65 they could “bring forward” two future years of contributions, and therefore bringing the total amount that they can contribute into superannuation by way of a lump sum to $540,000.
Whilst the bring forward rule remains in place the total amount that can be contributed into superannuation under this arrangement is limited to $300,000 from July 1.
This is an important consideration for people who may be selling non-superannuation’s assets prior to retirement in the expectation that they would be able to ”top up” their superannuation fund prior to retirement.
In addition, where a person holds more than $1.6 million in superannuation then they will not be able to make any after-tax contributions into their superannuation fund. Where someone holds a balance above $1.4 million but below $1.6 million they will be subject to a scale back after-tax contribution capacity.
The result of these changes will mean people will have to plan their superannuation contributions well in advance of retirement.
Spending money from your superannuation
From July 1 taking money out of superannuation in the form of a pension is changing.
Transition to Retirement (TTR) pensions
An often-used strategy for people over the age of 60, but under age of 65 who were still working, was to commence a Transition to Retirement Pension. Effectively this meant converting all or part of your superannuation into a Pension Account, and then making salary sacrifice contributions into your superannuation fund. This meant that a person could save tax as neither the pension earnings on the fund, nor the pension payments were taxed, and amounts contributed to superannuation were taxed at 15%.
From July 1 Transition to Retirement Pensions are to be taxed at the same rate as Accumulation Accounts, which is 15% on the earnings of the fund. This means there is no longer any benefit from holding superannuation in a Transition to Retirement Pension.
It will be important for individuals using a transition to retirement pension to assess this strategy prior to 30 June because there may be capital gains tax consequences where these accounts are converted back to accumulation phase.
$1.6 million pension limit
Prior to 30 June the amount which you can hold in a superannuation Pension Account was unlimited. This means that people over the age of 60 who held their benefit in a superannuation account would pay no tax on the earnings of the fund, and no tax on any payments received from the fund.
The government has now introduced a limit on the amount of superannuation that can be used to support a tax-free superannuation income stream. From July 1 the limit will be $1.6 million.
For any amounts held in superannuation above the new limit, these must be converted back to an Accumulation Account, where the tax on the earnings of the fund are applied at 15%.
It is important that if you have more than $1.6 million in pension phase that you attend to this prior to June 30. I would also stress the importance of receiving financial advice in reverting any amount above the pension cap because there may be capital gains tax consequences of doing so.
The government is offering capital gains tax relief, and the ability to reset the cost base of any assets that are transferred from pension to accumulation phase, however it is important that this is done correctly.
The bottom line
The bottom line when considering your situation in light of the new rules, and with superannuation and/or retirement planning generally is to always seek professional advice.
At Andrew Rowan Wealth Management, we will be attending to these issues in regard to our clients, and contacting them where there are arrangements may impact upon them.
We also stress the importance that under no circumstances should you act on any part of the issues highlighted in this article, without seeking professional advice. The information contained in this article is general advice only. We would further stress that there is no substitute for personal financial advice.
Naturally we would be happy to hear from you if you are not a client, but would like advice regarding your personal situation.