On May 3 2016, Treasurer Scott Morrison released his first Federal Budget. It was a budget that included significant changes to superannuation rules, as well as tweaks to a number of other limits and thresholds.  As a result, it could significantly affect the retirement plans of many Australians. The changes announced include;

Superannuation

Lifetime Non Concessional Contribution Cap introduced

The current annual non concessional caps are set to be changed immediately to a lifetime cap of $500,000.  This will be backdated to include any contributions made since 1 July 2007, but will not penalise anyone who has exceeded these limits prior to budget night.

Elston Comment
For anyone with large sums of money outside of super, looking to make contributions, the opportunity to add this to super has been reduced.  Taxpayers need to determine what they have done in the past and look to ensure they have fully utilised their lifetime limits.  This change is immediate, so there is no window of opportunity before the rule change.

Concessional Cap reduced to $25,000

The Concessional Contribution Cap for tax deductible amounts into superannuation has been reduced, effective from 1 July 2017.  Currently, a tax payer under 50 can put before tax money of up to $30,000 into super.  This is set to be reduced to $25,000.

For those over 50, the current $35,000 limit will also be reduced to $25,000.

Elston comment
This is a significant change to one of the main strategies used by people to save for retirement.  Typically workers over 50 use these limits to top up their super balances once the costs of mortgages and children have abated.  These people will no longer have the same opportunity, so need to consider starting with extra contributions at a younger age or other non-super savings. A window exists before 30 June 2017 to take advantage of the higher caps that exist this year and next.

Lowering the Division 293 Tax threshold to $250,000

Division 293 is a tax that applies to concessional contributions made by high income earners.  Currently an additional 15% is applied to contributions where a taxpayer’s adjusted taxable income exceeds $300,000.  The budget announced a decrease to this threshold, with the extra tax to be applied at above $250,000.  This will mean that from 1 July 2017, more high income earners will pay 30% tax on their contributions, instead of 15% currently.

Elston comment
Any tax payer with taxable income plus salary exceeding $250,000, but under $300,000 will be affected. Those people should look to maximise their contributions this financial year and next, where possible.  Going forward the extra tax could have a significant impact on retirement savings, so those affected need to review the adequacy of their strategy.

New $1.6 million Super Transfer Balance Cap

This new cap will limit the amount of super that a person can transfer into super pensions from 1 July 2017. Excess amounts will be allowed to remain in accumulation phase.  Subsequent earnings on the pensions will allow the balances to increase above $1.6m.

Amounts in excess of the limit that are transferred will be subject to an excess tax arrangement.

For those with more than $1.6 million in super currently, the government will require that amounts in excess of that limit be rolled back into accumulation by 1 July 2017.

Work test removed for over 65’s

The current requirement for those aged 65 to 74 to meet a work test to make super contributions will be removed from 1 July 2017.  This gives those in this age bracket the same access to super contributions as those under 65.

Reduced restrictions for personal contributions

From 1 July 2017, all individuals regardless of work status will be able to claim deductions for personal contributions up to the concessional cap. This will allow partially self-employed persons and employees who are not offered salary sacrifice to increase their super contributions.

Catch up Concessional Contributions

Individuals with a superannuation balance less than $500,000 will be allowed to make extra concessional contributions where they have not reached their concessional contributions cap in past years.  This will take effect from 1 July 2017.

Amounts will be 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.

The purpose of this measure is to allow those with broken work patterns to make catch-up payments to boost their superannuation savings.

Low Income Super Tax Offset introduced

To avoid the situation where low income earners pay more tax on super than their income, a Low Income Superannuation Tax Offset (LISTO) will be introduced.  Commencing 1 July 2017, the offset will provide a refund of up to $500 tax made for low income taxpayers with income up to $37,000.

Low Income Spouse tax offset increased

The income threshold for a receiving spouse in relation to the low income spouse tax offset will increase from $10,800 to $37,000.  This will provide more tax payers the $540 incentive to make contributions for low income spouses.

Transition to Retirement Pensions tax exemption removed

A Transition to Retirement Income Stream (TRIS) is a pension that allows those over preservation age and still working to supplement employment income with a super pension. With effect from 1 July 2017, these pensions will no longer receive a tax exemption on their earnings.

The rule that allows individuals to treat payments from these income streams as lump sums will also be removed.

Elston Comment
While a TRIS will remain useful for those looking to supplement part time work, there will be a reduction of the tax benefit.  Those with existing TRIS’s need to consider if they should continue beyond 1July 2017.

Anti detriment payment scrapped

The anti-detriment payment relating to super benefits will be removed from 1 July 2017.  This provision effectively provides a refund of a person’s lifetime concessional contributions, where a lump sum benefit is paid to a dependent.

Taxation

Marginal Tax Rates Adjusted

The threshold at which the 37% marginal tax rate kicks in will be lifted from $80,000 to $87,000.  This will save those on incomes of $87,000 or more $315 per annum in tax from 1 July 2016.

Small Business Tax Cuts

Small business owners have been given some additional tax cuts. The lower rate which applies to small business will fall 1% to 27.5% from 1 July 2016.

The threshold in which the lower tax rates kicks in for small business will also be lifted. From 1 July 2016, the turnover threshold for the reduced tax rate will become $10 million, up from $2 million presently.

Concessions that allow business owners to access an immediate write off on assets up to $20,000 will also be extended to business that fall under the new $10 million turnover threshold.

In Summary

The 2016 budget  delivered  a surprising number of changes announced to super.  With the exception of the lifetime Non Concessional Cap, these changes do not come into play until 1 July 2017 (assuming they are legislated at all).  This will provide people with an opportunity to assess and address these changes to try and minimise the impact.

Elston strongly recommends that individuals take this opportunity to fully review their arrangements over this timeframe. For further information please call 1300 ELSTON or email info@elston.com.au and someone will be in touch.