2016 Budget superannuation changes largest since 2006/07

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The 2016/17 Federal Budget has made significant changes to superannuation, arguably the largest changes since the 2006/07 Budget.

Update: the Government has dropped some of the policies announced in the 2016, and made significant changes to others.

The 2016 Budget includes changes to the super fund tax concessions for Transition to Retirement pensions, reductions in the concessional contributions cap and a lifetime non-concessional contributions cap, among other changes:

2016/17 Budget superannuation changes:

Note that these changes are all subject to being legislated – which is complicated by the imminent election.

Removing ECPI for Transition to Retirement pensions

It didn’t make the speech, but the Government plans to remove the concessional tax treatment for income in pension phase linked to Transition to Retirement income streams from 1 July 2017.

“The Government will improve integrity in the superannuation system by removing the tax exemption on earnings of assets supporting Transition to Retirement Income Streams from 1 July 2017 (income streams of individuals over preservation age but not retired),” says the Budget papers.

Changes will also be made to remove the ability to treat certain superannuation income stream payments as lump sums for tax purposes.

These changes are estimated to save the Budget $640.0 million over the forward estimates.

Reduction in Concessional Contributions Cap

From 1 July 2017 the concessional contributions cap will decrease to $25,000. The concessional cap is currently $30,000, or $35,000 for some older Australians. In addition these caps are indexed, and so would have increased in the near future.

“A concessional contributions cap of $25,000 per annum will affect just three per cent of superannuation fund members, particularly those who pay the top rate of income tax,” said the Treasurer.

“Commensurate measures will also be applied to high income earners with defined benefit arrangements, including current and former politicians and public servants.”

Together with changes to the Division 293 threshold, this change is estimate to save the Budget $2.5 billion over the forward estimates.

Lifetime Non-Concessional Contributions Cap

The Budget includes a lifetime Non-Concessional Contributions cap of $500,000, with retrospective elements.

“To ensure maximum effectiveness the lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007, from which time the Australian Taxation Office has reliable contributions records, and will commence at 7.30 pm (AEST) on 3 May 2016,” says the Budget papers.

“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).”

“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 and is estimated to have a gain to revenue of $550.0 million over the forward estimates period.”

$1.6 million ‘Transfer Balance Cap’

The Government wants to introduce a ‘transfer balance cap’ of $1.6 million “on amounts moving into the tax-free retirement phase, with balances able to increase above this cap, on account of tax free earnings, once transferred”.

“From 1 July 2017, the Government will introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the retirement phase. Subsequent earnings on these balances will not be restricted. This will limit the extent to which the tax-free benefits of retirement phase accounts can be used by high wealth individuals.”

“Where an individual accumulates amounts in excess of $1.6 million, they 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.”

“A tax on amounts that are transferred in excess of the $1.6 million cap (including earnings on these excess transferred amounts) will be applied, similar to the tax treatment that applies to excess non-concessional contributions.”

The Treasurer, in the Budget speech said:“A balance of $1.6 million can support an income stream in retirement around four times the level of the single Age Pension. The transfer balance cap will be applied to both current retirees and to individuals yet to enter their retirement phase”.

The Government says consultation will be undertaken on how this will be implemented. It is estimated to save the Budget $2.0 billion over the forward estimates.

End of 10% rule for tax-deductible super contributions

The Government will extend the ability to claim tax deductions for personal superannuation contributions.

“From 1 July 2017, the Government will improve flexibility and choice in superannuation by allowing all individuals up to age 75 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.”

Currently the ability to claim a tax deduction for personal superannuation contributions is restricted by the ‘10% rule’.

“Individuals who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements.”

This change is estimated to cost the Budget $1.0 billion over the forward estimates.

Rollover of unused concessional contributions caps

The Government plans to allow unused portions of the concessional contribution caps to be rolled forward into later years.

“From 1 July 2017, the Government will allow individuals to make additional concessional contributions where they have not reached their concessional contributions cap in previous years,” says the Budget papers.

This will be limited to people with superannuation balances of $500,000 or less.

“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.”

“Annual concessional caps can limit the ability of people with interrupted work patterns — for example women or carers — to accumulate superannuation balances commensurate with those who do not take breaks from the workforce. Allowing people to carry forward their unused concessional cap provides them with the opportunity to ‘catch-up’ if they have the capacity and choose to do so.”

This change is estimated to cost the Budget $350.0 million over the forward estimates.

Removing contributions restrictions for people aged 65-74

From 1 July 2017 people under the age of 75 wont have to pass the ‘work test’ to be able to make superannuation contributions.

“From 1 July 2017, the Government will improve the flexibility of the superannuation system by removing the current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement.”

“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 will simplify the superannuation system for older Australians and allow them to increase their retirement savings, especially from sources that may not have been available to them before retirement, including from downsizing their home.”

This change is estimated to cost the Budget $130.0 million over the forward estimates.

Replacement for LISC

The Government will introduce a Low Income Superannuation Tax Offset (LISTO) from 1 July 2017, to replace the Low Income Superannuation Contribution (LISC).

It appears the LISTO will operate the same as the LISC – a $500 offset for contributions tax for low income earners.

The Government legislated a repeal of the LISC, which applies from 30 June 2017.

“The Low Income Superannuation Tax Offset will, in particular, assist around 2 million low income women to build their superannuation savings,” said the Treasurer.

This change is estimated to cost the Budget $1.6 billion over the forward estimates.

Reduction in Division 293 threshold

The threshold for Division 293 tax – increasing the contributions tax from 15% to 30% for high income earners, will be reduced from $300,000 to $250,000 from 1 July 2017.

Together with the changes to the concessional contribution cap this change is estimate to save the Budget $2.5 billion over the forward estimates.

Expand spouse contributions

The Government plans to increase access to the low income spouse superannuation tax offset by increasing the income threshold for the low income spouse from $10,800 to $37,000 (for the lower threshold, meaning an increase from $13,800 to $40,000 for the upper threshold).

“The low income spouse tax offset provides up to $540 per annum for the contributing spouse and builds on the Government’s co-contribution and superannuation splitting policies to boost retirement savings, particularly of women.”

This change is estimated to cost the Budget $10.0 million over the forward estimates.

Stopping anti-detriment payments

From 1 July 2017 the Government will repeal the “outdated” anti-detriment payments.

“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). Currently, this provision is inconsistently applied by superannuation funds.”

This change is estimated to save the Budget $350.0 million over the forward estimates.

Again, note that these changes are all subject to being legislated.

“Ninety-six per cent of Australians with super will be unaffected by or be better off as a result of the superannuation changes we have announced tonight,” said the Treasurer.

“The net impact of changes to superannuation announced in these measures will be a net gain of $2.9 billion over the next four years.”

Other superannuation announcements

In addition to these Budget superannuation change the Government has also announced the legislative objective for superannuation and the outcome of the retirement income streams review:

Update: The Opposition Leader, Bill Shorten, has indicated the Labor party is likely to oppose the more retrospective superannuation changes announced in the 2016 Budget.

Mixed industry response to Budget super changes

Update: Budget 2016 brings back superannuation complexity.

The response to the 2016 Budget by the superannuation industry has been mixed, with some changes receiving praise and others criticism.

The reduction in the concessional contributions cap has been criticised by the SMSF Association as a “backward step that will severely reduce the ability of people to save adequately for retirement”.

SMSF Association CEO Andrea Slattery said the decision, combined with other “flawed” Budget changes, will send “shock waves” through the SMSF sector.

“We strongly believe that adequate concessional contribution caps are vital to allow people to save for a secure and dignified retirement.”

“Although this may be ameliorated, to some degree, by the carry forward of unused concessional contributions, which is a welcomed step in making super contributions more flexible, particularly for women and people with broken work patterns, the $500,000 balance limit on this measure restricts people building truly adequate retirement incomes.”

The Association is also concerned by the $1.6 million transfer balance cap and the reduction in the Division 293 threshold.

However the lower Div 293 threshold was welcomed by the Australian Institute of Superannuation Trustees (AIST).

“Reducing tax concessions for those earning over $250,000 recognizes that a retirement income system where the top spectrum of income earners receive the greatest benefit from super tax breaks is neither fair, nor sustainable,” said AIST CEO Tom Garcia.

AIST also welcomed the change to make it easier to make tax deductible super contributions.

“Saving for retirement will be more attractive as all Australians will now effectively have access to the benefits of salary sacrifice,” said Mr Garcia.

The announcement of the LISTO to replace the LISC has been welcomed by a number of organisations, including Industry Super Australia.

“This top up payment, which was due to be abolished in 2017, is critical in ensuring lower paid workers don’t end up paying more tax on their super than they do on their take home pay,” said ISA Chief Economist, Stephen Anthony.

“This is a sensible step in the right direction for which Industry Super Funds have strenuously advocated. However, with a whopping 45% gap in super savings between men and women, more will need to be done to actively boost the super savings of this lower paid group to help them reach a comfortable retirement standard.”

The Association of Superannuation Funds of Australia (ASFA) welcomed the unused contribution caps rollover.

“The changes to the flexibility caps will allow women, in particular, who currently retire with less than half the superannuation of men, to catch up. However, the restriction of a five year period for the calculation of previously unused cap amounts restricts the effectiveness of this.”

However, ASFA said “it will be important for the government to consult on the implementation of a number of the measures. Some of the measures have the potential to significantly increase administration costs of funds. Such costs would likely be passed on to all fund members, not just those directly impacted by the changes.”

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      1. I agree. Both parties now have very complex policies on superannuation – and that’s before we even see the detail in the legislation. This is compounded by the uncertainty from announcing such changes in a Budget days before a long election campaign.

  1. Reducing Concession to high income earners is good .

    There retirement income is not going to come only from SMSF

  2. Some very equitable changes. They should have lowered the Div293 rate to 180k and kept max concessional contributions rate higher 30 or 35k at least.

    I work in the area and the objective of many wealthy people is to stash the max possible into super. This may also affect those looking to roll in balances from sale of businesses.

    In my oppinion would have been better to flip the system (no tax in accumulation phase and at least 15% tax for pensions and lump sum withdrawals). This is how it is in America and it encourages people to keep money in super environment and withdraw what’s needed in retirement. Of course the baby boomers won’t like that

    1. There were reports the Government was considering a $180,000 threshold for Div 293, which would align it with the top marginal tax rate. But seems they settled on $250,000 – the same as the ALP, so I don’t think either of the major parties is going to talk about that much.

      I also think it would be better to allow investments to grow inside superannuation without, at least, contributions tax and then tax it on the way out. But would be very difficult politically to implement that now.

  3. Thanks for the clarifications. Wife and I are still puzzled by the apparent internal inconsistencies. How will my defined benefit pensions of $50,000 pa translate under the $1.6m rule? I do not have anything in accumulation phase. If this retro stuff passes the Senate, could we transfer the amount > $500k in my wife’s (aged 62) accumulation account to me (aged 69)?
    Presumably I will then lose my part pension now rather than when wife turns 66. A living example of what the Govt is trying to achieve!

    1. The Budget papers say the Government will consult on how to implement the $1.6 million Transfer Balance Cap for defined benefit accounts. It is unlikely we will see detail on this until sometime after the election, depending on which party wins. However the Budget papers also say, about the Transfer Balance Cap policy:

      Commensurate treatment for members of defined benefit schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000 from 1 July 2017.

      It is not as simple as transferring superannuation from one person to another, there are rules and limits around withdrawing and contributing (such as the proposed lifetime $500,000 non-concessional cap) – you would need to seek professional advice. I expect lots of people will need advice about these changes, though there will be considerable uncertainty for at least the next couple of months.

    2. Hi William

      What will your defined pension be valued at as cash in Super? An excellent question and at the moment you would need to consult a Crystal Ball for the answer.

      I don’t want to give you heartburn but it is generally accepted that you would withdraw 5% from your Pension Phase Super Fund. Working backwards, you would need a balance of $1m to draw down the value of your Defined Pension. So my guess is that you Super Fund will deemed to have an extra $1m to be added to your other cash in Super!!!!!

      Don’t forget, you can, with some restrictions, transfer some of your ‘real’ cash in Super to your spouse. But can you reveal why you collectively transfer cash from your wife’s super into your Super Fund???

      It’s all very, very unclear!

  4. The $1.6m cap promises to be a nightmare to administer, given that the precise balance in a member’s account is typically only known once per year, some months after 30th June when all tax statements from managed funds have been received, the fund’s accounts are finalised, tax liabilities are calculated and the fund is audited. For most SMSFs this will be 3-9 months after 30th June … and by this time, the balance will have changed due to further income received in the intervening period. The ability to control something relies fundamentally on the ability to measure it – and this is simply not possible “in real time” for members’ pension fund balances.

  5. Quote,’Oils ain’t all oils’ and our Treasurer compares apples to oranges: The Treasurer, in the Budget speech said:“A balance of $1.6 million can support an income stream in retirement around four times the level of the single Age Pension.

    So what is the max single payment, Say, $25,000 with a few pensioner benfits – v- $1.6m at 5% giving me $80,000. What $25,ooo x 4 = $80,000????

    However, a super balance of $1.6m probably represents a couple and the Aged Pension for a couple is about $35,000 with a few benefits. Realistically, a balance of $1.6m for a couple gives a little over double the Aged Pnaion for a couple …. That’s a far cry from 4 times the Aged Pension.

    Ah, but the couple would (if they could) split the $1.6 into two Super Accoumts of $800,000 each …. Which still gives an income of $80,000 combined..

    But that is not all, the $35,000 couple aged pensioners may have a little under $400,000 in Super which gives them an extra $20,000 plus the $35,000 aged pension = $55,000 – v- $80,000 from $1.6m = fours times the single pension = single aged pension $25,000 + Say $15,000 from the Super fund = $40,000? ????????

    The Above is not 100% accurate to the last penny but it is generally accurate to make the point!

  6. I find it interesting that the $1.6 million Transfer Balance Cap is getting so much attention, when there are other complex changes to superannuation that will likely apply to more people, such as the $500,000 lifetime Non-Concessional contributions cap and the tax changes to Transition to Retirement pensions. Why is the $1.6 million cap resonating with people?

    1. Hi Luke. I think it is because people think that they have a better understanding what 1.6m cap means. Hence they feel free to comment about it. But when you mention a $500,00 cap that is from non concessional contributions they don’t fully realise what that actually means and, in any case, who knows how much pre tax money they have contributed into their super??? Do you know how we can accurately find out how much non concessional contributions we have made???

      Before 65 I withdrew and the redeposit my cash in Super. Is some of the $500,000 double counted??? I think it is???

      1. That could be it. I think the Government is counting on the ATO being able to tell people how much they have contributed to superannuation as non-concessional. Each super fund will have records – but people could have made contributions to several funds.

        This policy could apply to a lot of people who used re-contribution strategies – it sounds like that’s what you did. Where money was re-contributed as a non-concessional contribution (on or after 1 July 2007) there is nothing in the Budget papers saying this wouldn’t be counted for the lifetime cap.

        1. Luke, I don’t know if I should laugh or cry. We have just taken out a substantial amount of cash out of our Super with the intention to redeposit that cash back into Super, ditto in July this year. But now I don’t know if we can put this cash back into Super??? I think we can do that till 1/1/17 but what are the future implications for us re Super???

          Alas, I think that Super has now lost all credibility!!!! If you were a young person what faith could you have in locking away your Super cash till retirement??? It seems that every year ‘they’ change the Super rules!!!

          1. Unfortunately we (SolePurposeTest.com) aren’t in a position to provide advice. I expect these announcements are causing uncertainty for a lot of people. Especially given, depending on the outcome of the election, there would be questions over if the policy is enacted as announced, or even legislated.

  7. I worked in the super industry for 15 years and commenced a SMSF prior to my early retirement 20 years ago. I was able to make good use of the 2006 changes and recontribute to my wife account.
    At one stage I had an RBL problem but this disappeared when the ATO found It impossible to administer the regulations.
    Even though ATO systems may now be better I would think going back 10 years and then into the future could create an administrative nightmare like the old RBL”s.
    I am now 75 and having witnessed thousands of changes I can understand Peter Morgan’s concerns.
    For comparison when I first commenced work retiring employees could receive their lump sum and paid tax on 5% on it, no complicated rules.
    Of course if we went back to this system we would make most of the industry and half of the ATO redundant.

  8. Hi Wally

    “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.”

    I am now screwed, retired, married and It’s been calculated that we both have unfairly reached the $500,000 post tax cap even though we have no where near $1m in Super. We have two ‘investment’ properties to sell and we were going to put the proceeds into our Super Funds. (We can get around the 40 hrs work test.). At best when we sell we can only contribute in that financial year $30,000 as a pre tax contribution in respect to the ‘taxable’ capital gain from the sale of the property under the current rules …. Then incur a heafty tax liability!

    OK, what about this:

    Plan to sell the house 4 plus years from 1/7/17, make no pre tax contributions during that period of time (because we don’t draw an income allowing that to occur) and then roll those 5 years into the year we sell the property?

    We can then make a pre tax contribution into Super. That figure being $30,000 X 5 years = $150,000 each. That’s a total family income for that year of $300,000 taxed at a mere 15%.

    We are in no hurry to sell the properties.

    This strategy does not seem to be consistent with the new ‘fairness’ Super objectives that I read about???

    Do you think we can do that under the proposed Super rules?????



    1. You would need to seek advice on your plan. I would note that the proposed 2016 Budget changes – which aren’t legislated yet – include reducing the concessional contributions cap to $25,000 from 1 July 2017. Also, if enacted as announced, the carry-forward of unused concessional contributions only applies for people with balances of $500,000 or less.

      1. HI Wally

        They keep on changing these caps all the time but the scheme is true for a cap of $25,000. I take your point re the $500,000 balance cap …. No problem, just withdraw cash the year before the sale of the house so as not to break the $500,000 balance!

        But, In this new era of ‘fairness’ then it sounds like a rort, and it would be an intended consequence of these daft proposed rules.

        Problem is, Super rules seem change every a budget and one could have little faith in these rules being still valid 5 years from now. But it is a thought for some.

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