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:
- Removing ECPI for Transition to Retirement pensions
- Reduction in Concessional Contributions Cap
- Lifetime Non-Concessional Contributions Cap
- $1.6 million ‘Transfer Balance Cap’
- End of 10% rule for tax-deductible super contributions
- Rollover of unused concessional contributions caps
- Removing contributions restrictions for people aged 65-74
- Replacement for LISC
- Reduction in Division 293 threshold
- Expand spouse contributions
- Stopping anti-detriment payments
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:
- Government decides on objective for superannuation
- Review leaves super pension drawdowns at current levels
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
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.”