The Government has released the second tranche of draft superannuation legislation, which includes the $1.6 million Transfer Balance Cap and a reduction in the concessional contributions cap.
Update: the Government has released the third tranche of draft superannuation legislation, which includes the lower non-concessional contributions cap of $100,000, preventing non-concessional contributions once super balances reach the Transfer Balance Cap and changes to the bring-forward rule.
The draft legislation includes a number of measures announced in the 2016 Budget:
- the $1.6 million Transfer Balance Cap
- lowering the concessional contribution cap to $25,000
- lowering the Division 293 threshold to $250,000
- allow catch-up concessional contributions for people with balances under $500,000
- changes to ECPI for Transition to Retirement income streams and removing the ability to treat certain payments as lump sums instead of pension payments
- removing anti-detriment provisions
Also included are measures to “remove regulatory barriers to innovation in the creation of retirement income stream products”.
A statement by the Treasurer said: “The reforms will make the superannuation system fairer, more flexible and more sustainable. The majority of Australians – 96 per cent of individuals with superannuation – will either be better off or unaffected as a result of these changes.”
“Around a quarter of fund members (including many low income earners) will benefit from the Government’s superannuation package.”
Draft legislation for the new non-concessional contributions cap policy – $100,000 annually, stopped once a persons balance reaches $1.6 million – is yet to be released. Other superannuation measures announced in the 2016 Budget were included in the first tranche of draft legislation.
“The release of exposure draft legislation and explanatory material on the remaining measures will follow in coming weeks,” said the statement from the Treasurer.
“The Government remains on track to have these measures introduced into the Parliament before the end of the year. This will provide taxpayers with certainty so they can make decisions about their savings and superannuation with confidence. With the support of the Senate, there will be no impediment to this occurring.”
These changes are contained in the:
- Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016
- Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016
- Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016
Treasury is accepting submissions in response to the draft legislation and regulations until 10 October 2016, which is also the next Parliamentary sitting day.
$1.6 million Transfer Balance Cap can vary from person to person
There is a great deal of detail in the draft legislation, but one point of interest is that once indexed the Transfer Balance Cap can vary from individual to individual.
Per the draft legislation the Transfer Balance Cap will be indexed to CPI, in $100,000 increments. However not everyone will receive the same amount of indexation, what is referred to in the legislation as ‘proportional indexation’.
“Proportional indexation is intended to hold constant the proportion of an individual’s used and unused cap space as their personal cap increases. An individual’s personal cap is only indexed by their unused cap percentage,” says the Explanatory Memorandum.
The EM includes the following example:
…Amy’s transfer balance account is credited by $800,000 in 2017-18. At that time, she has used 50 per cent of her $1.6 million personal transfer balance cap. When the general transfer balance cap is indexed to $1.7 million in 2020-21, Amy’s personal transfer balance cap is increased proportionally to $1.65 million. That is, Amy’s personal transfer balance cap is increased by 50 per cent of the corresponding increase to the general transfer balance cap. As such, Amy can now contribute $850,000 without breaching her personal cap.
Some SMSFs to be prevented from using Segregated Method
The draft legislation includes a measure to prevent some SMSFs, and small APRA funds, from using the segregated method to determine their earnings tax exemption. As part of the $1.6 million Transfer Balance Cap some funds will be required to roll back a portion of the fund into accumulation phase – this measure is intended to prevent assets being “cycled between the segregated pools for each phase to avoid capital gains tax”.
The Explanatory Memorandum says:
SMSFs and small APRA funds will not be able to use the segregated method to determine their earnings tax exemption for an income year if:
- at any time during the income year, there is at least one superannuation interest in the fund that is in the retirement phase; and
- just before the start of the income year:
- a person has a total superannuation balance that exceeds $1.6 million; and
- the person is the retirement phase recipient of a superannuation income stream (whether or not the fund is the superannuation income stream provider for the superannuation income stream).
A couple of other points of interest:
- the catch up concessional contributions cap for people with balances under $500,000, from 2018/19, will be based on the superannuation balance on 30 June in the previous financial year
- the indexation of the concessional contributions cap is to be lowered from increments of $5,000 to $2,500