In brief
Written by Partner Michelle Levy and Managing Associate Simun Soljo
The Government's main changes to superannuation have been passed by Parliament. We look at what this means for the superannuation industry (and for you).
Headline changes make superannuation tax concessions less generous and others provide incentives to save more. Together they add enormous complexity to what is already fiendishly difficult. In addition to getting to grips with non-concessional contributions caps and concessional contributions caps, we will be the recipient of a 'transfer balance account', 'transfer balance cap', 'personal transfer balance cap', 'highest transfer balance' and a 'used and unused cap space'. We are feeling anxious already. And it is hard to read this while thinking about the subsidiary objectives of the superannuation which are meant to include the following: 'be simple, efficient and provide safeguards'.
Here, we highlight the main changes and make some comments about what might be in store with the superannuation objectives Bill recently referred to committee. Most measures take effect from 1 July 2017.
First some belt tightening…
Perhaps the measure that has attracted the most attention from industry is the introduction of a $1.6 million superannuation 'transfer balance cap'. The policy intention behind this proposal is clear enough. Earnings on assets that support superannuation income streams are currently tax free, and there is no limit on the balance that can support such an income stream. The amendments will impose a cap from 1 July 2017 on the amount of superannuation savings that can be transferred into tax-free superannuation income streams. The cap will initially be $1.6 million and will be indexed. While the majority of retirees will never need to consider the cap (the Government estimates that less than one per cent of Australia’s superannuation account holders will be affected by it), for those it affects and for trustees that must administer it, things will get complicated.
As an example of the complexity that the new regime creates, the cap applies only to amounts transferred to the retirement phase. The total amount transferred will be the individual's 'transfer balance account'. This is a notional account which, after the transfer, is unlikely to have any connection with the member's actual account balance. Following the transfer to retirement phase, the individual's account balance in their superannuation income stream will increase and decrease with earnings and pension payments. Unless the individual transfers further amounts into retirement phase or commutes any part of their income stream, their 'transfer balance account' will remain the same. This means that a member's account balance in the retirement phase and their transfer balance account are almost certain to diverge over time. Apart from the administrative difficulties this raises, not least of which will be who will keep a record of each person's transfer balance cap, it is also likely to cause confusion. This is just one example of the many complexities the transfer balance cap regime will create.
A number of other changes simply reduce the generosity of the current superannuation tax concessions:
- The annual concessional superannuation contributions cap will be reduced from 1 July 2017 to $25,000 (from the current cap of $30,000 for those under 49 at the end of the previous financial year and $35,000 otherwise). This is the cap on contributions that can be made before-tax and that will attract a 15 per cent contributions tax.
- The annual non-concessional (after-tax) contributions cap will also be lowered from $180,000 to $100,000, while individuals with a superannuation balance of $1.6 million or more will no longer be eligible to make non-concessional contributions.
- Those earning over $300,000 per year currently also pay additional tax on superannuation contributions. From 1 July 2017 this threshold will be lowered to $250,000.
- The tax exemption for income from assets supporting transition to retirement income streams will be removed. These income streams are available to those who have reached their preservation age (age 55 for those born before 1 July 1960), but who may still be working. Earnings on the assets supporting the income stream will be taxed at 15 per cent.
- The 'anti-detriment rule' will also be abolished. This is a provision in the tax law that allows superannuation trustees to claim a tax deduction for certain death benefits paid to eligible dependants. The deduction may allow the trustee to increase the amount of the benefit paid. It has not always been consistently applied by trustees.
And then some belt loosening…
Perhaps the most significant measure that will broaden tax relief is the extension of the tax exemption on earnings in the retirement phase beyond the current list of complying pension to new products such as deferred lifetime annuities and group self-annuitisation products. This change, along with changes to the pension rules that are expected to be announced shortly, are intended to encourage superannuation trustees to offer a wider range of superannuation products that are better able to meet the needs of retirees. But without trustees being compelled, or at least encouraged to provide retirement products by default, experience suggests they may not find many willing buyers.
The budget measures also include a number of other changes that maintain or extend the superannuation tax concessions:
- From 1 July 2017, the Low Income Superannuation Contribution will be replaced with the Low Income Superannuation Tax Offset. The offset effectively refunds to the member the tax paid on concessional contributions by individuals with a taxable income of up to $37,000. This achieves the same outcome as the contribution but by a different means.
- From 1 July 2017, individuals under the age of 65, and those aged 65 to 74 who meet the work test, will be able to claim a tax deduction for personal contributions to eligible superannuation funds up to the concessional contributions cap, even if they earn more than 10 per cent of their income from salary or wages.
- From 1 July 2018, individuals with a total superannuation balance of less than $500,000 will be able to 'catch up' on their superannuation contributions by carrying forward unused concessional cap space (the difference in a year between the cap and the contribution made) for up to five years.
- The tax offset of up to $540 for individuals who make superannuation contributions for their spouses will be extended so that it applies where the recipient spouse earns up to $40,000 (currently $10,800).
What is the objective?
Finally, the Superannuation (Objective) Bill 2016 recently passed the House of Representatives and was referred to the Senate Economics Legislation Committee with a report due early next year.
If passed, the Bill will defined the 'primary objective of the superannuation system' as being 'to provide income in retirement to substitute or supplement the age pension'.
The Bill says that the objective 'does not affect the meaning of any law of the Commonwealth'. It also would not prevent a future Government from bringing legislation that is inconsistent with the objective, although it would be required to prepare a 'statement of compatibility' with the objective (much like it currently prepares statements of compatibility with human rights). Presumably it might be embarrassed to put forward a Bill that is clearly contrary to the objective it has defined for the system.
We will have to wait and see whether the objective will have any real effect on the direction of superannuation policy. If the Government was determined to bring the existing superannuation tax concessions into line with the objective, the lists of belt tightening and belt loosening measures above would need to be much longer. The system currently provides benefits (including tax concessions on income) to many who will never need to rely on an age pension. If the objective of the system is to 'substitute or supplement the age pension', these benefits appear inconsistent with that objective. It also currently fails to produce any meaningful account balance for many of those who will primarily rely on the age pension in retirement.
There is unlikely to be a re-writing of the superannuation tax concessions to bring them in line with the objective any time soon. The objective is more likely to influence future development of policy. Again, if taken seriously, rather being the last of the changes to the superannuation rules, it could be the inspiration for many more.