Some big changes will occur to super in the budget.

Here’s a run down of what we will see.

Federal Budget 2016-17

What does the Budget mean for you?

Federal Treasurer Scott Morrison put forward a number of proposed changes, mainly around contributions to superannuation and taxation, in his budget speech last night.

Here’s a brief roundup of what the proposals could mean for you—whether you’re starting out in your career, taking care of family, on the cusp of retirement or enjoying life after work.

Remember, proposals are not set in stone and could change as legislation passes through parliament.

Superannuation

1. Lifetime cap for non-concessional superannuation contributions

Proposed effective date: 7.30pm (AEST) 3 May 2016

Currently, the non-concessional contributions cap is $180,000 per person, per financial year. If you are under age 65 at any time in the financial year, you can make a non-concessional contribution of up to $540,000 under the bring-forward provisions.

The government proposes to replace the current contributions cap with a $500,000 lifetime non-concessional contributions cap. This lifetime cap is proposed to commence at 7.30pm (AEST) on 3 May 2016. The cap will be indexed to average weekly ordinary time earnings (AWOTE).

The lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007.

Contributions made between 1 July 2007 and 3 May 2016 will be counted towards this lifetime cap. However, contributions made before commencement of this measure, that is 7.30pm (AEST) on 3 May 2016, will not result in an excess.

Excess contributions made after commencement will need to be removed or be subject to penalty tax.

2. Reduction of the concessional contributions cap

Proposed effective date: 1 July 2017

Currently, the standard concessional contribution (CC) cap is $30,000 per financial year. A higher temporary concessional contributions cap of $35,000 (unindexed) applies if you are aged 49 years or over on 30 June of the previous financial year.

The government is proposing to reduce the annual cap on concessional superannuation contributions to $25,000 for everyone, irrespective of their age.

3. Reduction to Division 293 tax threshold

Proposed effective date: 1 July 2017

From 1 July 2017, the government has proposed to lower the Division 293 threshold (the point at which high income earners pay an additional 15 per cent tax on contributions) from $300,000 to $250,000.

4. Allowing catch up concessional contributions

Proposed effective date: 1 July 2017

Currently, the concessional contributions cap is applied on a ‘use it or lose it’ basis. That is, the unused amount of the concessional cap cannot be carried forward.

From 1 July 2017, the government will allow eligible individuals to make additional concessional contributions where they have not reached their concessional contributions cap in previous years. This option will only be available to those individuals with a superannuation balance less than $500,000.

It is proposed that the unused amounts will be carried forward on a rolling basis for a period of five consecutive years with only unused amounts that accrue after 1 July 2017 being eligible.

The proposed measure will also apply to members of defined benefit schemes.

5. Removal of the work test to contribute to superannuation

Proposed effective date: 1 July 2017

Currently, individuals aged 65 to 75 who want to make voluntary superannuation contributions need to meet the work test. People aged 70 or over are also currently unable to receive contributions from their spouses.

The government will remove these restrictions for all individuals aged less than 75, from 1 July 2017.

 

6. Making it easier to claim tax deductions for personal super contributions

Proposed effective date: 1 July 2017

Currently, if you are engaged in employment activities during a financial year, a deduction for personal superannuation contributions can only be claimed where the ‘less than 10% rule’ is satisfied. This rule broadly requires that the income attributable to employment activities does not exceed 10% of income from all sources.

The government is proposing to abolish this test, allowing all individuals up to age 75 to claim an income tax deduction for personal superannuation contributions. If legislated,
this will effectively allow all individuals, regardless of
their employment circumstances, to make concessional superannuation contributions up to the concessional cap.

Observations:

– This measure assists those whose employer may not provide the ability to make salary sacrifice contributions to super. It will also assist those who are partially self- employed and partially wage and salary earners.

7. Introducing the Low Income Super Tax Offset (LISTO)

Proposed effective date: 1 July 2017

From 1 July 2012, individuals with an income of up to $37,000 automatically received a government contribution of up to $500 paid directly into their super. However, this Low Income Superannuation Contribution (LISC) will not be available in respect of concessional contributions made after 1 July 2017.

From 1 July 2017, the government is proposing to introduce
a replacement – the Low Income Superannuation Tax Offset (LISTO). The LISTO will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners, up to an annual cap of $500.

The LISTO will apply to members with adjusted taxable income up to $37,000 who have had a concessional contribution made on their behalf.

8. Making spouse contributions more attractive

Proposed effective date: 1 July 2017

Currently, if you make contributions into your spouse’s account you are entitled to a tax offset of up to $540 if certain requirements are met. One of the requirements to qualify for the maximum offset is that the receiving spouse’s assessable income, reportable employer superannuation contributions and reportable fringe benefits in the financial year must be less than $10,800.

To be eligible to receive the contribution, the receiving spouse must currently be:

  • –  under age 65, or
  • –  aged between 65 and 70 and has met the work test for the financial year in which the contribution is made.The government proposes to:
  • –  remove the work test restrictions for all individuals aged up to 75, and
  • –  increase access to the spouse superannuation tax offset by raising the lower income threshold for the receiving spouse to $37,000 (cutting out at $40,000).

9. Changes to the taxation of Transition to Retirement (TTR) income streams

Proposed effective date: 1 July 2017

The internal earnings within a superannuation account on the amount used to purchase a pension are currently tax-free. This will no longer apply to transition to retirement income streams from 1 July 2017 should the proposal go ahead.

This means that earnings on fund assets supporting a transition to retirement income stream after this date would be subject to the same maximum 15 per cent tax rate applicable to an accumulation fund.

10. Introduction of a $1.6 million superannuation transfer balance cap

Proposed effective date: 1 July 2017

From 1 July 2017, the government is proposing to introduce a $1.6 million transfer balance cap. This cap will limit the total amount of accumulated superannuation benefits that an individual will be able to transfer into the retirement income phase. Subsequent earnings on pension balances will not form part of this cap.

If you have superannuation amounts in excess of $1.6 million, you will be able to maintain this excess amount in a superannuation accumulation account (where earnings will be taxed at the concessional rate of 15 per cent).

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 currently applies to excess non-concessional contributions.

Fund members who are already in the retirement income phase with balances above $1.6 million will be required to reduce their retirement balance to $1.6 million by 1 July 2017 should the proposal go ahead. These excess balance amounts may be converted to a superannuation accumulation account.

 

What you need to know

Any advice contained in this document is general in nature and does not consider your particular situation. Please do not act on this advice until its appropriateness has been determined by a qualified financial adviser. Whilst the tax implications have been considered we are not, nor do we purport to be a registered tax agent. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.

AMP Financial Planning Pty Limited ABN 89 051 208 327, AFSL No. 232706.

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