Major Changes Coming Into Effect

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Financing costs on loans to pay superannuation contribution
February 9, 2017
Announced major changes in the budget
June 29, 2017

Change 1- Earnings within Transition to Retirement Pensions will now be taxed at superannuation rates

Regarding Transition to Retirement Pensions (TTRP’s)

The Government is changing the legislation on the taxation of TTRP’s.

Currently TTRP’s do not have any tax within the fund i.e. earnings or capital gains tax. The government has changed the legislation to make the tax rate within any TTRP (despite the age of the investor) the same as the tax rates of superannuation i.e. 15% on income and 10% on capital gains. This comes into effect on the 1st of July this year.

 

Pension payments from TTRP’s remain unchanged. Income drawn as pension payments will remain tax-free for anyone over 60 and taxable (only on the taxable component) at marginal rates less a 15% rebate for anyone under 60.

 

Implications for investors

The changes are designed to eliminate the tax advantages for those that have simply started a TTRP to eliminate earnings tax within their fund and don’t necessarily need the pension income. The TTRP is probably still necessary though for anyone that still needs the pension income for living expenses or as part of a TTR salary sacrifice arrangement despite the earnings becoming taxable within their fund.

 

Anyone that is in a TTRP that satisfies a condition of release should consider converting to a standard retirement pension instead of maintaining their TTRP.

 

 

Change 2 – Concessional contributions are being lowered from $35,000 p.a. to $25,000 p.a.

 

Concessional contributions

Fact Sheet – December 2016

 

Concessional contributions include those contributions for which a deduction has been claimed by an employer or an individual, are generally assessable income of the super fund and taxed at 15%.

 

Concessional contributions are generally made from an individual’s pre-tax income, in contrast to non-concessional contributions which are made from an individual’s after-tax income.

 

From 1 July 2017, the following changes will apply to concessional contributions (CCs):

  • the annual CC cap is reduced to $25,000 regardless of age
  • the income threshold above which an additional 15% (Div 293) tax is payable on CCs is reduced to $250,000
  • a tax deduction can be claimed for personal super contributions (10% test is removed), and
  • unused CCs can be carried forward.

 

CC cap from 2017/18

 

From 1 July 2017, the annual CC cap is $25,000 regardless of age.

 

The threshold at which high income earners pay an additional 15% tax on their CCs is reduced to $250,000 from 1 July 2017

 

The $25,000 cap will be reviewed annually for indexation in line with wages (AWOTE) but will only increase in $2,500 increments (rounded down).

 

Deduction for personal super contributions

 

From 1 July 2017, all 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 their personal super contributions. Currently the ability to claim a tax deduction is limited to self-employed individuals and those who earn less than 10% of their total income from employment.

 

Other conditions for claiming a tax deduction and the applicable timeframes for lodgement of the section 290-170 notice are unchanged.

 

To access the tax deduction, individuals will need to submit a valid section 290-170 notice and have it acknowledged by their fund before they lodge their income tax return. It is expected that this process will be simplified from 1 July 2017.

 

A deduction will not be available for:

  • defined benefit contributions to Commonwealth public sector super schemes, and
  • contributions to untaxed super funds where the contributions are not included in the fund’s assessable income, and
  • other prescribed funds.

 

Members of these schemes may claim a deduction for contributions to other super funds (subject to meeting the normal eligibility conditions).

 

Which concessional contributions cap applies to you?

 

Under 50s concessional cap, for the 2016/2017 year: If you’re aged 48 years or younger on the 30 June 2016, you can contribute up to $30,000 in concessional contributions for the 2016/2017 year. Refer table below.

 

Special over-50s concessional cap, for the 2016/2017 year: If you’re aged 49 years or older on the 30 June 2016, then you can contribute up to $35,000 a year in concessional contributions for the 2016/2017 year.

 

Note: From 1 July 2017, the general concessional contributions cap will drop to $25,000 for all ages. The higher cap of $35,000, for those who are aged 49 years or older on the last day of the previous financial year (30 June), will not apply from the 2017/2018 year onwards

 

Change 3 – There will now be per a person limit of $1.6m for tax-free pensions retirement pensions

Transfer balance cap (TBC)

From 1 July 2017, a transfer balance cap (TBC) ($1.6 million in 2017/18) limits the total amount of superannuation that can be transferred into the pension phase where investment earnings (including capital gains) are tax-free.

 

The limit applies per member so each member of a couple have a separate TBC.

 

Where an individual accumulates amounts in excess of their TBC, the excess can be maintained in an accumulation account (where earnings are taxed at up to 15% and capital gains are taxed at 10% if held for 12 months or more).

 

An individual’s personal TBC is linked to the general TBC.

 

The TBC applies to ‘retirement phase recipients’ ie individuals who:

  • commence a superannuation pension, or
  • have a deferred income stream payable at a future time.

 

An individual must satisfy the following conditions of release to be considered in ‘retirement phase’:

  • retirement
  • terminal medical condition
  • permanent incapacity
  • reach age 65.

 

Transition to retirement (TTR) pensions are not included but will count once any of the above conditions of release is satisfied.

 

Individuals will be able to make transfers to the retirement phase as long as they have available cap space.

 

 

Change 4 – Non-Concessional Contributions are being lowered from $180,000 p.a. to $100,000 p.a. From next year, the bring forward rule means only $300,000 can be added to super compared to the current amount of $540,000

Non-concessional contributions (NCCs) are generally after-tax personal contributions made to superannuation where a tax deduction has not been claimed. They are not included in the assessable income of the super fund.

 

From 1 July 2017, the following changes will apply to non-concessional contributions (NCCs):

  • the annual NCC cap is reduced to $100,000 (from $180,000)
  • the bring forward NCC cap is reduced to $300,000 (from $540,000)
  • transitional rules if bring forward cap triggered in 2015/16 or 2016/17
  • NCCs not permitted where total super balance exceeds transfer balance cap
  • ability to trigger and make ongoing NCCs under bring forward restricted as total super balance approaches (or exceeds) transfer balance cap
  • co-contribution eligibility criteria changed.

 

Eligibility to contribute

 

To be eligible to make a non-concessional contribution to super an individual must be:

  • under age 65, or
  • age 65 to 74 and meet a work test (gainfully employed for at least 40 hours in 30 consecutive days in the financial year of the contribution), and
  • total super balance must be under the transfer balance cap (TBC) – $1.6 million in 2017/18 on 30 June of the previous financial year.

 

NCC caps from 2017/18

 

From 1 July 2017 the NCC caps are:

  • annual NCC cap of $100,000
  • bring forward NCC cap of $300,000 (must be under age 65)
  • NCCs are not permitted if total super balance exceeds the transfer balance cap ($1.6 million in 2017/18) on 30 June of the previous financial year.

 

The annual NCC cap is 4 times the CC cap of $25,000. Indexation of the CC cap automatically flows through to the NCC caps. The CC cap is indexed in $2,500 (previously $5,000) increments so it is likely the CC cap, and therefore the NCC caps, will increase more frequently in future.

 

Total super balance

 

An individual must have a total superannuation balance of less than the general transfer balance cap (TBC) – $1.6 million for 2017/18 – on 30 June of the previous financial year to be eligible to make NCCs in the current financial year. If total super balance is equal to or more than the TBC, the individual is not permitted to make any NCCs.

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