Proposed changes to super: Federal Budget 2016

May 2016

The Federal Government’s super reforms have cleared Parliament. Some of the changes may affect you, so read our overview for more information. Before making any considerable changes to your super or pension as a result of the changes, we encourage you to speak with a UniSuper financial adviser.



A number of proposed changes to super were announced as part of the Federal Budget last night.

The 2016 Budget proposes the widest-ranging changes to superannuation seen in several years—but with an election likely to be held in coming months, changes may not be legislated and even if passed, most are unlikely to impact UniSuper members until 1 July 2017.

One change does take immediate effect, however, being a new ‘lifetime limit’ on the amount of after-tax (non-concessional) super contributions members can make.

In this special update, we outline last night’s Budget proposals for super, tax and retirement income products.

A bird's eye view of the proposed changes

The proposed changes include reductions to contribution caps, a new lifetime limit on after-tax (non-concessional) contributions, and a cap of $1.6 million for starting balances of ‘retirement phase’ accounts, such as account-based pensions.

New measures have also been flagged to encourage low income earners to contribute to super, together with changes to spouse tax offsets. 

Further proposals include lowering the ‘Division 293’ tax threshold (generally impacting very high income earners) and removing anti-detriment payments for deceased members’ beneficiaries.

Transition to retirement pensions may also be impacted, with a recommended 15% tax on investment earnings.

The government’s objective for superannuation: ‘to provide income in retirement to substitute or supplement the Age Pension’, is likely to be enshrined in legislation.

The proposals include: 


Contributions

REDUCING THE BEFORE-TAX (CONCESSIONAL) CONTRIBUTIONS CAP TO $25,000

What was announced?

From 1 July 2017, the annual before-tax (concessional) contributions cap will be reduced to $25,000.

Current before-tax (concessional) cap Proposed change to cap
Aged less than 49 on 30 June for the previous income year $30,000 $25,000
Aged 50 and over on 30 June for the previous income year $35,000 $25,000

What this means

If passed, members will be able to make a lower amount of before-tax (concessional) contributions to super each year. All concessional contributions will fall into this category, including employer contributions, Superannuation Guarantee (SG), salary sacrifice contributions, and personal contributions for which a deduction has been claimed.

Defined Benefit Division (DBD) members will be allowed to make before-tax (concessional) contributions to accumulation schemes. However, the $25,000 cap will be reduced by the amount of their notional contributions. People in defined benefit-style schemes as at 12 May 2009 will continue to have their existing grandfathering arrangements (where applicable). We will write to any impacted Defined Benefit Division members.

More information

Allow catch-up before-tax (concessional) super contributions

What was announced? 

From 1 July 2017, people with balances of less than $500,000 will be allowed to make extra before-tax (concessional) contributions if they haven’t reached their concessional contributions cap in previous years.

What this means 

If legislated, those with balances under $500K who haven’t made $25,000 before-tax (concessional) contributions in any year from 1 July 2017 will have the next five years (on a rolling basis) to make additional contributions to reach this cap. This is also expected to apply to members with defined benefits.

A new lifetime limit for after-tax (non-concessional) contributions

What was announced?

From 3 May 2016 (subject to the legislation being passed), a $500,000 lifetime after-tax (non-concessional) contributions cap now applies. The lifetime cap includes all after-tax (non-concessional) contributions made on or after 1 July 2007, from which time the Australian Taxation Office (ATO) has reliable contributions records. After-tax (non-concessional) contributions made on or after 1 July 2007 (but before 7:30 pm on 3 May 2016) will count towards this cap but cannot result in an excess. However, after-tax (non-concessional) contributions made after 7:30pm on 3 May 2016 will count towards the lifetime cap and can result in an excess. Exceeding the cap may mean a penalty tax or removing contributions above the cap from super.

What this means 

The new lifetime after-tax (non-concessional) cap will replace the existing annual caps which currently allow annual after-tax (non-concessional) contributions of up to $180,000 per year (or $540,000 every three years for individuals aged less than 65).

After-tax (non-concessional) contributions made into defined benefit accounts will be included in the new cap. If a defined benefit member exceeds their lifetime cap, ongoing contributions to the defined benefit account can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold.

The amount that could be removed from any accumulation accounts will be limited to the amount of after-tax (non-concessional) contributions made into those accounts since 1 July 2007.

More information

Tax deductions for personal superannuation contributions

What was announced? 

From 1 July 2017, the Government will allow people up to age 75 to claim an income tax deduction for personal superannuation contributions.

What this means

If legislated, this means anyone can make before-tax (concessional) super contributions up to the cap, regardless of their employment circumstances. This will apply to partially self-employed members and partial wage and salary earners, as well as people whose employers don’t offer salary sacrifice arrangements.

New low income superannuation tax-offset (Listo)

What was announced?

From 1 July 2017, a Low Income Superannuation Tax Offset (LISTO) will be introduced to reduce tax on super contributions for low income earners. The LISTO will provide a non-refundable tax offset to super funds, based on the tax paid on before-tax (concessional) contributions made on behalf of low income earners, up to a cap of $500.

What this means

The LISTO will apply to members with adjusted taxable income up to $37,000 who’ve had a before-tax (concessional) super contribution made on their behalf.

Improve superannuation balances of low income spouses

What was announced? 

From 1 July 2017, the Government will increase access to the spouse super tax offset by raising the income threshold for the low income spouse from $10,800 to $37,000. The 18% tax offset provides up to $540 per annum for the contributing spouse.

What this means 

Spouses can now earn up to $37,000 and still benefit from the spouse super tax offset where their partner makes a super contribution on their behalf. We expect this will encourage a larger number of people to make contributions on behalf of non-working or low income earning spouses.

Changes to the way high income earners' super is taxed 

What was announced?

From 1 July 2017, the Government will lower the Division 293 threshold (the point at which high income earners pay additional contributions tax) from $300,000 to $250,000.

What this means

This is likely to mean more people will pay Division 293 tax—an extra 15% tax on certain super contributions—if the change is legislated.

Before retirement 

Changed contribution rules for those aged 65 to 74

What was announced?

From 1 July 2017, the current restrictions on people aged 65 to 74 from making super contributions will cease. People under the age of 75 will no longer have to satisfy a work test and will also be able to receive contributions from their spouse.

What this means 

If passed, this essentially means older workers can continue contributing to super until age 75 with fewer restrictions—and receive super contributions from a spouse.

Changes to the way transition to retirement strategies are taxed

What was announced?

The tax exemption on earnings of assets supporting Transition to Retirement Income Streams is expected to cease from 1 July 2017.

What this means 

Members with Transition to Retirement strategies may be taxed 15% on investment earnings if the changes are passed.

In retirement

Introduce a $1.6 million super transfer balance cap

What was announced?

From 1 July 2017, a $1.6 million cap has been proposed on the total amount of super an individual can transfer into the retirement phase. A cap of $100K (income per annum) has also been proposed for defined benefit pensions. These caps will be applied to both current retirees and to people yet to enter their retirement phase. 

What this means

Opening balances for retirement products, such as our Flexi Pension, will be limited to $1.6 million or less. Defined benefit pensions paying over $100K (p.a.) will be taxed—with half of any payment over the $100K threshold likely to be taxed at members' marginal tax rates. It's not yet clear how the $1.6 million cap and $100K defined benefit threshold will be implemented (at the time of writing), but one option may be that the value of members' defined benefit pensions will be assessed as an equivalent lump sum against the $1.6 million cap.

If legislated, 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 accumulation accounts and taxed at the 15% tax rate and payments above the $100K defined benefit threshold taxed as described above. The government has said it will consult with the broader industry about implementing this for both accumulation and defined benefit members.

More information

Changes to rules for retirement income products

What was proposed?

Changes to the rules applying to retirement income streams have also been proposed. If passed, this is likely to mean greater flexibility and more options for how and when members choose to receive income in retirement, making options such as deferred lifetime annuities more accessible.

Other 

Anti-detriment payments to cease

What's been proposed? 

Anti-detriment provisions have been slated to cease from 1 July 2017, changing the way lump sum death benefits are taxed.

What this means

Anti-detriment payments for eligible beneficiaries of deceased members will no longer be paid. This is also likely to mean changes to estate planning.


Next steps

While there are many proposed changes to super, it’s important to remember that at this stage they are proposals only—and still need to be passed through both houses of parliament before being legislated.

We will provide further details as they are available. To achieve good outcomes for our members, we will be participating in industry consultation regarding many of these proposals.

If you are concerned about how these changes may impact your personal situation, we encourage you to speak with a qualified UniSuper financial adviser. You can email us or call on 1800 331 685.