Superannuation - the picture becomes clearer

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Superannuation Where is it now?

Superannuation: The Picture Becomes Clearer

Clive Todd

November 2016

www.hanrickcurran.com.au

The Year That Was3 May 2016 Federal Budget announces major changes2 July 2016 LNP wins Federal Election16 September 2016 Backbench revolt & NCC Lifetime Limit scrapped22 November 2016 Changes pass House of Representatives23 November 2016 Changes pass Senate

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experience. new thinkingWhat Are The Changes?

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experience. new thinkingConcessional Contributions CapReduced to $25,000 from 1 July 2017 for everyone2015/162016/172017/18Under 50$30,000$30,000$25,000Over 50$35,000$35,000$25,000

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experience. new thinkingIncreased Access to Personal ContributionsRemoves 10% ruleEffective from 1 July 2017All individuals under age 75 are able to claim tax deductions for personal contributions in addition to having employer contributions up to total of $25,000

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experience. new thinkingCatch-Up Concessional ContributionsUnused concessional contribution cap amounts can be carried forwardEffective from 1 July 2018Restricted to individuals with a super balance less than $500,000Calculated on a rolling basis over 5 consecutive years

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experience. new thinkingTransfer Balance Cap (TBC)Restricts the total amount of super that can be converted to tax-free pension phase to $1.6 million (ie purchase price)Effective from 1 July 2017Any amount in excess of $1.6 million must be left in accumulationAvailable capacity tracked via Transfer Balance Account (TBA)

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experience. new thinkingExisting pensions greater than $1.6 million will have to transfer excess to accumulation or withdraw from super

Will be indexed in $100,000 increments in line with CPIIf cap exceeded then notional earnings taxed and excess converted to accumulationSubsequent earnings on pension balance will not be required to be withdrawn

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experience. new thinkingTransitional CGT ReliefApplies if in pension mode prior to 1 July 2017 (but conditions)Choice to re-set cost baseBoth account based pensions and transition to retirement income streams can utiliseDepends on method currently used for tax exemptionTreasury and ATO have warned anti-avoidance may apply if trying to exploit

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experience. new thinkingTransition to Retirement ChangesEarnings on assets supporting Transition to Retirement Income Streams will no longer be tax freeEffective from 1 July 2017No longer able to treat income stream payments as lump sums for tax purposes

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experience. new thinkingNon-Concessional Contributions CapAnnual limit reduced to $100,000Effective from 1 July 2017Can only be made if a members Total Superannuation Balance (TSB) is below $1.6 millionBring forward still applies if under 65CGT Small Business Rollovers not included

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experience. new thinkingDivision 293 TaxAdditional 15% contributions tax for high earnersEffective from 1 July 2017Income includes taxable income, reportable fringe benefits, net investment losses & concessional contributionsCan be paid personallyIncome threshold reduced from $300,000 to $250,000Only applies to contributions that exceed the $250,000 threshold

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experience. new thinkingSpouse Superannuation Tax Offset18% offset available up to $540 for contributions made to eligible spouses superEffective from 1 July 2017Income threshold increasing from $10,800 to $37,000Counts towards spouses non-concessional cap

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experience. new thinkingLow Income Superannuation Tax OffsetRefund of the 15% contributions tax for low income earnersApply to individuals with adjusted taxable of less than $37,000Capped at $500Replaces Low Income Superannuation Contribution (LISC)

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experience. new thinkingWhat Didnt Make It?Removal of the Work TestOver 65s need to be working to contributeNCC Lifetime Limit of $500,000

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experience. new thinkingWhat Didnt Change?Tax-free withdrawals for over 60sMaximum tax rate on earnings still 15%

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experience. new thinkingWhat About This Year?Same rules from 2016 FY apply to 2017 FYNCC cap is $180,000, can bring forward & contribute up to $540,000CC cap is $30,000 if under 50, $35,000 if over

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experience. new thinkingQ: Barry is 55 and makes a NCC of $320,000 on 16 April 2017 and no further NCC before 30 June 2017.

What NCC can he make after 1 July 2017?

His Total Superannuation Balance at 30 June 2017 is $1.65m.A: None.

As his TSB is >$1.6m he can make no further NCC (however he could have made a further $220,000 prior to 30 June 2017)

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experience. new thinkingQ: What if his TSB at 30 June 2017 was $1.35m?A: $220,000? ($540,000 - $320,000)

2017 FY - $180,0002018 FY - $100,0002019 FY - $100,000$380,000Therefore, $380,000 - $320,000 = $60,000XNew Bring Forward balance (triggered in 2017 FY)

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experience. new thinkingQ: Michelle is 52 and has a TSB at 30 June 2017 of $1.45m.

What is the maximum NCC she can make in 2018 FY?A: $300,000?X

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experience. new thinkingTSB on 30 June 2017Non-concessional contributions cap for the first yearBring forward periodLess than $1.4 million$300,0003 years$1.4 million to less than $1.5 million$200,0002 years$1.5 million to less than $1.6 million$100,000No bring forward period, general non-concessional cap applies$1.6 million or moreNilN/A

A: As her TSB at 30 June 2017 is between $1.4m and $1.5m, her maximum NCC using the bring forward is $200,000

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experience. new thinkingQ: What if she contributes $150K in 2018 FY and at 30 June 2018 her TSB is then $1.6m.

What NCC can she make in 2019 FY? A: Zero

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experience. new thinkingMain Points About NCCUse it or may lose itDoesnt impact ability to make CC$1.6m TSB is a moving targetReduces effectiveness of re-contribution strategies

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experience. new thinkingQ: Donald is 70 and has an account based pension in a SMSF.

The value of this at 30 June 2017 is $2.4m.

What happens on 1 July 2017?A: $1.6m remains as an account based pension and $800,000 is rolled back into accumulation. He does not need to take the excess out of super.

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experience. new thinkingQ: What are the taxation implications?A: Earnings on the pension portion remain tax-free.

Earnings on the accumulation portion are taxed at 15% (CGT Relief may apply).

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experience. new thinkingQ: Donald has some high yielding assets can these be applied to his pension balance so that the earnings are tax-free?A: No. The legislation contains an Integrity Measure restricting the ability to segregate assets. Earnings will be proportional between accounts.

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experience. new thinkingQ: Is there anything he can do about this?A: Yes.

He could withdraw his accumulation balance leaving only pension so therefore 100% tax-free. (Depends on personal tax situation).He could establish a second SMSF and roll accumulation balance over to it resulting in a tax-free fund and taxable fund.

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experience. new thinkingQ: Donalds total balance in his SMSF has risen from $2.4m at 30 June 2017 to $3m at 30 June 2018.

What impact is there on his pension and accumulation accounts?A: Earnings are applied proportionally pension balance is now $2m and accumulation is $1m.

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experience. new thinkingQ: Donalds financial adviser, Ivanka, turns out to not be very good and his fund balance drops to $1.5m leaving him $1m in pension and $500,000 in accumulation.

Can he now top up his pension?A: No. Investment losses do not decrease his Transfer Balance Cap.

NB: Unless as a result of fraud or dishonesty and an individual is convicted of an offence regarding it.

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experience. new thinkingQ: Bill (70) and Hillary (69) have superannuation balances of $2m and $1m respectively.

How can they equalise their benefits to maximise their tax benefits?

They both work (for now.).A: Bill has unrestricted access to his benefit so can withdraw whatever he wants. This could then be contributed to Hillary (up to limits).

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experience. new thinkingQ: Can they utilise a Contribution Splitting strategy for their concessional contributions?A: No. As Hillary is over 65 this is unavailable.

Contributions can be split to a spouse either below preservation age or between preservation age and 65 and not retired.

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experience. new thinkingMain Points for Transfer Balance CapTBC is different to TSBAssets cant be segregated while in one fundNo requirement to withdraw excess if balance over $1.6m

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experience. new thinkingQ: Mike is currently in receipt of a Transition to Retirement Income Stream (TRIS).

Given the removal of the exemption on earnings tax post 1 July 2017 is it worthwhile continuing?A: Maybe

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experience. new thinkingMike may have reduced work hours so needs payments to top up incomeCGT relief applies to TRIS as well may be beneficial taking on new cost baseIf over age 60 withdrawals are still tax-free. Could be used to pay down non-deductible debt, re-contribute or simply live the good life.

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experience. new thinkingHe could also look to satisfy a retirement condition of releaseTRIS would then become an account based pensionpreservation age to 60 cease gainful employment and have no intention of becoming gainfully employed in the future60 to 65 cease gainful employment arrangement

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experience. new thinkingIs It Over Yet?Scott Morrison has promised the Govt will not take any further changes to super to the next electionLabor still not happy and want further changes:Reduce annual NCC li