Federal Budget delivers changes to super contributions

In reforms not seen in superannuation since Peter Costello handed down the Federal Budget in 2006, the Treasurer, Scott Morrison in his first Federal Budget delivered new measures clearly targeting the sustainability of tax concessions and greater equity of these superannuation concessions across all taxpayers. It is a budget reflective of the current state we live in.  Many of the super changes announced back in 2006 were a part of boom times in the economy.  The changes announced in this year’s budget paint an entirely different picture of an economy in transition.

By listening closely to the superannuation debate over the past 12 months, you got a clear sense that a re-weighting of super tax concessions was always on the cards.   Just how far was the Government prepared to go in a budget that is so tightly linked to any potential re-election? Well, you can watch this video and read more below about the impact of these contribution measures:   

 

Concessional contributions

A reduction in the concessional contribution cap

From 1 July 2017, the Government will reduce the concessional contribution cap to $25,000.  The concessional contribution cap currently sits at $30,000 for those under 49 at 1 July each year, or $35,000 for those above 49 at 1 July (temporary cap).  This change will reset the contribution caps back to levels seen in 2012-13.

Lowering the Div 293 threshold

It was one of the worst kept secrets… however political pressure clearly got the better of the Government deciding to settle on a reduction of the ‘income‘ threshold at $250,000.  This level matches the previously announced threshold by the Labor Government should they win the next Federal election.  This will take effect from 1 July 2017.

Allowing catch up of concessional contributions

From 1 July 2017, the Government will allow individuals with a super balance of less than $500,000 to utilise a rolling concessional contributions cap for a period of five consecutive years.  The unused portion of the concessional contribution cap can be accrued and carried forward. The basis for this change is to allow for people with interrupted work patterns to benefit through periods of time where they may have an ability to catch up if they have a capacity to do so.

Example

Jane has had extended time out of the workforce, having accumulated approximately $150,000 in super.  During the 2017/18 and 2018/19 income years, she had concessional contributions for each year of $10,000.  For each of these completed years where she did not utilise the $25,000 concessional contribution cap, she can carry forward these amounts meaning that in the 2019/20 year her concessional contribution cap is $55,000 subject to her balance remaining under the $500,000 threshold for that income year.

Removal of ‘work test’ for 65 – 74

From 1 July 2017, the Government will remove the restriction on people between 65 to 74  to be gainfully employed for at least 40 hours within a 30 day consecutive period prior to making a contribution into super.  This applies for both concessional and non-contributions, along with extending to spouse contributions for people aged under 75. This decision allows older Australians to consider making additional contributions into superannuation that may result from events such as downsizing the family home.  Importantly, it removes the contrived arrangements by individuals needing the find work to make contributions into super up to reaching age 75.

Tax deductions for personal super contributions

Finally…  long overdue, we finally see a level playing field for everybody to make personal contributions into super and claim a tax deduction. From 1 July 2017, the Government will provide greater flexibility for individuals to claim a tax deduction for personal super contributions.  The current 10% rule provides a ridiculous framework that limits an individual’s ability to make additional contributions where their salary represents more than 10% of their assessable income.  This new measure will allow all individuals, regardless of their employment circumstances to make concessional contributions up to the concessional contribution cap ($25,000).  Where a person is partially self-employed and is in receipt of salary and wages, they will be eligible to make personal contributions into super and claim a tax deduction.

Low Income Super Tax Offset (LISTO)

Let’s be honest, nothing new here… With the existing low-income super contribution legislation to cease on 30 June 2017, the Coalition Government has effectively given the legislation a lifeline to ensure that low-income earners are not burdened with a 15% contributions tax rate when they would have paid a lower tax rate on these amount if they had received the amounts as assessable income. The LISTO provides a non-refundable tax offset of up to $500 on concessional contributions where the member has adjusted taxable income of up to $37,000. 

Non-concessional contributions

Introduction of a lifetime cap

The Government will introduce a $500,000 lifetime non-concessional contribution (NCC) cap that takes into account all non-concessional contributions made on or after 1 July 2007.  This measure takes effect from, 7.30pm on 3 May 2016 (Federal Budget night).  

No retrospectivity will be applied to individuals who may have made non-concessional contributions in excess of the $500,000 lifetime threshold between 1/7/2007 to 3 May 2016.  

However, any excess contributions made after commencement will need to be removed or else be subject to penalty tax. The lifetime NCC cap will be indexed to average weekly ordinary times earnings (AWOTE). Note that this measure will replace the existing annual NCC cap which is current linked to the concessional contributions cap.

Example

John wishes to make a non-concessional contribution of $100,000 into his SMSF before 30 June 2016.  In reviewing his previous history of non-concessional contributions since 1 July 2007, it is noted that he has made prior non-concessional contributions of $450,000.  As a result, he can only make a further $50,000 of non-concessional contributions against his lifetime NCC cap.

If he contributes the $100,000, he will have an excess non-concessional contribution with the excess to be returned through the refunding of non-concessional contributions laws.

Increasing the low-income spouse super contribution tax offset

From 1 July 2017, the Government will increase the income threshold for the low-income spouse from $10,800 to $37,000.  This provides the contributing spouse with a tax offset of up to $540 for the first $3,000 of after-tax (non-concessional) contributions made into a complying super fund.