Federal Budget – Changes to Superannuation

Treasurer Scott Morrison has handed down his first Federal Budget – there are significant changes to superannuation.

Note: These changes are proposals only and may or may not be made law.

Summary

  • A lifetime cap on non-concessional (after-tax) superannuation contributions of $500,000 will apply from 7.30pm on 3 May 2016.
  • The income tax threshold at which the 37% tax applies will increase to $87,000 pa on 1 July 2016, from the current $80,000 pa.
  • The tax rate that applies to small business companies will reduce to 27.5% for businesses with a turnover up to $10 million in 2016/17. Further tax concessions will apply in future financial years.

A range of superannuation measures will also apply from 1 July 2017.

  • The annual cap on concessional (pre-tax) super contributions will reduce to $25,000, regardless of age.
  • Concessional super contributions may exceed the annual cap if certain conditions are met.
  • Those aged between 65 and 74 will be able to make super contributions regardless of whether they work or not.
  • Tax deductions will be able to be claimed for personal contributions regardless of employment status.
  • A lifetime limit of $1.6m will be placed on the amount of superannuation that can be transferred to start pensions.
  • Earnings on investments held in ‘transition to retirement’ pensions will be taxed at 15% (currently 0%).

 

Cap on concessional contributions

The annual cap on concessional super contributions will reduce to $25,000, regardless of age. This change will reduce the amount of concessional contributions that can be made each year without a tax penalty. There will, however, also be the opportunity for certain people to contribute more if they haven’t fully utilised the cap in previous financial years—see below.

 

Concessional contributions include:

  • salary sacrifice
  • superannuation guarantee
  • personal contributions claimed as a tax deduction, and
  • certain other

Currently the cap on concessional contributions depends on age—see table below.

 

Concessional cap Current Proposed
Under age 49 $30,000 pa  

$25,000 pa from 1 July 2017

Age 49 or over $35,000 pa

 

Concessional super contributions

  • Individuals with super balances under $500,000 will be able to bring forward previously unused concessional cap amounts from 1 July 2017.  The unused amounts can be carried forward on a rolling basis for a period of five (5) consecutive years, for example, if an individual contributes $20,000 in the 2016/17 financial year, they will be able to make an additional $5,000 CC on top of the $25,000 CC cap in 2017/18.
  • Individuals up to age 75 will be able to claim a tax deduction for their personal superannuation contributions up to the CC cap from 1 July 2017, regardless of their employment circumstances.

 

  • All clients will not be able to make personal deductible contributions regardless of whether they own a salary or not. Previously, if a client derived more than 10% of their income from employment they could not make deductable contributions.

Contributions between ages 65 and 74

Those aged between 65 and 74 will be able to make super contributions regardless of whether they work or not. Currently, you need to work 40 hours in 30 days in the relevant financial year to make super contributions in this age bracket.

 

Tax deduction for super contributions

Tax deductions will be able to be claimed for personal contributions regardless of employment status. Currently only self-employed people (eg sole traders) and those who earn less than 10% of total income from employment sources are eligible to claim a tax deduction.

 

Superannuation pension limits

A lifetime limit of $1.6m will be placed on the amount of superannuation that can be transferred to start pensions. This limit will be called the ‘transfer balance cap’.

 

Earnings on investments held in pensions (other than transition to retirement pensions—see below) will continue to be taxed at 0%. Earnings on any balance that needs to remain in superannuation will continue to be taxed at 15%.

 

People with existing pensions over $1.6 million will need to reduce the balance below this limit by 1 July 2017 to avoid penalties.

 

Transition to retirement pensions

Earnings on investments held in ‘transition to retirement’ pensions will be taxed at 15% (currently 0%). A transition to retirement pension is a pension that is started with superannuation money when you have reached your preservation age, which is between 55 and 60 depending on date of birth. Once permanently retired (or another condition of release is met), it is expected that the underlying earnings will then be taxed at 0%.

 

Change effective immediately

Changes to non-concessional contributions

A lifetime non-concessional contribution (NCC) cap of $500,000 will apply from 7.30 pm on 3 May 2016. All NCCs made on or after 1 July 2007 will count towards this lifetime cap.

 

NCCs include personal contributions made where no tax deduction is claimed, contributions made on behalf of a spouse and certain other amounts.

 

Any contributions made after commencement exceeding the lifetime limit (as well as assumed earnings on these amounts), will be subject to penalty tax if not withdrawn.

 

These measures will replace the current NCC cap of $180,000 pa, or $540,000 over a three year period if certain conditions are met.

 

Non-concessional cap    
Under age 65 at 1 July $180,000 pa or $540,000 over 3 years $500,000 lifetime cap from 7.30 pm on 3 May 2016
Age 65 or over at 1 July $180,000 pa