Navigating the key features of the Government’s New Superannuation Reforms Since budget night on 3rd May last, the Government has come out with a new 3rd tranche reform package with a view to being “sustainable, flexible and with more integrity”. This reform package has now resulted in the Government releasing exposure draft legislation and regulations on 7th September and 10th of October last. This month’s bulletin is designed to focus on the key features of the proposed new legislation as they affect clients with SMSFs and some of the strategy or action plans that may result. It’s important to realise however that the draft legislation [Treasury laws Amendment (fair and sustainable superannuation) Bill 2016] and the draft explanatory materials have been released by the Government for public and industry comment and is likely to undergo some changes before the legislation is finally passed. Because of this, clients are advised NOT to take any steps based on the draft legislation without first discussing their affairs with us and awaiting the ascent of the legislation in its final form. We comment on the legislation and possible action plans so that clients start to consider how their affairs should be structured when the new legislation is enacted because the changes coming into place are to be implemented on 1 July 2017. 1. New non-concessional contribution cap limits From 1st July 2017 the Government will lower the current non-concessional contribution cap (after tax superannuation contributions) from $180,000 to $100,000 per annum. For those under age 65 they will be able to invoke the three year bring forward amount of $300,000 (currently $540,000) providing their superannuation member balance is not above $1.6 million. For those above age 65 the current work test of 40 hours of a 30 day period will remain in place for any contributions being made to a Super Fund. The $1.6 million limit per person will be indexed each year in the same way as the transfer balance cap (see further below). Further the $1.6 million limit is determined as at 30 June in the previous year. This means that if an individual’s balance at the start of the financial year (the contribution year) is more than $1.6 million they will not be able to make any further non-concessional contributions. Where they are close to the cap, they will only be able to invoke the bring forward amount to bring their balance to $1.6 million.  Because these rules operate as from 1st July 2017, clients will be able to rely on the current contribution rules including the annual $180,000 non-concessional contribution limit and $540,000 per person (under age 65) non-concessional bring forward rule if it is made in this financial year regardless of the size of the account balance. If clients use part of the bring forward amount, this will be adjusted after 1st July 2017 with the new bring forward Cap limit of $300,000. For those clients who are at or approaching the $1.6 million cap limit, this financial year is likely to be the most significant in terms of being able to increase the size of their superannuation balances. For some people, property transfers may be one way of using up the existing contribution cap limits. Note that as this restriction applies to non-concessional contributions there is at present no attempt to restrict other money or asset contributions going into the Superannuation Fund above the $1.6 million member account balance limit. This would include concessional contributions and CGT exempt amounts arising from the sale or transfer of active assets like business goodwill or business real property which at present allows a member to contribute lifetime lump sum cap amount of $1.415 million! 2. New concessional cap limits At present those under age 50 are able to make annual concessional (tax- deductible) contributions of $30,000 or $35,000 each for those people aged 50 or over. As from the 1st July 2017 the annual concessional contribution cap limit regardless of age will be $25,000 per person. As with the present rules, the work test will apply to any concessional contributions made by persons aged 65 or over until they reach the age of 75. As with the present arrangement, concessional contributions will attract a contributions taxed in the Fund at 15%. Additional contributions tax In addition, the Government will reduce the income threshold above which individuals will be required to pay an additional 15% tax on their concessional contributions from $300,000 per annum to $250,000 per annum. The additional tax is imposed on the whole amount of the contributions up to the concessional cap if a person’s salary and wages are above this threshold. For these people they will be liable for a total of 30% contributions tax up to their contribution limit of $25,000 per annum. Catch up payments for account balances under $500,000 The Government will allow people who have superannuation balances of $500,000 or less to be able to make catch up concessional contribution amounts from 1st of July 2018 calculated over a rolling 5 year basis. This means that if an individual uses only half of their concessional contribution cap limit in any one year, from 1st July 2018 they will be able to make additional concessional contributions to the annual cap limit that will accrue but only for a five year period after which the amount of the accumulated cap not used will expire.  Because the concessional contribution cap limits are falling, it is advantageous for everybody particularly those aged 50 or more to use up their $35,000 concessional contribution cap limit in this financial year. For those that are likely to receive taxable income of more than $250,000 per annum from next financial year (2017/2018) there is a financial benefit in maximising your concessional contribution cap limit in this financial year. 3. CGT relief The draft legislation grants a resetting of the cost base if prior to 1st July 2017 assets are transferred back from the retirement phase to the accumulation phase in order to comply with the new transfer … Continue reading THE SUPER BRIEF – ISSUE – September/October 2016