SMSF members urged to seek appropriate and qualified advice now as changes to super rules pass through Parliament

23 November 2016

 

The SMSF Association welcomes the passage of the legislation implementing the Government’s superannuation reforms through both Houses of Parliament unamended.

Andrea Slattery, SMSF Association Managing Director/CEO, said that this gives a high degree of certainty for those affected by the changes to plan for their future, now that the details of the changes are in place.

The high level of speculation as to the final form of the Government’s reforms has meant that many Australians were left unsure how to respond to the various proposals and counter-proposals being put forward. With the legislation now set to receive Royal Assent, that uncertainty has been removed said Ms Slattery.

However, the work needed to be done does not end here, she said. In fact, the important work is now ahead of us.

 “With just over seven months left of the financial year and therefore seven months left till the new super regime kicks in, now is the time for SMSF trustees, members and individuals to make themselves fully aware of the substantial changes and determine what is their best course of action to be implemented before the 30 June 2017 deadline.

“Its particularly important to get on top of the changes, as the taxation advantages will be reduced after this financial year.

“I would strongly advise SMSF trustees and members that their first point of call should be their financial adviser or accountant.”

The headline changes can be put in three  boxes:

Concessional contributions cap reduction

First are the changes to the tax deductible super contributions, also known as concessional contributions. These have been significantly reduced and the current financial year is the last time the existing higher amounts can be claimed.

From July 1,2017 all concessional contributions, regardless of age will be reduced to a maximum of $25,000 pa. There will be no change to the current rule that those 75 years or older can only have mandated employer contributions made on their behalf. “The current concessional amounts that will be allowed for the last time this financial year are $30,000 for people aged under 49 on 30 June 2016, and $35,000 for people aged 49 and over on 30 June 2016.

It should be noted that reserving strategies, whereby additional concessional contributions in relation to a member are contributed to a fund and allocated to a reserve account prior to 1 July 2017will be subject to the new annual maximum cap of $25,000 when amounts are allocated from the reserve to the member’s account after 30 June 2017.

Non–concessional contribution reduction

The government abandoned its proposed  $500,000 post 2007 lifetime cap on non-concessional or non tax-deductible contributions to super funds.

Essentially, this has been replaced by a two-pronged policy.

First the current annual non-concessional  contribution amount will remain unchanged until the financial year ending on 30 June 2017.

“For members of all superannuation arrangements including SMSF members, they have until the end of this financial year to maximize their after-tax contributions to their superannuation account. We encourage all superannuation members to seek suitably qualified professional advice as to their eligibility to maximize their entitlements under the existing rules before this cut-off date” said Ms Slattery.

“This is because these non-concessional contributions will be capped at $100,000 per annum from the financial year commencing 1 July 2017 and later years. It is worth noting that as is the case under the current rules, up to 3 years of non-concessional contributions will be able to be brought forward and made on a member’s behalf under the new rules.

“Second, all non-concessional contributions made on or after 1 July 2017 will be subject to an additional limit. This is that no non-concessional contribution can be made which will cause the recipient member’s account balance to exceed $1.6 million.

“Avoiding the application of this additional restriction on non-concessional contributions adds a degree of urgency for affected members who may wish to contribute non-concessional contributions to their superannuation accounts, to do so before the 1 July 2017 introduction date of the new rules.

Pension Transfer Balance Cap

“Lastly, and in addition to the above changes to contribution caps, it is also proposed that from 1 July 2017 onwards,  a member’s total superannuation pension balance that will be the subject of tax-free earnings will be limited to $1.6million.

“Further, those taxpayers with more than $1.6 million in the pension  phase of the super fund will be required to transfer those excess amounts to the accumulation phase holdings where the income derived from these accounts  will be taxed at 15%

“In short, $1.6million is the limit per member for funds in the tax-free retirement phase, which means, for a couple, they can have a super savings retirement pool of $3.2million where investment income derived from these assets will be exempt from tax in the fund. The actual pension received by members will continue to be tax free for those 60 and over without any change to these arrangements, Ms Slattery emphasised.

“Once the $1.6 million amount is reached for an individual member all excess funds will need to be transferred back to  the accumulation phase and should be treated accordingly in the fund’s accounts.

“It is worth emphasising that while the income derived on the balance of funds beyond the $1.6million per member will be subject to a taxation rate of 15%. This is still very attractive compared to how those funds would be treated outside the SMSF/superannuation environment.

“There are many more technical changes involved in the changes however those above are the main ones with the widest scope,” Ms. Slattery said.