Superannuation reforms

The superannuation reforms first revealed in the May 2016 Federal Budget, are finally taking shape.

The main Acts have become law,^[1] and the draft Regulations are open for public comment until 10 February 2017.

While not all the relevant rules have been finalised, it is clear that from 1 July 2017 the super landscape will have been altered in important ways.

This article summarises the key changes.

Melissa Ramov and Julian Smith, Maddocks Lawyers

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Overview

Some of the key reforms to the super laws include the following:

• imposition of a $1.6 million cap on the asset value of all fund accounts in pension phase;
• reduction of the concessional superannuation contributions cap to $25,000 per annum;
• reduction of the non-concessional contributions cap to $100,000 per annum;
• Increasing access to income tax deductions for all individuals making concessional superannuation contributions; and
• introduction of the ability to 'bring forward' unused concessional superannuation contribution caps which can be rolled over for up to 5 years.

This article focusses on the changes which are most relevant to SMSFs and account-based pensions.

$1.6 million transfer balance cap on pension accounts

With effect from 1 July 2017, members who receive a pension or are to receive a pension (including amounts received as a death benefit income stream) will have a $1.6 million cap — which will be indexed in $100,000 increments over time — imposed on the amounts which can be transferred into the 'retirement phase' accounts of their superannuation (transfer balance cap).

'Retirement phase' effectively means a pension account but no longer includes a transition to retirement pension account.

The transfer balance cap is imposed on an individual's 'transfer balance account'. The ATO will maintain a centralised transfer balance account for each member, reflecting the fact that the transfer balance account is a combined account which records the member's balances across all super funds: the transfer balance is constituted by the total amount of assets which have been transferred into all super accounts which fund or are to fund pensions to a member.

However none of the following changes alter the pensioner's transfer balance in their transfer balance account:

• earnings on the assets in the pension account — these do not result in credits to the transfer balance;
• draw-down of payments from a pension account — these do not result in debits to the transfer balance;
• increases, or decreases, in the value of assets in the pension account — these do not result in credits or debits to the transfer balance.

Managing the transfer balance account and transfer balance cap

Where a member's transfer balance in their transfer balance account exceeds the transfer balance cap, the trustee and the member will be required to work together to determine which of the member's pension assets will be commuted in whole or in part, and either:

• transferred back into the accumulation account (where earnings will be taxed at 15%) in order to reduce the member's transfer balance to less than the $1.6 million cap; or
• transferred out of super (where, amongst other things, earnings will be subject to tax at the individual's marginal tax rate).

If on or before 30 June 2017, the transfer balance of an individual member's transfer balance account is between $1.6 million and $1.7 million, then the trustee and the member will have until 31 December 2017 to transfer the excess capital out of the relevant pension accounts (by commutation back to the member's accumulation account, or out of super altogether where permissible). No penalty will be imposed where the assets are transferred within this timeframe.

If on or before 30 June 2017, the transfer balance of an individual member's transfer balance account is over $1.7 million, then by 30 June 2017 the trustee and the member must remove the excess assets by way of commutation. If the excess assets are not removed within this time, then the earnings on the excess funds will be subject to excess transfer balance tax.

By 30 June 2017, members will need to work with their trustees and advisors to ensure that the transfer balance in their transfer balance accounts does not exceed the transfer balance cap.

The ATO will also issue determinations to members who it determines have a transfer balance in excess of their transfer balance cap, which sets in train a process for the reduction of the transfer balance to below the member's transfer balance cap, and which determines any excess transfer balance tax payable in respect of the member.

Further discussion on the transfer balance cap, and its impact on death benefit arrangements, can be found in our ClearLaw January 2017 article titled "The 2017 superannuation reforms — thinking about death benefits".

Exceeding the transfer balance cap

Where a member's transfer balance cap is exceeded, the ATO will issue the trustee with a transfer determination^[2] with respect to that member. This initiates a process whereby the trustee and member can work together to remove the excess assets by way of commutation. Where this does not occur the ATO will issue an authority which requires the trustee to commute an excess sum.

Because a person's transfer balance and transfer balance account include all super funds in which the person has a super interest which is in retirement phase, it is important that trustees and members work together to ensure that their pension accounts are dealt with as they wish. If not, then the ATO will make a decision — which may not suit the member — regarding which pension accounts, and in what proportions, must be commuted.

Arrangements in respect of death benefits have important implications for transfer balance accounts, which is explored in more detail in our related January 2017 article on death benefits under the new laws "The 2017 superannuation reforms — thinking about death benefits".

Concessional Contributions

Concessional contributions caps

From 1 July 2017, the limit imposed on concessional superannuation contributions for members of all ages will be lowered to $25,000 per annum (previously $30,000 or $35,000 depending on the member's age).

Concessional contributions are taxed at 15% in the fund. Where a member exceeds the concessional contributions cap, the amount contributed in excess of the cap will be included in the member's assessable income and taxed at their marginal rate.

Currently, members with combined income and concessional superannuation contributions of above $300,000 per annum are required to pay an additional 15% tax on their concessional contributions. From 1 July 2017, this income threshold will be lowered to $250,000 per annum. Accordingly, members who earn above $250,000 per annum will be required to pay 30% tax on any concessional contributions.

Income tax deductions on concessional contributions — available to more people

Currently, income tax deductions are available for super contributions made by members who earn less than 10% of their income from employment sources.

The Government has increased access to these deductions. Accordingly, from 1 July 2017, if you are under age 65, or aged 65 to 74 and meet the work test, you will be eligible to claim a tax deduction for personal contributions to eligible super funds up to the new concessional contributions cap of $25,000.

Catch-up concessional contributions

Currently, members who make no or limited concessional contributions into their super effectively forfeit access to their unused concessional contributions cap amounts.

From 1 July 2018, members with a total superannuation balance of less than $500,000 as at 30 June in the previous financial year, will be allowed to make 'catch-up' contributions up to their unused concessional contributions cap space amounts.

The ability to carry over any unused cap space amounts will commence from 1 July 2018 (that is, if you do not meet your limit in 2018-2019, you can catch up in 2019-2020). If you fail to use any unused cap space after 5 years it will expire.

Members under age 65, or aged 65 to 74 who meet the work test, will be able to access these arrangements.

Non-Concessional Contributions

Currently, all members can make non-concessional contributions (which are typically voluntary contributions from a member's post-tax income) up to a maximum annual limit of $180,000. Those under the age of 65 may also bring forward this amount for 3 years (that is, a total bring forward amount of $540,000) and effectively use up any unused non-concessional contributions space in advance.

From 1 July 2017, the Government will lower the non-concessional contributions limit to $100,000 (with a 3 year bring forward of $300,000) and will restrict eligibility to make such contributions.

Currently there is no restriction on individuals who may make non-concessional contributions into their super accounts. From 1 July 2017, individuals with a total superannuation balance of $1.6 million as at 30 June in the previous financial year will no longer be eligible to make non-concessional contributions into their superannuation accounts in the following financial year.

There are transitional rules which apply to those people who triggered the bring-forward cap in either the 2015-2016 year, or the 2016-2017 year, which produces a combined figure based on the $180,000 annual cap which applied before 1 July 2017, and the $100,000 annual cap which applies on and from 1 July 2017.

Low Income Superannuation Tax Offset

From 1 July 2017, to assist low-income earners, the Government will introduce the Low Income Superannuation Offset (LISTO).

The LISTO enables low-income earners (that is, members with an adjusted taxable income of up to $37,000 per annum) to receive a refund of the tax paid on concessional superannuation contributions, up to a cap of $500. The refunded amount is paid back into the member's super account.

Contributions in respect of low-income spouses

Members can make contributions to a low-income spouse's super account in return for an 18% tax offset of up to $540. The beneficiary spouse must be under 70 years of age and must meet the work test if they are aged 65 to 69.

In order to qualify for the offset, the current low-income threshold for the beneficiary spouse must be $10,300 or less. From 1 July 2017, the threshold will be increased to $37,000 to encourage such contributions. The offset will gradually reduce for income thresholds above $37,000 and is completely phased out for thresholds above $40,000.

However, to stop a contributing spouse receiving a tax offset on making the contribution, and the beneficiary spouse withdrawing the contribution (as an excess contribution), from 1 July 2017, where a beneficiary spouse has already exceeded their non-concessional contributions cap or their total superannuation balance exceeds the general transfer balance cap, then the contributing spouse will not be entitled to receive any tax offset.

Earnings on income in the retirement phase

Upon retirement (or meeting another relevant condition of release), members may draw down on their super in the form of an account based pension. Currently, earnings on savings supporting the account based pension are tax exempt.

However from 1 July 2017 this earnings tax exemption will only apply to account based pensions which are in 'retirement phase': essentially this means where a pension is being paid to a person from a complying super fund, but excludes a transition to retirement pension.

Transition to retirement income streams

Members between preservation age and age 65 can access income by way of a transition to retirement income stream (TRIS) pension. Accessing a TRIS enables members to receive an income stream from tax-free earnings on their superannuation assets with the idea that members will work less hours whilst receiving this income.

From 1 July 2017, the Government will abolish the tax exempt status of income from assets supporting a TRIS pension. The earnings from assets supporting all TRIS pensions will thereafter be taxed concessionally at 15% (consistent with earnings on assets in an accumulation account).

Death benefits and superannuation

Upon the death of another person, an individual member may be entitled to receive a death benefit either in the form of a lump-sum payment or as a superannuation income stream (depending on the rules which govern the deceased's fund).

Pensions received from deceased member's fund

In some circumstances, upon the death of another person, an individual beneficiary may be entitled to be paid a pension as a death benefit from that fund (provided they are an eligible pension dependant).

Generally such pensions are paid from the deceased person's fund. The new rules allow that death benefit to be rolled-over or transferred from the deceased person's fund into another fund of the beneficiary's choice. The amount rolled-over or transferred must be used to pay a pension to the beneficiary.

In both scenarios the amount received by the beneficiary will depend entirely on the size of the relevant death benefit from the deceased person's fund.

With the introduction of the transfer balance cap — and new rules restricting when a dependant child may receive a pension from a deceased parent's fund — the beneficiary must work closely with their trustee and advisors to ensure that the amount rolled-over or transferred does not cause the beneficiary to exceed their own transfer balance cap.

These issues are explored in greater detail in our related January 2017 article on death benefits under the new laws "The 2017 superannuation reforms — thinking about death benefits".

Abolishing the 'anti-detriment' tax offset

Upon the death of a member, a dependant may be entitled to receive a payment in the form of a lump-sum death benefit. The deceased's fund may elect to pay the dependant an 'anti-detriment' payment together with the lump-sum death benefit.

The 'anti-detriment' payment is effectively a refund of the 15% tax paid by the deceased member throughout their lifetime on any superannuation contributions. Currently, where the deceased's fund makes an anti-detriment payment, the trustee of the fund is entitled to claim an income tax deduction of an equivalent amount.

From 1 July 2017, if a member dies on or after 1 July 2017, or a death benefit is to be paid on or after 1 July 2019, the deceased's fund will not be permitted to claim a tax deduction for that part of a lump-sum benefit paid which represents the 'anti-detriment' payment.

Status of the laws

Some of the regulations which support the new rules are still in draft form, and open for public submissions until 10 February 2017.

The changes will be reflected in the Cleardocs SMSF documents in coming weeks.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Superannuation team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics.

Order Cleardocs SMSF packages

• Set up an SMSF
• SMSF set up + register corporate trustee
• Update an SMSF deed
• Set up an SMSF pension
• Create an SMSF Investment Strategy
• Arrange SMSF borrowing documents:
  • for when the lender is a bank
  • for when the lender is a related party
• SMSF Death Benefit Nomination — binding or non binding
• SMSF Death Benefit Agreement — binding and permanent
• SMSF Wind Up
• SMSF Minutes & Resolutions Package