On November 23, 2016, legislation to implement superannuation reforms passed the Parliament. This legislation aims to improve the superannuation system and make it more sustainable with better targeted tax concessions. It likewise increases the flexibility of the system in staying aligned with the changing work-life patterns of people in Australia. These reforms will take effect on July 1, 2017.
Here are several things that you should know about superannuation changes in Australia for 2017:
Legislating the objective of superannuation
This reform aims to provide income in retirement as a substitute or supplement to the Age Pension. Every bill or regulation related to superannuation should have a statement of compatibility to ensure that all proposed superannuation reforms are aligned with the objective of the system.
Introducing the transfer balance cap
A transfer balance cap worth $1.6 million will be introduced on the total amount of superannuation accumulated by an individual and can be transferred into the tax-free retirement phase, though future earnings on balances on this phase will not be capped. These can be in an accumulation account or outside the superannuation system and are taxed at 15%.
For those who are retired and whose balances are lower than $1.7 million by June 30, a transitional arrangement will apply. This means that starting July 1, they have half a year to make their balances under $1.6 million. Also, the transfer balance cap will be indexed and will grow. By 2020-21, it can reach up to $1.7 million.
Reforming the taxation of concessional superannuation contributions
From $300,000, the additional contributions tax (Division 293) will be lowered to $250,000. Also, the government will lower the annual cap on concessional superannuation contributions from $30,000 to $25,000. This is applicable for people who are below 49 years old at the end of the previous financial year.
Lowering the annual non-concessional contributions cap
The annual non-concessional contributions cap to $100,000 will be reduced. A new constraint will then be introduced, wherein those with a balance of $1.6 million and above will no longer be eligible to make non-concessional contributions. For those who are below 65 years old, they will be eligible to bring forward up to three years’ worth of non-concessional contributions.
If the balance of an individual at the start of the contribution year is $1.6 million and above, he/she will no longer be able to make non-concessional contributions. For those whose balances which are close to $1.6 million, they can access the years of bring forward so their balance becomes $1.6 million.
Transitional arrangements will be applicable for those who have not fully used their bring forward before July 1. If this is the case, the amount of the remaining bring forward will be up for a re-assessment on July 1 to determine the new annual cap. For individuals who are 65-74 years old, they are eligible for making annual non-concessional contributions of $100,000 if they work for 40 hours in a 30-day period for every income year, also called the work test. They will not be able to access the three years of bring forward of contributions.
Introducing the Low Income Superannuation Tax Offset (LISTO)
The Low Income Superannuation Contribution (LISC) will be replaced with Low Income Superannuation Tax Offset (LISTO). With this reform, individuals with taxable income reaching $37,000 will be refunded for the tax paid on concessional contributions of up to $500. This ensures that low-income earners do not pay more tax on superannuation contributions than their net pay.
Improving access to concessional contributions
All individuals who are below 65 years old as well as those who are 65 to 74 years old who meet the work test will be allowed to get a tax deduction for personal contributions to eligible superannuation funds up to the annual cap of concessional contributions.
Allowing catch-up concessional contributions
Individuals who have a total superannuation balance of below $500,000 before the start of the financial year will be allowed to carry forward unused concessional cap space for up to five years. This will soon be helpful for individuals who took time out of work or whose income differs greatly from one year to the next.
Extending the spouse tax offset
The Government will extend the spouse tax offset to individuals whose recipient spouses have incomes reaching $40,000. This can help ensure that more couples will be able to support each other in saving for retirement. This superannuation reform will mostly be beneficial for women who have lower incomes and have lower balances in superannuation contributions.
Removing barriers to innovation in retirement income stream products
To encourage providers to have more retirement offerings, the Government will extend the tax exemption to deferred income stream products. This reform will help retirees in managing consumption and risk in retirement such as the longevity risk wherein retirees outlive their savings.
Improving the integrity of transition to retirement income streams
In this superannuation reform, the Government will eliminate the tax exempt status of income from assets which support TRIS. Instead, these will be taxed at 15%. This aims to ensure that the TRIS will not be used as a tax minimisation strategy. Under this reform, certain superannuation income stream payments will no longer be used as a lump sum for tax purposes. Income streams will be tax-free, or will be taxed at the marginal tax rate of below 15% offset of the individual.
Abolishing the anti–detriment rule
The anti-detriment rule that allows superannuation funds to claim a tax deduction for anti-detriment payments given to eligible dependents will be removed as it is obsolete and not aligned with other aspects of the tax law. The anti-detriment payment is an amount that is included in the lump sum death benefit which is paid to an eligible dependent. With this reform, there will be consistent treatment of death benefits in all superannuation funds. The lump sum death benefits given to eligible dependents will still be tax-free.
Streamlining administrative processes
The Government will implement measures to minimise the compliance challenges on taxpayers and superannuation providers. This reform will also make the system more efficient as it aims for fairness in procedures in dealing with the Commissioner. These are the measures to streamline administrative processes:
- A single notice for all tax liabilities in a financial year will be issued to taxpayers by the Commissioner of Taxation. Having only one notice will make it easier for taxpayers to seek advice on all of their tax liabilities.
- The compulsory obligation for superannuation providers will be removed. With this measure, individuals with defined benefit superannuation interests will no longer have to provide an individual end benefit notice to the Commissioner.
- Align objection rights which are applicable to discretionary decisions by the Commissioner about non-concessional contributions with those which are applicable to discretionary decisions on concessional contributions. This measure corrects any inconsistency in the law, ensuring that individuals have the same objection rights when disagreeing with a discretionary decision by the Commissioner on non-concessional contributions.
Starting July 1, 2018, the current release authority arrangements will be replaced with standardised timeframes and processes. A default process will be introduced for those who want to undertake it or those who do not make an election when it comes to all release amounts from superannuation.
These are some of the things that you should know about superannuation Australia for 2017. You may want to do more research to have a better understanding of these reforms and be guided accordingly.
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