With all the turmoil and change that has occurred in the superannuation landscape over the past year, the 2016 Federal Budget has almost faded from memory and been relegated to the dark crevices of our minds. We are now living with its many reforms on a daily basis.
Remember, this was the Budget that was brought forward by a week, to 3 May, 2016, to fit in with the election cycle.
The 2016 Budget contained significant changes to superannuation. Some say they were the biggest changes since the massive reforms announced in the May 2006 Budget – 10 years earlier.
As we are now only three months out from the end of the 2018 financial year, perhaps it is timely to revisit some of the changes relating to superannuation contribution rules that came into effect from 1 July, 2017, and some general rules around getting money into super.
Before we start, and despite all the negative comments that seem to perpetuate around superannuation, it is timely to remember that superannuation is the governments preferred retirement savings structure.
It forms one of the pillars of the retirement incomes policy, and the Australian superannuation system is regarded as world class - one of the best in the world.
2016 Budget Reforms
The superannuation reforms announced in the 2016 Budget were far-reaching. Perhaps the most significant was the restriction on the amount an individual could hold in the retirement phase of superannuation – the transfer balance cap.
However, there were important changes that apply to superannuation contributions including:
- a reduction in concessional and non-concessional contribution caps
- a prohibition on certain people making non-concessional contributions
- a reduced threshold for previously triggered brought forward contributions
- the ability to carry forward any unused concessional contribution cap
- changes to the spouse superannuation tax offset
- tax deductibility for personal contributions; and
- a reduction in the Division 293 income threshold.
While on the topic of contributions, it is worth also mentioning two important reforms that were announced in the 2017 Budget and have now passed into law: the First Home Super Savers scheme and downsizer contributions – both aimed at attempting to alleviate Australia’s housing affordability crisis.
Just by way of a recap, a concessional contribution is any contribution other than a contribution made by an individual for themselves (non-tax deductible), or contributions made for a spouse, and contributions made by a parent for a child who is a minor.
Concessional contributions include contributions made by an employer, be they under a superannuation guarantee obligation or made under an effective salary sacrifice arrangement, contributions made by another entity or a third party (including contributions made by a family trust for the benefit of a beneficiary), contributions made by a parent for an adult child, and personal contributions that will be claimed as a tax deduction.
For the 2017-18 financial year, concessional contributions are capped at a maximum of $25,000 per person. This represents a reduction from $30,000 or $35,000, depending on age, from the previous financial year.
The concessional contribution cap will be indexed in line with movements in Average Weekly Ordinary Time Earnings (AWOTE), in increments of $2,500. If AWOTE increases by two per cent per annum, the concessional contribution cap will not increase to $27,500 until 1 July 2022.
When considering the impact of the reduced cap, it is vital to review the current level of contributions being made. This applies to both superannuation guarantee contributions, and those made under a salary sacrifice arrangement.
Anecdotally, I hear of many individuals who have salary sacrifice arrangements currently in place that were established in previous financial years when the concessional contribution cap was significantly higher. Often, those arrangements have not been reviewed in the light of the reduced caps.
Reviewing such arrangements now is imperative if the risk of breaching the concessional contribution cap is to be minimised.
Remember, an employer is obligated to make the March quarter superannuation guarantee contribution by 28 April, 2018, however the June quarter contributions may be deferred until after the end of the financial year, but must be made by 28 July, 2018.
Another aspect of superannuation guarantee contributions that is worth revisiting is the maximum contribution base. It is not unusual to hear comments along the lines of ‘I have a client who has a salary of $400,000. As a result, their superannuation guarantee contributions of $38,000 exceed their cap’.
For 2017-18, the maximum contribution base is $52,760 per quarter. That is, an employer is not required to make superannuation guarantee contributions on that part of an employees’ salary that exceeds $52,760 per quarter.
Therefore, an excess concessional contribution cannot arise simply because an employer is meeting their superannuation guarantee – unless of course, an employee has more than one job, in which case each employer is obliged to make superannuation guarantee contributions.
In certain circumstances, other amounts may, while not being contributions per se, be counted against an individual’s concessional contribution cap. Most notably are certain amounts transferred to a members account from a reserve account being held within a self-managed superannuation fund.
Division 293 Tax
When concessional contributions are made to a superannuation fund, other than a constitutionally protected fund, they are included as part of the funds assessable income and are taxed at a rate of 15 per cent.
However, where an individual is a high-income earner, an additional 15 per cent tax is levied on them personally, in respect of their concessional contributions.
A high-income earner is one with an income of more than $250,000 per annum. The income threshold was reduced from $300,000, effective from 1 July 2017.
The definition of income for Division 293 purposes is rather complex and is based on income for Medicare levy surcharge purposes.
While discussion of Division 293 tax is outside the scope of this article, suffice to say advisers should be considering the reduction in the income threshold when advising their high-income earing clients on superannuation contribution strategies.
Arguably one of the more controversial announcements of the 2016 Budget reforms was the plan to impose a lifetime limit of $500,000 on non-concessional contributions. The proposed limit would also take into account all non-concessional contributions made since 1 July, 2007.
Fortunately, common sense prevailed, and this proposal was abandoned.
It was replaced with a reduction in the annual non-concessional cap to $100,000 per person (down from $180,000 in 2016-17). This is four times the concessional contribution cap. The ability to bring forward up to three years of contributions remains a feature of current arrangements.
However, a number of restrictions were introduced that impact the ability of an individual to make non-concessional contributions.
Firstly, non-concessional contributions may only be made by an individual whose total superannuation balance does not exceed the transfer balance cap.
The transfer balance cap is currently $1.6m, and an individual’s total super balance is the sum of their accumulation and pension interests, together with rollovers in transit, as at the previous 30 June.
The total superannuation balance may also impact those who have already triggered their three-year bring forward cap. If their total superannuation balance exceeds $1.6m before they complete making contributions under the three-year rule, they will be unable to complete their planned contributions.
For example, if we assume someone has a total superannuation balance of $1.350,000 (at the previous 30 June) and they make a non-concessional contribution of $175,000, they trigger their three-year bring forward contribution.
Assume that when coupled with investment growth, their total superannuation balance at the following 30 June is $1,650,000. They will be unable to complete their contributions under the previously triggered three-year cap as their total superannuation balance now exceeds $1.6m.
The second issue to consider is the ability to trigger the three-year bring forward rule in the first place. As readers will be aware, to access the three-year bring forward cap, an individual needs to be aged 64 or younger at the start of the financial year.
And of course, if they wish to make contributions after they turn 65, they must meet the work test.
The July 2017 reforms saw the introduction of restrictions on accessing the three-year bring forward cap where an individual’s total superannuation balance was less than but approaching $1.6m.
The following table sets out the contributions that may be made under the three-year bring forward rule:
Total superannuation balance
Maximum non-concessional contributions
Less than $1,400,000
$100,000 + 2 years
$1,400,000 to $1,499,999
$100,000 + 1 year
$1,500,000 to $1,599,999
$1,600,000 or more
Another area of complexity that needs to be considered is the ability to make further non-concessional contributions where the three-year bring forward cap was triggered in either 2015-16 or 2016-17, but was not fully utilised.
The three-year cap in these previous years was $540,000 and was triggered when non-concessional contributions of more than $180,000 were made in either of the two financial years mentioned.
Where the cap has been triggered, the amount of further non-concessional contributions that can be made over the following two financial years was $540,000, less the amount contributed in years 1 and/or 2.
Put simply, if a non-concessional contribution of $200,000 was made in 2015-16, the maximum additional contributions that could be made over the course of the next two financial years was $340,000 ($540,000, less $200,000).
However, with the reduction of the non-concessional contribution cap from $180,000 to $100,000 from 1 July, 2017, the amount that may be contributed under a previously triggered three-year cap has been reduced as set out in the following table:
Year the three-year bring forward was triggered
Amount that may be contributed over three years
2015 - 16
2016 - 17
Again, let’s consider another simply example to illustrate the application of this change.
A non-concessional contribution was made in 2016-17 of $350,000. Under the previous three-year cap, a further $190,000 could have been made at any time during the course of the following two financial years.
However, with the reduction of the caps from 1 July 2017, the maximum that can now be contributed in following two years to 30 June, 2019 is now $30,000 ($380,000, less $350,000).
When advising clients on non-concessional contributions, consideration must be given to a number of matters including:
- their total superannuation balance – to determine if they are eligible to make a non-concessional contribution and/or how their three-year cap may be affected
- their age as at the start of the financial year – can contributions under the three-year bring forward cap be made, and does the work test need to be met? and
- the amount of non-concessional contributions made in 2015-16 and 2016-17 – was the three-year bring forward cap triggered and if so, can further contributions be made under the reduced residual cap?
Strategies to consider for clients
Apart from making concessional and non-concessional contributions, there are a number of opportunities clients can be considering in the current financial year. Following is a brief contribution ‘check-list’ for 2017-18:
- review salary sacrifice arrangements
- Government co-contribution
- spouse superannuation contribution tax offset – increased income threshold
- low income superannuation tax offset contributions (LISTO) – refund of contributions tax for low income earners
- tax deductibility of personal contributions – removal of the 10 per cent employment income test
- contributions under the First Home Super Savers scheme; and
- contributions using the small business capital gains tax concessions.
From 1 July 2018, two new opportunities will become available:
- the ability to carry forward any unused concessional contribution cap (accruing from 1 July, 2018) of those individuals with a total superannuation balance of less than $500,000; and
- downsizer contributions for those aged 65 and older who enter a contract on or after 1 July, 2018, to sell their home - provided they have owned it for at least 10 years.
While superannuation remains an attractive vehicle for saving for, and drawing down wealth in retirement, the rules are complex and even small indiscretions may carry penalties.
Understanding the intricacies of superannuation is a key skill for those advising clients of all ages.
Peter Kelly is a specialist in retirement strategies and solutions at Centrepoint Alliance.