New new Super reforms – what do you need to know?
“So this is the way the super reforms end, not with a bang but a whimper” (with apologies to TS Elliot)
Note: This is general advice only and takes no account of your personal circumstances.
Having taken the superannuation reforms announced in the 2016 Federal Budget to the 2016 election, today the government materially changed them.
Today Treasurer Morrison announced the details of new superannuation reforms (‘the new new rules’) that supersede the rules announced in their May Budget (‘the old new rules’) that will reform the current rules (‘the old old rules’).
The reforms announced in the Budget lived a brief but innovative and agile life. It seems this is a very exciting time to be discussing superannuation reforms.
Are you confused yet? Stay with us.
Aside: Be mindful that these new new rules are still proposed – they need to be passed by both houses of Parliament before they become law. This will need either the support of Labor or a significant portion of the cross benches. It’s a little bit uncertain how good this Government is at organising the required numbers.
We summarise below the key points from the new new rules that our clients should be aware of:
- There will be no lifetime non-concessional (personal or after tax) superannuation contribution cap. The proposal for a $500k lifetime cap is no more. It has ceased to be. It’s expired and gone to meet its maker. This is a late lifetime cap. It’s a stiff. Bereft of life, it rests in peace. It’s rung down the curtain and joined the choir invisible. This is an ex-lifetime cap. I think you get the gist (and with apologies to Monty Python).
Aside: This complete about-face re the lifetime cap on the part of the Government is what comes of making policy on the run without involving stakeholders. This approach is not what our superannuation system needs or deserves – it dramatically reduces our faith in a system in which we need to make highly important long term decisions.
- Instead the current non-concessional caps of $180k per annum (or 3 times that amount of $540k bring forward over three years) has been reduced to $100k per annum (or 3 times that amount of $300k bring forward over three years) from 1 July 2017.
- The above new non-concessional caps of $100k/$300k only apply to those with less than $1.6m in their super account. If you have $1.6m or more in super, you won’t be able to make non-concessional contributions from 1 July 2017.
- In effect, a couple can have a combined $3.2m (2 x $1.6m) in super before they can no longer make non-concessional contributions.
- As announced previously, concessional (or pre-tax) contributions will be reduced to $25k per annum for everyone (down from $35k for those over 49 and down from $30k for those under 50).
- The previously announced new catch up provision for concessional contributions where you could catch-up five year’s worth of contributions (5 x $25k = $125k) has been delayed until 1 July 2018.
- Under the previously announced rules, those aged 65-74 would be able to make contributions to super without meeting the work test (work 40 hours in 30 consecutive days). This proposed reform will no longer be introduced. Now under the new, new rules, if you’re aged over 64 and under 75 you now need to meet the work test to make contributions to your super.
We re-iterate below the key points from the old new rules that will still apply that our clients should be aware of:
- This financial year (2016/17), if you have the funds available, you’re under 65; and if you haven’t already triggered your bring forward in the previous two financial years, you will still be able to take advantage of a $540k bring forward contribution up to 30 June 2017.
- Super account balances of more than $1.6m (‘transfer balance cap’) in retirement will now attract tax from 1 July 2017 (ie they will be treated as accumulation accounts and taxed at 15% on income and 10% on capital gains for assets held more than 1 year / 15% on capital gains for assets held less than 1 year)
- Having more than $1.6m in your super is fine, it just won’t all be tax free as it was under the old rules. You won’t have to take anything out of your super (other than the minimum pension amount for those in pension mode as you do now). All pensions payments will still be tax free – it is just the balance of your super fund in excess of $1.6m that will attract the 15% or 10% tax.
- So a couple can have a combined $3.2m in their pension accounts (if their balances are equal at $1.6,) before they will pay any tax. You can also hold around $1m in assets outside of super and effectively pay no tax (taking advantage of the tax free thresholds and other available tax benefits) assuming you aren’t earning other income. So we will have strategies for you to ensure you don’t pay any more tax than you need to.
- For those transitioning to retirement (TTR) typically in the age bracket 56-65, your super will now pay tax as if it was in accumulation mode (ie 15%/10%).
- For clients earning more than $250k, your concessional contributions will be taxed at 30% instead of 15%. So if you contribute the maximum under the new rules of $25k each year, the tax paid will increase from $3,750 to $7,000). Under the current rules, this excess tax only kicked in for those earning more than $300k so this will impact a larger number of clients.
- You can now claim a tax deduction for concessional contributions you make without having to meet the old 10% rule (where less than 10% of your income needed to be from employment income, employer super contributions and fringe benefits)
- For clients with anti-detriment reserves, these will still cease from 1 July 2017.
While the new new rules are undoubtedly tougher than the current super rules, they are far less restrictive than the proposed reforms the Government had announced previously. We estimate the following:
- Before the May 2016 Budget, an individual over 49 could contribute a total of $2.1m into their super over 10 years (after tax, both concessional and non-concessional contributions)
- Before the May 2016 Budget, an individual under 50 could contribute a total of $2.0m into their super over 10 years (after tax, both concessional and non-concessional contributions)
- Under the rules announced in the Budget, an individual could contribute a total of $713k into their super (after tax, both concessional and non-concessional contributions) over 10 years. This represented a decrease of 65% to 66%
- Under the rules announced today, an individual can contribute a total of $1.2m into their super (after tax, both concessional and non-concessional contributions) over 10 years. This represents an increase from the Budget night of 170% (or a decrease of 40 to 42% from the current rules)
- So an individual’s ability to contribute to their super is certainly down from the current rules, but it represents a significant increase compared to the rules announced in the May 2016 Budget
- We have previously argued that the rules as proposed in the 2016 Federal Budget would drastically reduce the future growth of Self Managed Super Funds due to the restrictions on people getting money into their super. Today we believe SMSFs got a second wind with this reprieve from the Government.
- We believe individuals with time on their side, a strategic plan for future contributions and available cash flow will be able to better manage their transition to retirement under the amended rules.
The new rules have only been announced today and this is our first analysis of the rules. In the coming days and weeks we will refine our views and start applying the rules to each of our clients’ personal situations so we can best optimise our super position for the new rules. As we said earlier and to borrow from our Prime Minister, this is a very exciting time to be discussing superannuation reforms.