On top of the new caps: superannuation contributions in 2017
Overview
On 1 July 2017, the Federal Government’s new rules on superannuation contributions come into effect. A number of significant changes will be implemented, including
reductions to the concessional and non‐concessional contribution (NCC) caps, which will decrease to $25,000 and $100,000 respectively. The cap reductions will also affect contributions made under the bring‐forward rule, though transitionary caps may apply.
On the same day, new eligibility requirements for NCCs will commence, along with flexible new rules for personal concessional contributions and an income threshold decrease for Division 293 tax.
Featured interviewees
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The amount of superannuation you have will be decided on 30 June. For the next financial year, that will dictate whether you can make non‐concessional contributions. Andrew Donachie ● National financial planning manager ● First"
State Super
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The $540,000 p.a. — if you haven’t used it in the prior three years up until 30 June 2017 — you must use it or lose it."
Andrew Yee ● Director, superannuation ● HLB Mann Judd
Learning objectives
After reading this article, you should be able to:
Outline the new contributions caps and explain how they will be indexed
Analyse how the contribution cap changes will affect the bring‐forward rule
Summarise the updated eligibility criteria for individuals interested in making NCCs
Identify how the new changes will affect Division 293 tax, personal contributions, and superannuation contributions on behalf of a spouse.
Knowledge areas and accreditation
Knowledge area: Superannuation (75 minutes/1.25 points).
FPA CPD points 1.25 Dimension: Capability (FPA 008782).
AFA CPD points 1.25 (AFA 01022009).
CPA Australia CPD points 1.25 (CPA 000208).
SMSF Association CPD points 1.25.
TPB CPE (75 minutes/1.25 points).
New caps at heart of superannuation changes
On 29 November 2016, the Federal Government’s (Government) superannuation changes received Royal Assent. The changes were introduced to refocus the superannuation system and help average Australians save for retirement, while removing incentives for wealthier individuals to use the system as a taxation haven.
A large part of these changes includes the introduction of new contribution caps, commencing on 1 July 2017.
Prior to 1 July 2017, there were two tiers of concessional contribution caps which
depended on an individual’s age. Those under 49 years of age on the 30 June in the prior financial year were limited to $30,000 of concessional contributions. Australians aged 49 and over, on the other hand, had a higher concessional cap of $35,000.
As of 1 July 2017, the concessional cap will reduce to $25,000 per financial year for all Australians, regardless of their age (as long as they satisfy the work test).
On the same date, the non‐concessional cap for all individuals under 75 years of age will also change, decreasing from $180,000 to $100,000 per financial year.
Importantly, non‐concessional contributions (NCCs) will only be granted concessional tax status if they are made to an account with a total superannuation balance less than the general transfer balance rate, which will be $1.6 million as of 1 July 2017. Contributions made to accounts with balances greater than this amount will be deemed to be “excess contributions” and, if not withdrawn by the end of the financial year, will be taxed at 47%.
Work test still in play
Along with satisfying other eligibility criteria, individuals aged between 65 and 74 will still need to satisfy the work test if they wish to make NCCs. To satisfy the work test, an individual will need to declare that they were “gainfully” employed for a minimum of 40 hours over 30 consecutive days during the corresponding financial year.
Caps to rise through indexation
The Government intends to index the contribution caps to mitigate the effects of inflation.
First State Super’s national financial planning manager, Andrew Donachie, outlined how these caps will be indexed.
“They’ll be indexed moving forward in line with Average Weekly Ordinary Time Earnings [AWOTE] in increments of $2,500 [rounded down]. Two thousand five‐hundred dollars over the $25,000 p.a. concessional cap is around 10%, so we would need the AWOTE to grow by 10% before the next increment increase,” he said.
“If AWOTE is at 2.5% p.a., it will take approximately four years before we see the next increase in concessional caps [to $27,500 p.a.].
“Moving onto the non‐concessional caps, they’re based on a factor of four times the concessional caps. So, once the concessional cap goes up to $27,500 p.a., the non‐
concessional cap will be increased at the same time from $100,000 p.a. to $110,000 p.a.”
Did you know?
Changes to the bring‐forward rule
After 1 July 2017, some individuals will still be able to contribute up to three years’ worth of future NCCs in a single financial year under the bring‐forward rule. However, new eligibility and cap restrictions apply.
For an individual commencing their three‐year bring‐forward period in 2017/18 or beyond, the three‐year bring‐forward cap will reduce from $540,000 to $300,000. The $300,000 cap corresponds to three years’ worth of NCCs based on the new $100,000 p.a. NCC cap.
The rules are more complicated for individuals whose three‐year period commenced in 2015/16 or 2016/17. HLB Mann Judd’s director of superannuation, Andrew Yee, outlined how the cap changes will affect the bring‐forward contribution limits.
“The $540,000 — if you haven’t used it in the prior three years up until 30 June 2017 — you must use it or lose it,” he said.
“If you’ve triggered the bring‐forward cap in the last two financial years, then the
Government is providing a transitional cap … If you triggered the cap in the 2015/16 year, your bring‐forward cap — if you haven’t used the whole amount by 30 June 2017 — reduces to $460,000 [after 1 July].
“Similarly, if you’ve triggered your cap in the current financial year of 2016/17, but you haven’t fully utilised it, [from 1 July] it reduces to $380,000. It’s basically a combination of the current caps and the future caps giving you that amount.”
Table 1 illustrates how the transitional cap amounts are determined.
Table 1: Total NCC bring‐forward caps over the transitionary period
2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
$180,000 $180,000 $180,000
$0 to $540,000
$180,000 $180,000 $100,000
$0 to $460,000
$180,000 $100,000 $100,000
$0 to $380,000
$100,000 $100,000 $100,000
$0 to $300,000
Source: ATO
Eligibility to access the bring‐forward rule
From 1 July 2017, access to the bring‐forward rule will only apply to individuals who satisfy the following eligibility criteria:
As under the prior rules, they must be under 65 years of age for at least one day in the first financial year of the three‐year bring‐forward period
As under the prior rules, they must contribute more than the annual NCC cap to trigger the bring‐forward period. This is $100,000 for 2017/18, but will be indexed upwards in the future
The general transfer balance cap — $1.6 million 2017/18 — must exceed the individual’s total superannuation balance, as of 30 June in the prior year, by a greater amount than the NCC cap, initially $100,000
This means that the individual’s total superannuation balance must be less than $1.5 million as at 30 June 2017
From 2017/18 onwards, the cap amounts for the second or third year in a bring‐forward arrangement drop to zero if the total superannuation balance, as of 30 June in the prior year, equals or exceeds the superannuation transfer balance cap for that year. The transfer balance for 2017/18 is $1.6 million.
Other cap restrictions apply to individuals seeking to utilise the bring‐forward rule, but have total superannuation balances close to, but more than $100,000 below, the existing transfer balance limit. Donachie explained how these caps work.
“At 30 June each year, as your balance is calculated … if you sit between $1.4 million and
$1.5 million, you can add $200,000 in non‐concessional contributions, assuming you enacted the bring‐forward rule. If you sit between $1.3 million and $1.4 million, you can add the full $300,000 in non‐concessional contributions,” he said.
The contribution limits pertaining to the bring‐forward rule are outlined in Table 2.
Advisers should bear in mind that these figures will change as cap indexation occurs.
Table 2: 2017/18 bring‐forward period Total superannuation
balance on 30 June 2017
NCC cap for the first year Bring‐forward period
Less than $1.4 million $300,000 3 years
$1.4 million to less than
$1.5 million
$200,000 2 years
$1.5 million to less than
$1.6 million
$100,000 No bring‐forward period,
general NCC cap applies
$1.6 million Nil N/A
Source: ATO
Determining a fund’s superannuation balance
For the purpose of determining the correct bring‐forward contribution cap, an individual’s total superannuation balance is recorded on only one day per financial year — 30 June.
According to Donachie, the movement of an individual’s account before and after this date does not affect their cap amount.
“The amount of superannuation you have will be decided on 30 June. For the next financial year that will dictate whether you can make these non‐concessional contributions,” he said.
“It allows the account to fluctuate during the year, but if you’re over $1.6 million on 30 June, even if your account drops under [$1.6 million] the following year, you still cannot make any contributions until it’s reassessed at the end of the financial year.”
Conversely, an individual will be able to make an NCC to their superannuation balance if it is over $1.6 million throughout the year, provided it was less than $1.6 million on the 30 June of the previous financial year, and they satisfy all other eligibility requirements.
Maximising superannuation contributions before 1 July 2017
Bill and Ann, both aged 63, were planning to sell an investment in September 2017 and contribute the $1,000,000 proceeds (net of tax and fees) to their respective
superannuation funds ($500,000 to each individual fund). Neither has made NCCs in the past, and both currently have approximately $1.7 million in their respective
superannuation accounts.
If Bill and Ann wait until September 2017 to sell their investment, the new
superannuation caps, introduced on 1 July 2017, will likely prevent them from making their planned NCCs for the following reasons:
a) If on 30 June 2017, the total individual balances in Bill and Ann’s superannuation accounts equals or exceeds $1.6 million, then neither Bill nor Ann will be eligible to make NCCs.
b) From 1 July 2017, the maximum bring‐forward amount for eligible individuals will be
$300,000. However, to contribute $300,000, both Bill and Ann’s total individual account balances would need to be less than $1.4 million on 30 June 2017.
Strategy
Bill and Ann have reconsidered their situation and have decided to sell their investment property this financial year to maximise their NCCs.
The property is sold on 1 April 2017, and settlement will be made on 1 June 2017.
Bill and Ann can utilise the bring‐forward rule and can each make $500,000 of NCCs to their respective super funds in June 2017.
Outcome
By bringing forward the sale of their investment property and making their NCCs prior to 1 July 2017, Bill and Ann have each been able to add a further $500,000 to their
superannuation balances.
If they had waited until September 2017 then, given the new eligibility requirements, these proceeds could not have been contributed to superannuation as NCCs.
While Bill and Ann are able to get this additional $500,000 each into superannuation, from 1 July 17 the transfer balance cap of $1.6 million means they will be limited to $1.6 million for their individual retirement phase income streams. Their superannuation balances above this amount will need to be retained in the accumulation stage and subject to 15% tax. Whether this is appropriate will depend on Bill and Ann’s future plans and tax positions.
Source: First State Super Case study
Borrowing to invest in superannuation before 1 July 2017
An option for eligible individuals eager to take advantage of the higher contribution caps prior to 1 July 2017 is to use borrowed money to maximise their NCCs. At the time of writing, the window for adopting this strategy is closing. However, Yee pointed out that it may be worth considering, given that the period prior to 1 July 2017 provides eligible individuals with a “free hit from the Government”, subject to existing caps.
Borrowing money to make last‐minute NCCs has a number of risks and drawbacks. Yee explained that these risks relate to the interest charged, and the investment risks undertaken within superannuation.
“Obviously they will have to pay interest. The other downside is that they don’t get a tax deduction for the interest, but the benefit of doing it is that they’re getting that money into a [concessionally taxed] environment where they will only pay 15% — or 0% if super is in pension mode — as opposed to their marginal tax rate, which could be as high as 49%.
That’s a major benefit,” he said.
“There are risks in terms of when you get that money into super, how you invest it. There are investment risks on that side, but the benefit is the arbitrage in the tax rates and the cost of the interest.”
Greater flexibility for concessional contributions
The rules regarding personal concessional contributions will also change on 1 July, granting individuals increased flexibility in terms of how they contribute up to the new $25,000 cap.
Under the existing rules, concessional contributions for employees predominantly consist of the 9.5% Superannuation Guarantee (SG) payment plus salary sacrifice amounts.
Personal contributions are only allowed for the self‐employed or the partially self‐employed who receive less than 10% of their total income from an employment source.
According to Yee, the new changes will allow employees to make personal concessional contributions to their superannuation account and claim them as tax deductions.
“They’re saying that employees can [make personal contributions like the self‐employed], even though their employers are also making contributions on their behalf,” he said.
“Realistically it means that if people are currently salary sacrificing, they don’t need to. They can just make the contributions themselves and be able to claim the tax deduction without having to go through their employer.”
Practical applications for the new personal contribution rules
Donachie explained that the additional flexibility of the new personal contribution rules would be advantageous for individuals who find themselves in possession of a financial windfall and able to contribute up to the concessional cap.
“Should an individual receive a bonus payment, they could add that to super
concessionally at the end of the financial year to top up their employer contributions, Consider
plus their salary sacrifice. Should they receive some long service leave or annual leave, it might allow a little bit more flexibility there,” he said.
“This is seen as a real positive change to the current rules, providing people with more flexibility to add concessional contributions to super.”
Broadened eligibility for the low‐income spouse tax offset
Another 1 July 2017 change is that more Australians will be eligible to claim the maximum tax offset of $540 after making a superannuation contribution on behalf of a
low‐income‐earning spouse.
Existing rules prior to 1 July 2017 state that an individual can make a $3,000 contribution to their spouse’s superannuation account and receive a rebate of up to $540 off their tax return. It is restricted to individuals with spouses earning a total income of $13,800 or less, with the total $540 tax offset available when the spouse’s total income was equal or less than $10,800. Donachie explained how the threshold would change.
“From 1 July 2017, this threshold is going to increase to $37,000 p.a. So, if you make a spouse contribution up to the $3,000 limit, as long as your spouse is earning less than $37,000 p.a.
of assessable income, you will be eligible for the full [$540] rebate. The rebate cuts out once your spouse is earning $40,000 per annum,” he said.
“Certainly this — along with the [Government] co‐contribution — can enable the lower income earners, if they can afford it, to add that extra money to super.”
Division 293 tax
Another notable contribution change concerns Division 293 tax, an initiative introduced by the Government to reduce the tax savings for high‐income earners. Yee explained how the current rules operate, and how they will be changing.
“The Government will, from 1 July 2017, reduce the income threshold. Currently, it’s
$300,000. Basically, if your assessable income plus your concessional contribution is over
$300,000, you’re liable for an extra 15% income tax on your concessional contributions [above the $300,000 threshold],” he said.
“The Government will now lower that threshold to $250,000. Again, that will bring more taxpayers into that net, and you’ll find more people paying that additional 15% tax on their contributions. It is a revenue‐raising measure.”
How Division 293 tax is calculated
An important point to reiterate is that Division 293 tax is only applied to the combined amount of assessable income and concessional contributions over the specified threshold.
For instance, if an individual in 2017/18 earned assessable income of $240,000 and had a maximum mandatory employer SG payment of $19,615.60 (based on the SG maximum earnings base requirements), their assessable income plus their concessional
contributions would equal $259,615.60. Given the threshold reduction to $250,000 from 1 July 2017, only $9,615.60 of their total concessional contributions (assuming no salary sacrificing) would be liable for the additional 15% Division 293 tax.
For example
Consider
Their Division 293 tax component would equal $9,615.60 x 15% = $1,442.34
It is important to remember that this amount is in addition to the 15% tax payable on the total concessional contribution, meaning that a total of 30% of tax would be payable on the $9,615.60, the amount over the threshold.
The total tax on the concessional contribution of $19,615.60 would therefore equal:
Tax on the concessional amount under the threshold = $10,000 x 15% = $1,500 Tax on the concessional amount over the threshold = $9,615.60 x 30% = $2,884.68 Total tax on the concessional contribution = $4,384.68.
Defined benefit funds
Defined benefit funds will also be subject to the non‐concessional and concessional cap changes introduced on 1 July 2017. Donachie highlighted that one of the key changes would relate to how concessional contributions are accounted for.
“Basically, concessional contributions that you’re making towards your defined benefit account will count towards your concessional cap. A notional amount may also be added to reflect the contributions your employer is also adding towards the account. Depending on your individual defined benefit fund, this might be a change from the past — certainly for some of the constitutionally protected funds,” he said.
The Division 293 threshold reduction will also apply to individuals with defined benefit funds, and, as Donachie explained, the amount of lifetime pension an individual receives will be a factor when evaluating their total superannuation balance.
“If you’re receiving a lifetime pension from your defined benefit account, this will be grossed up and will count towards your total superannuation balance. Depending on how much lifetime pension you’re receiving, this could have an impact not only on how much you can non‐concessionally contribute to super — because the grossed up lifetime income stream will now have a capitalised value — but also on how much you can transfer into an income stream,” he said.
The impact on small business CGT concessions
In a supportive move for many of Australia’s entrepreneurs, the Government’s
superannuation changes do not affect the existing contributions that can be made from the sale of a small business. Yee explained why this could be of significant value for small business owners.
“The small business CGT contribution concessions, they’ll be maintained. They won’t change. So, they don’t form part of your normal concessional or non‐concessional cap limits,” he said.
“If people are already maximising their caps or they’re selling a business or transferring an asset and taking advantage of the CGT small business concessional contribution limits, that’s a good thing … You could get potentially another $1.415 million into superannuation in addition to the other caps.”
Donachie agreed, but he qualified that the mandatory tests for small business owners looking to access these additional contribution provisions still apply, and while the
definition of a small business has changed for tax purposes, it has not changed with regard to CGT concessional contributions.
“Small business owners do get some concessions on making contributions to super from the sale of their businesses, as long as it meets the 15‐year exemption test and also the retirement exemption test,” he said.
“They have changed the small business threshold. They’ve increased that to $10 million.
But for the purposes of the CGT concessions and making contributions to super, it remains at $2 million.”
Conclusion
On 1 July 2017, caps for both concessional and non‐concessional contributions will drop to
$25,000 and $100,000 respectively. The bring‐forward cap will also drop to $300,000, though transitional caps may apply to eligible individuals who commenced their three‐year period in 2015/16 or 2016/17.
Changes to the Division 293 tax threshold, personal concessional contribution rules, and the number of individuals eligible to claim the maximum rebate for a contribution to a low‐income‐earning spouse will also occur.
In addition to adjusting their superannuation strategies to accommodate the new rules, advisers must be able to explain the value of utilising the existing contribution caps prior to the changes on 1 July.
To give advice on the product(s) referred to in this article you must be licensed or accredited by your licensee and operating in accordance with the terms of your/their licence. Kaplan Professional recommends
consulting a tax adviser on matters relating to tax advice and a legal professional for legal advice.
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