THE BUDGET TROJAN HORSE CONTINUES TO ROLL IN
The government has released another ‘Exposure Draft’ Bill to test public reaction to the superannuation proposals they want to legislate. A short consultation period will ensue followed by a potentially arduous passage of the Bill through parliament before finally coming into law.
This edition details the 2nd tranche of superannuation proposals.
7 Items in this Round
- The introduction of a $1.6m pension transfer cap.
- A reduction in the concessional contributions cap to $25,000 across the board from 1 July 2017 with a reduction of indexation lots to $2,500.
- Reduce the cut-in income threshold for contributions surcharge to $250,000.
- Enable concessional contribution ‘catch-up’ in limited cases.
- Remove the tax exemption for TRIS balance earnings.
- Abolish the tax saving amount provision.
Remove the ability for a person to elect for a part of a TRIS payment to be treated as a lump-sum for tax purposes.
A reduction in the concessional contribution limit to $25k is tempered by a reduction in the indexation level to $2,500.
$1.6m question now answered
As announced in the May Budget, the Bill proposes a lifetime limit on the amount that can be transferred to the pension phase. If passed into law, the measure will commence from 1 July 2017 and the cap will be $1.6m. The cap will be subject to indexation in $100,000 increments in line with movements in the CPI however, once an individual reaches their cap, they will not be entitled to indexation top-ups.
For example, if an individual uses their lifetime cap of $1.6m to commence a pension on 1 July 2017, they will not have the opportunity to add to the pension balance over time as the cap is indexed. This is regardless of whether the pension balance reduces over time due to drawings.
If an individual commences a pension on 1 July 2017 with an amount less than $1.6m, they will be entitled to a pro-rata indexation top-up. This will be useful for people who haven’t already accumulated $1.6m in super but will not represent a potential strategy for the rest.
Death benefit income streams will not be exempt from the pension cap although reversionary pensions will be subject to a 6-month period in order to deal with the potential breach of the beneficiary’s personal cap. Again, no potential strategy options arise from this measure.
The only exemptions to the pension cap will be in respect of children’s pensions, income streams commenced as a result of a structured settlement, commutations which are related to a family law split and bankruptcy.
The new measure won’t prevent you from changing pension providers or otherwise making changes to your pension balance providing that the total transferred capital amount in pension phase is no greater than your individual pension cap.
For example, your pension cap is $1.6m and you decide to commute (draw a lump sum) of $500k in order to pay out an outstanding loan. You reserve the right to add $500k to your pension balance at some stage in the future. It is the transferred capital amount that is counted for your individual cap, not the balance, and, contributions and lump-sum withdrawals are capital transactions.
A transition to retirement income stream will not be included in the pension transfer balance cap until such time as the person becomes entitled to a pension with no cashing restrictions. If you are working, this will be post age 65. Transition to retirement income streams will loose their tax exempt status from 1 July 2017. This means that the earnings on the pension capital will be subject to normal super taxing at rates up to 15%. The amount drawn by you from the pension will remain subject to the taxing regime that is currently in place – if you are over 60 years of age, the drawings are tax free.
Catch-up contributions regime
The May Federal Budget included a measure to allow people with balances less than $500,000 to utilise unused concessional contribution caps in the following 5 years.
This latest Bill includes this measure but pushes the commencement date out to 1 July 2018 which means that it will be the 2020 year before any catch-up contributions will be able to be utilised.
In order to use the catch-up regime, the person’s balance (across all their superannuation interests) as at the previous 30 June must be less than $500,000.
If you have a cap of $25,000 in the year that starts 1 July 2018 and only contribute $20,000 in concessional contributions by June 2019, you can carry forward the remaining $5,000 and use it in any of the 5 years starting 1 July 2019, providing you are eligible to contribute to super and your super balance is less than $500k.
This may provide a planning opportunity in some cases even though its availability is 2 years away. By way of example, if you expect a large capital gain in 2023, 5 years from the commencement date of the contribution carry forward provisions but, for now, you don’t have a significant tax problem and therefore maximizing concessional contributions is not a priority. Your super balance is less than $500k and you intended topping it up on the realization of the capital asset. If you ‘bank’ a level of contributions in each year, you may be able to offset some of the tax imposition of the capital gain by making a (larger) concessional contribution when the capital gain is realized.
The (Excess Transfer Balance Tax) Imposition Bill introduces a tax penalty regime for breaches of the pension transfer balance cap at a rate of 15% for the first breach and thereafter, at a rate of 30%.
The tax will be levied on a notional earnings amount which will be calculated in a similar manner to the excess non-concessional contributions regime.
The person will be required to commute the excess pension amount back to accumulation.
The 2017 financial year may provide some planning opportunities ahead of the new super regime that commences from 1 July 2017.
Although the limit on the level of pension capital is likely to be $1.6m, super in the accumulation phase is taxed at a rate of 15% so continues to provide a low tax environment for holding investments.
People less than 65 years of age, who haven’t made large contributions to super in the past 3 years, may be able to contribute up to $540k before June 2017 in addition to the $35,000 that is available in concessional contributions.
Existing pension portfolios could benefit from a review of the unrealised capital gains position to decide whether some restructuring should occur prior to 1 July.
All in all, the terrain remains unclear until we see the finalised legislation but the likely form of the final regime is starting to take shape and we can begin our planning around it.