Federal Budget Q&A
Given the significant amount of interest in the superannuation-related changes proposed, what follows is a compilation of common questions relating to these proposals by Fabian Bussoletti.
The 2016 Federal Budget contained a number of superannuation-related proposals which, if legislated, will have an impact on the advice provided to clients.
The discussion in this bulletin is based on the limited detail provided in the Federal Budget papers and supporting Government fact sheets. These proposals are not yet law.
Proposal to replace the current non-concessional contribution (NCC) Cap with a $500,000 lifetime limit
1. How will the Government keep track of NCC amounts contributed?
Currently the Australian Taxation Office (ATO) manages data relating to clients' contributions. The ATO can be contacted directly to obtain this information.
Each superannuation fund sends details of all contributions made by and on behalf of a member during the year directly to the ATO.
For retail public offer superannuation funds, this information is provided to the ATO in a member contribution statement by 31 October for the previous financial year. This means that even if access to the most up-to-date ATO information was available, this is unlikely to include contributions made for the current (and possibly the previous) financial year.
The Government has indicated that if this measure is legislated, the ATO will be seeking to update the online display of superannuation accounts through MyGov to include an individual's NCC lifetime balance.
2. If a client had already contributed more than $500,000 as NCCs prior to the Budget announcement, will they be penalised?
No. Contributions made before the Budget announcement will not be subject to a penalty, nor will they need to be withdrawn from super.
However, as these contributions will count toward a client's lifetime limit, clients in this position will have used up her lifetime NCC cap and therefore, cannot make any further NCCs into super.
3. What's the penalty for making an excess NCC?
Assuming that the measure will be applied in a manner consistent with the current excess NCC regime, individuals will be given the option to withdraw the amount contributed above the $500,000 lifetime limit, along with 85 per cent of any notional earnings associated with this amount.
If the individual withdraws this amount, the notional earnings on the excess amount will be taxed at the individual's marginal tax rate (less a 15 per cent tax offset).
The earning amount will be determined by the ATO but is currently calculated using an interest rate of around 9.5 per cent.
This notional earnings rate is applied from the start of the financial year in which the contribution was made — regardless of when the contribution was actually made or the actual earnings derived within the fund.
An excess contributions tax rate of 49 per cent will apply to the excessive amount if the individual chooses not to withdraw the required amount, or fails to make the election within the specified timeframes.
4. Do contributions made using the small business capital gains tax (CGT) concessions count as NCC amounts for the purposes of this lifetime limit?
No. Qualifying contributions made as a result of using the small business CGT concessions currently fall under a separate CGT contribution cap ($1,415,000 for 2016/17). This will not change and will continue to be available in addition to the $500,000 lifetime limit.
5. What about excess concessional contributions? Will they be counted?
Excess concessional contributions that are not (or have not been) released from super are counted toward an individual's NCC cap.
As such, they will count toward this lifetime limit and should not be overlooked when determining a clients' NCC history.
6. What about personal injury contributions?
Qualifying amounts contributed as proceeds from structured settlements and personal injury payments are currently not subject to any contribution caps. The Treasurer has confirmed that this treatment will not change.
Further, the Treasurer also confirmed that amounts contributed as personal injury amounts will be exempted from the $1.6 million transfer balance cap (discussed later).
Proposal to allow catch-up concessional contributions
1. Under the proposed ability to make catch-up concessional contributions, how will the rolling five-year period operate?
Once the five-year period has been reached, any carried forward amount from year one will drop off and no longer be available.
Any carried forward amount(s) from the remaining four years will continue to be available for use — as well as any new amount carried forward from the current year (i.e. year six).
For example, if an eligible client makes $10,000 of concessional contributions in 2017/18, and $15,000 in 2018/19, there would be:
- $15,000 unused from the first year;
- $10,000 unused from the second year; and
- $25,000 available for the third year.
So it would appear that a maximum of $50,000 of concessional contributions could be made in the third year.
Proposal to tax earnings derived by transition-to-retirement (TTR) income streams
1. Will the proposed tax change to TTR pension earnings apply to existing TTR pensions?
Existing TTR pensions will not be grandfathered. As such, the earnings of all TTR income streams (regardless of their commencement date) will be subject to 15 per cent tax within the fund from 1 July 2017.
2. If a client is 60 or over and receiving a TTR income stream, will their pension payments still be tax-free?
Yes. This proposal only relates to the tax treatment of internal fund earnings for income streams commenced using the TTR condition of release.
It is not proposing to change the tax treatment of pension payments. Similarly, the 15 per cent tax offset will continue to be available to clients aged from preservation age to 60.
Proposed introduction of a $1.6 million transfer balance cap
1. Is this proposed cap going to apply per pension or based on how much a client has in pension phase across all pension accounts?
This $1.6 million is a lifetime cap that will apply per individual, not per income stream. It will limit the amount someone can transfer into tax-free retirement income accounts regardless of how many pension accounts are held.
2. How will existing clients with pension assets over the $1.6 million amount be impacted?
Existing clients who have pension accounts with a combined balance exceeding $1.6 million will be required to reduce their combined balance to $1.6 million by 1 July 2017.
Future investment earnings, that may subsequently take the account balance above $1.6 million, will be permitted to remain in a pension account.
Note: A withdrawal from the super system is not mandatory. Clients may, for example, rollover/transfer back to an accumulation account.
3. What if a person transfers, say, $1.6 million into an account based pension after 1 July 2017, and it subsequently reduces in value to $1.1 million. Can additional amounts be transferred to a pension account as a "top-up"?
An individual will only be able to transfer more money into the retirement phase if they have not previously exceeded the $1.6 million lifetime cap. So where a person has reached or exceeded the cap, and their account balance then reduces below the cap due to withdrawals or investment losses, they will not be able to top up from their accumulation fund.
4. What if a client transfers $1.3 million into an account based pension after 1 July 2017, and it subsequently grows by investment earnings to $2 million, can additional amounts be transferred to a pension account?
Partial use of the $1.6 million cap will be dealt with on a proportional basis.
If a client transfers $1.3 million into pension phase at 1 July 2017, they have utilised 81.25 per cent of the $1.6 million cap.
Therefore, this client could subsequently use the remaining 18.75 per cent of the (indexed) cap.
So, if the cap increases to $1.7 million, the client could move another $318,750 into pension phase (i.e. 18.75 per cent of $1.7 million).
5. How will self-managed super funds (SMSFs) with property in the pension phase be impacted?
The same rules will apply to SMSFs. That is, any excess above the $1.6 million cap will need to be moved to an accumulation interest for the pension member, or potentially withdrawn from the fund.
Where a pension account is made up of a large physical asset, (e.g. a property), given that an asset cannot be partially segregated, this may mean that the fund will be forced down the unsegregated path (requiring an actuarial certificate to establish the pension exemption).
If required, transferring physical assets out of an SMSF via an in specie transfer may also be an option.
Fabian Bussoletti is the technical strategy manager at AMP.
Recommended for you
When entering paid employment, it’s not long before we are told that we’ll need to lodge a tax return but there are times when a person will be excepted.
Anna Mirzoyan examines how grandfathering affects income support payments and how factors such as paying for aged care can impact them.
There are specific requirements that only apply to trustees of self-managed superannuation funds, writes Tim Howard, including the allocation in their investment strategy.
Investments bonds offer a number of flexible, tax-advantaged benefits, writes Emma Sakellaris, but these are often overlooked as old fashioned when it comes to portfolio allocations.
