Significant changes to the superannuation system, including new terminology, concepts and reporting requirements. These changes took effect from the 2017-18 year.
The Government's stated intention for these changes were to make the superannuation system more sustainable, flexible and with integrity.
Some of the changes will affect you directly now, others in the future. You may need to take immediate action now to meet the new requirements, or review your situation to determine any opportunities.
Reforms include:
There are a many of changes to the superannuation system commencing from 1 July 2017. Below are the changes that we believe you must know.
Concessional contributions
From 1 July 2017, the concessional contribution cap is $25,000. This cap includes superannuation guarantee and salary sacrificed amounts.
Non-concessional contributions
From 1 July 2017, the non-concessional contribution will be $100,000. Persons under the age of 65 can ‘bring-forward’ two future years of contributions. However, there is an upper cap that restricts further contributions if the person's total superannuation balance exceeds $1.6 million. If the person's total superannuation balance is between $1.4 million and $1.6 million, the amount of that may be contributed with the 'bring-forward' rule is modified.
$1.6 million transfer balance cap
From 1 July 2017, exemption from income tax on earnings applies to assets in 'retirement phase'. The amount that a person can transfer to the retirement phase is $1.6 million (the transfer balance cap). There is no limit on the amount that can remain in accumulation phase – which is taxed at 15%.
Existing superannuation income stream exceeding $1.6 million on 30 June 2017 will need to be commuted on 30 June 2017 and either cash as a lump sum or retained in the superannuation fund in the accumulation phase.
Subsequent earnings, growth or losses in retirement phase will not count towards the member’s personal transfer balance cap.
Transition to retirement income stream
From 1 July 2017, earnings on capital supporting transition to retirement income streamsare not exempt from income tax.
Existing transition to retirement income stream may be commuted or continue after 30 June 2017 without the tax exemption. New transition to retirement income stream may be commenced after 30 June 2017, without the tax exemption.
Are you 'retired'? The definition of retirement is provided in the legislation. For example, you satisfy the retirement definition if you are age 60 or over, and an employment arrangement has come to an end on or after you attained age 60 or over. A person over 60 cease one of two employment would meet the definition of retirement.
Transitional CGT relief
To recognise the tax exempt status of superannuation income streams, including transition to retirement income streams, capital gains tax relief is available to 'reset' the cost base to the market value on 30 June 2017. The reset is only available for assets that are held on or before 9 November 2016, and continue to be held to just before 1 July 2017. The reset is not automatic, and an election must be made.
| Up to 30 June 2017 | From 1 July 2017 |
| Concessional contributions cap – general $30,000 Concessional contributions cap – 50 years of age and over $35,000 |
Concessional contributions cap for everyone $25,000 [reduced] Allowing for 'catch-up' from 1 July 2018. |
| Non-concessional contributions cap $180,000 Persons aged 65-74 can only make personal non-concessional contribution if they satisfy the work-test. 3 year bring-forward rule available for persons aged under 65. |
Non-concessional contributions cap $100,000. [reduced and total super balance limit] Persons aged 65-74 can only make personal non-concessional contribution if they satisfy the work-test. [no change] 3 year bring-forward rule still available, but subject to transitional rules if triggered in 2015-16 or 2016-17. [subject to transitional rules and total super balance limit] Non-concessional contributions are permitted when total super balance limit is below $1.6 million. |
| Additional 15% tax on concessional contributions for high income earners (Div 293 tax) income threshold - $300,000 | Additional 15% tax on concessional contributions for high income earners (Div 293 tax) income threshold reduced to - $250,000 |
| Earnings on retirement phase assets – tax-free | Tax-free earnings on assets supporting a current pension capped [reduced] $1.6 million transfer balance cap - assets that can be transferred to a tax-free pension account is capped at $1.6 million. Earnings on assets exceeding of $1.6 million will be subject to the normal superannuation fund rate of tax – 15% (capital gains as low as 10%) *Must have satisfied the condition of release of retired or age over 65. |
| Earnings on assets supporting a transition to retirement pension – tax-free | Earnings on assets supporting a transition to retirement pension – 15% (capital gains as low as 10%) [tax exemption removed] |
| Certain income stream payments may be elected to be treated as lump sum. | No longer possible to elect to treat certain income stream payments as lump sum. |
| Anti-detriment rule allows superannuation fund to claim a tax deduction for a portion of the death benefits paid to eligible dependents. | Anti-detriment rule abolished. |
| May use segregated method for calculating ECPI for tax purposes. | No longer permitted to use the segregated method for calculating ECPI for tax purposes when a member's total superannuation balance exceeds $1.6 million. |
From 1 July 2017, the concessional contributions cap will be reduced to $25,000 per year for everyone (before the changes, general cap was $30,000, and for people 50 year of age and over was $35,000).
The Division 293 tax threshold has been reduced to $250,000 (before the changes, $300,000). Division 293 tax is charged at 15% of an individual’s taxable concessional contributions above the threshold.
Concessional contributions cap – claiming a tax deduction
More individuals will be able to make personal contributions to superannuation as concessional contributions. The requirement to satisfy a number of requirements has been removed.
From 1 July 2017, the 10% maximum earnings condition will be removed. This means most people under 75 years old will be able to claim a tax deduction for personal super contributions (those aged 65 to 74 must meet the work test to make contributions).
Concessional contributions cap – catch-up
From 1 July 2018, persons with total superannuation balance of less than $500,000 will be able to 'catch-up' on their concessional contributions by utilising unused portion of concessional cap from previous year (up to 5 years). It is important to note that the unused cap amount starts to be carried forward from 1 July 2018 (i.e. unused cap amount up to 30 June 2018 cannot be carried forward).
From 1 July 2017, the non-concessional contributions cap will be reduced to $100,000 per year (before the changes, the cap was $180,000). The 3 years bring-forward rules continue to apply for individuals under the age of 65. The non-concessional contributions cap is subject to total superannuation balance.
Your eligibility to make non-concessional contributions is based on your total superannuation balance.
Total superannuation balance is generally calculated at the end of 30 June of each financial year. The first date it will be used to determine your eligibility for these measures is 30 June 2017.
For example, if your total superannuation balance at the end of 30 June 2017 is $1.6 million or more, then your 2017–18 non-concessional contributions cap is nil. Any non-concessional contributions you make in 2017–18 will be in excess of your cap.
| Total Superannuation Balance* | Contribution and bring forward available |
| Less than $1.4 million | Access to $300,000 cap (over 3 years) |
| Greater than or equal to $1.4m and less than $1.5 million | Access to $200,000 cap (over 2 years) |
| Greater than or equal to $1.5m and less than $1.6 million | Access to $100,000 cap (over 1 year – no bring forward period) |
| Greater than or = to $1.6 million | Nil |
*The Total Superannuation Balance is determined on 30 June of the previous financial year.
Transition bring-forward rules
Where the bring-forward is triggered in 2015-16 or 2016-17 year, the cap is $540,000 if all the contributions is on or made before 30 June 2017. Otherwise, the transition arrangement will apply so that the amount of bring forward available will reflect the reduced annual contribution caps.
If the bring forward was triggered in 2016-17, the transitional cap will $380,000 (the annual cap of $180,000 in 2016-17 and $100,000 cap in 2017-18 and 2018-19). Amounts contributed up to 30 June 2017 exceeding exceeding the transitional cap will not cause an excess.
Total superannuation balance is a new terminology introduced from 1 July 2017. Generally, it covers all of a person's superannuation interests in all superannuation fund(s).
An individual's total superannuation balance at a particular time is the sum of:
Any personal injury or structured settlement contributions that have been paid into superannuation fund is excluded.
Total superannuation balance is generally calculated at the end of 30 June of each financial year.
For example, if your total superannuation balance at the end of 30 June 2017 is $1.6 million or more, then your 2017–18 non-concessional contributions cap is nil. Any non-concessional contributions made in 2017–18 will be in excess of the cap.
The reform package includes changes to superannuation pension/ income stream, including capping the amount that may be transferred to retirement phase pension/ income stream.
From 1 July 2017, a new cap will be introduced to limit the amount of superannuation capital that can be transferred to the retirement phase (the transfer balance cap). This cap will limit the amount of the earnings that are exempt from taxation.
This exemption from taxation applies to earnings on 'retirement phase' assets. To be eligible, the member will be required to have satisfied the retirement condition of release or have attained age 65.
Superannuation benefits exceeding the transfer balance cap may remain in the superannuation fund in an accumulation account, where earnings are taxed at 15 per cent, or outside the superannuation system.
Transitional arrangements will apply. People already retired with balances below $1.7 million on 30 June 2017 will have 6 months from 1 July 2017 to bring their retirement phase balances under $1.6 million.
Earning on assets supporting a transition to retirement income stream will no longer be exempt from income tax from 1 July 2017.
From 1 July 2017, a new cap will be introduced to limit the amount of superannuation capital that can be transferred to the retirement phase (the transfer balance cap). This cap will limit the amount of the earnings that are exempt from taxation.
The transfer balance cap is $1.6 million for the 2017-18 year. The cap is indexed to CPI in $100,000 increments. Once a proportion of cap is utilised, it is not subject to indexation. The unused balance of the cap is proportionally indexed. Where the transfer balance cap is exhausted, the cap is not indexed.
Transitional arrangements will apply for individuals already retired with balances below $1.7 million on 30 June 2017, who will have until 31 December 2017 to bring their retirement phase balances under $1.6 million.
The transfer balance cap is determined on a 'net' basis of amount transferred to the retirement phase and does not value earnings, losses or pension drawn-downs (the transfer balance account). Subsequent earnings on balances in the retirement phase will not be capped or restricted.
The following amount are the main items that adds to (credit) the individual's transfer balance:
The following amounts are main items that subtracted from (debit) the individual's transfer balance:
Modification to the general rule for defined benefits income stream
The transfer balance cap applies differently to certain defined benefit income streams. This is because these income streamscannot be commuted, so the person may not be able to remove any amount exceeding the transfer balance cap.
The 'special value' of a capped defined benefit income stream is determined by the annualised amount of the income stream payment.
If the income stream is a lifetime pension or annuity, the special value is the annualised income stream amount multiplied by 16.
If the income stream is a non-commutable life expectancy or market-linked product, the special value is the annualised income stream amount multiplied by the number of years (rounded up to the nearest whole number) remaining in that product.
Transfer balance cap - exceeding the cap
If a person exceeds their personal transfer balance cap, the ATO will issue an excess transfer determination. You should commute the excess amount. If you do not commute the excess amount, the ATO will issue a commutation authority directly to the super fund.
You will be liable for for excess transfer balance tax.
The standard rate of excess transfer balance tax is 15 per cent, applied on the notional earnings (using a deemed rate) rather than actual earnings.
The rate of tax will increase to 30% on repeat breaches to the transfer balance cap.
Defined benefit income stream modification - the general transfer balance cap is modified in relation to certain defined benefits income stream. As these defined benefits income stream are subject to commutation restrictions, the application of the general rules are inappropriate. The rules are modified to prevent the excess, but additional income tax is applied.
You can find out from the scheme paying their define benefits income stream the transfer balance amount. Generally, the modified transfer balance cap amount is determined by multiplying the annualised income stream amount by 16. This means if your annualised defined benefits income stream amount is $100,000, you will have exhausted the whole of your transfer balance cap.
Earnings from assets supporting a transition to retirement income stream will be subject to taxation as it will not be categorised as 'retirement phase' assets. The rate of taxation is 15% on income, capital gains on assets held for less than 12 months taxed at 15% and capital gains on assets held for 12 months or more.
When do I move from transition to retirement income stream to a 'retirement phase' income stream that is subject to income tax exemption?
A person is in 'retirement phase' income stream when the person satisfies the retirement condition of release or is age 65 or more.
The retirement of a person is taken to occur:
For person who has reached preservation age but is less than 60 years of age - if:
For person who is attained the age of 60, but is less than 65 years of age -an arrangement under which the member was gainfully employed has come to an end, and either of the following circumstances apply:
What happens to the transition to retirement income stream when you retire?
The transition to retirement income stream will become 'retirement phase' without the need for commutation and re-commencement of a new retirement phase pension.
Superannuation income stream payments will no be permitted to be treated as a lump sum.
Prior to the changes (up to and including 2016-17 year), the superannuation income stream payments may be treated as superannuation lump sum for tax purposes, but still meet the minimum pension withdrawal requirements. This provides tax benefits to recipient under age 60 as superannuation lump sum payments is not taxed up to the lifetime low rate cap.
A self-managed superannuation fund will not be able to use the segregated assets method to calculate the exempt current pension income (ECPI) for tax purposes if any member's total superannuation balance exceeds $1.6 million.
The superannuation fund will be required to use the proportionate method. An actuary is required to certify the ECPI percentage for tax purposes.
When a member dies, that member's benefits must be cashed and paid to the beneficiaries or legal personal representative as soon as practicable.
For dependant beneficiaries, superannuation death benefits can be cashed:
For non-dependant beneficiaries or legal personal representatives, the superannuation death benefits must be cashed as a superannuation lump sum that is paid out of the superannuation system.
A dependant beneficiary includes:
From 1 July 2017, where the superannuation death benefits is cashed as death benefit income stream to a dependant beneficiary (excluding child recipients), the capital value of the income stream counts towards the transfer balance cap.
Reversionary and non-reversionary income stream
A superannuation income stream cease when the member dies. Where the dependant beneficiary becomes entitled to the death benefits, and is cashed as a death benefits income stream, it is the creation of a new superannuation income stream. The capital value of the income stream at the time the dependant becomes entitled to be paid the income stream will count towards the Transfer Balance Cap of the dependant beneficiary.
A reversionary income stream reverts to the reversionary beneficiary automatically upon the member's death. The income stream does not cease, and is passed from the deceased member to the dependant beneficiary. The capital value of the income stream at the date of death will count towards the transfer balance cap of the dependant beneficiary, 12 months after the date of death.
Can death benefits be retained in the superannuation fund?
Superannuation death benefits can only be retained in the superannuation fund if it is paid as an income stream. It cannot be retained in the superannuation fund as 'accumulation' assets. Where the dependant beneficiary has exhausted his or her transfer balance cap or the unused cap amount is not sufficient, he or she may commute some or all of his or her existing income stream.
A reversionary income stream does not in itself allow for preservation of benefits in the superannuation fund if the capital value will cause the dependant beneficiary to exceed his or her transfer balance cap. However, as the point in time the credit arises in the transfer balance cap is 12 months from of death, the dependant beneficiary has the opportunity to commute his or her own income stream thereby causing a debit to the transfer balance cap.
For a non-reversionary income stream, the point in time the credit arises in the transfer balance cap is when the dependant beneficiary becomes entitled to the death benefits. The dependant beneficiary becomes entitled to the death benefits 'as soon as practicable'.
The ATO published LCG 2017/3, which therein provided the following examples to provide some context:
An example of reversionary:
"Theodor commenced a superannuation income stream on 1 October 2017. The rules of the superannuation income stream allow for it to revert to a dependant beneficiary. Theodor dies on 1 January 2018. Valerie is Theodor's spouse and is the reversionary beneficiary of this superannuation income stream.
As Valerie is a reversionary beneficiary, the 'starting day' of the reversionary death benefit income stream is the date of Theodor's death (1 January 2018).
The value of the superannuation interest that supports the reversionary death benefit income stream on 1 January 2018 is $1,000,000.
A transfer balance credit arises 12 months from this date (1 January 2019) in Valerie's transfer balance account.
The transfer balance credit is equal to the value of the superannuation interest that supports the reversionary death benefit income stream on the 'starting day' ($1,000,000) and not the value of the superannuation interest when the transfer balance credit arises (1 January 2019)."
An example of non-reversionary:
"Nathaniel commenced a pension worth $1,400,000 on 1 October 2017. The rules of the pension do not provide that it may revert to another person on Nathaniel's death. Nathaniel dies on 1 January 2018.
At the time of Nathaniel's death, the value of the superannuation interest supporting the pension is $1,300,000. Nathaniel had no other superannuation interests.
Malena is Nathaniel's spouse and the only beneficiary. On 15 June 2018 she becomes entitled to all of Nathaniel's remaining superannuation interest, to be paid as a death benefit income stream.
During the period between Nathaniel's death (1 January 2018) and when Malena becomes entitled to be paid the death benefit income stream (15 June 2018), $1,000 of investment earnings accrued to the superannuation interest bringing its value to $1,301,000. The value of the superannuation interest supporting the death benefit income stream on 15 June 2018 is $1,301,000.
A transfer balance credit arises in Malena's transfer balance account on 15 June 2018 in respect of the death benefit income stream equal to the value of the superannuation interest that supports the death benefit income stream on 15 June 2018 ($1,301,000)."
The anti-detriment provision which allows superannuation fund to claim a tax deduction for a portion of the death benefits paid to eligible dependents will be abolished.
From 2017-18 year, superannuation funds will no longer be able to claim a tax deduction for anti-detriment payments made to eligible dependent.
Generally, self managed superannuation funds do not utilise the anti-detriment provisions as the tax deductions that may be claimed may never be utilised in the future. This change will provide consistent treatment of death benefits across all superannuation funds.
Do you need help with your situation or if you wish to discuss the above, please contact us. Our contact details.
