Agreement on super boosts investor confidence

retire beachBy Steve Blizard   7 Oct 2016

After five months of needless uncertainty and confusion created by the Federal Coalition and Treasury, the major parties have finally found common ground on superannuation.

Individuals will be allowed to hold up to $1.6 million in the tax-free pension phase, concessional (tax deductible) super contributions will be reduced to $25,000 a year for all ages, and non-concessional (after tax) super contributions will be reduced to $100,000 per year.

However, with the existing super rules set to remain in place for the next nine months, there are some handy strategies to consider before 30 June 2017.

Now the ridiculous $500,000 lifetime non-concessional super cap has finally been consigned to the dustbin of history, those wanting to boost their super have a limited window to make large contributions to their super fund.

Bring Forward Rule

Until 30 June, the annual non-concessional contribution limit remains at $180,000, and if eligible, you may be able to bring forward three years’ contributions by contributing $540,000 in one lump sum.

For a couple with unused caps, it can mean a combined maximum one-off non-concessional contribution of $1,080,000 between them.

However, special rules are proposed where the three-year “bring forward” period has already been triggered in the 2015-16 or 2016-17 tax year but not used up, prior to 1 July 2017.

This could occur if, for example, you contributed in excess of $180,000 but had not done so for up to the full amount of $540,000.

In these scenarios, it is proposed that the following transitional arrangements will apply.

If the “bring forward” was triggered in the 2015-16 tax year, the cap will reflect two years of $180,000, and one year of $100,000.

Therefore, the transitional “bring forward” cap will be $460,000.

If the “bring forward” was triggered in the 2016-17 tax year, the cap will reflect one year of $180,000 and two-years of $100,000.

Therefore, the transitional “bring forward” cap will be $380,000.

Where the “bring forward” provisions have been triggered and the cap has been reached, no further non-concessional contributions may be received into the fund until the three-years has elapsed since the “bring forward” was triggered.

From 1 July 2017, three-year bring-forward provisions will remain unchanged but will be based on the lower cap of $100,000 pa (maximum bring forward of $300,000).

No further non-concessional contributions will be allowed once the proposed $1.6m transfer cap has been reached.

Just ensure that you take tax advice before proceeding, as there can be penalties for getting the rules wrong.

Fund rebalancing

Given the future $1.6 million limit in pension phase, if a couple’s fund has a large balance, all skewed to one member, it might be worth investigating making a tax-free withdrawal, and then use the current window to make a large non-concessional contribution to the other partner’s fund.

Attempts to balance up the fund will minimise the risk of exceeding the $1.6 million per member limit in addition to substantially increasing the non-taxable component of the fund.

Note that withdrawal is commonly prevented by preservation rules.

This strategy can result in much lower death tax if a member dies, leaving the proceeds to the fund non-dependent beneficiary.

Concessional Contribution Caps

For those 50 are over, the concessional super contribution cap will remain at $35,000 a year until 30 June.

In some situations, this strategy may also help reduce capital gains tax that could arise when selling shares or property.

After June 30, the concessional super cap will drop back to $25,000, with no further contributions permitted should your individual fund balance exceeds $1.6 million.

Disappointingly, Labor has opposed proposals to allow those aged between 65 and 75 to contribute to your super without passing a work test.

Those over age 65 to 74 who are in the position to make extra contributions to their super, it is still possible to qualify for the work test by lining up some casual work.

The rules are simple – just 40 hours of work in 30 consecutive days in the financial year.

Generally speaking this isn’t too difficult for a resourceful senior to organise.

However, the Coalition’s proposal to do away with the ridiculous work test was a reasonable initiative, sidelined for now.

Catch up concessional super contributions

In the May Budget it was announced that individuals with super balances of $500,000 or less will be allowed to access their unused concessional cap space to make additional catch-up concessional (before-tax) contributions.

The Government has announced that this measure will now only commence from 1 July 2018.

Individuals will be able to access their unused concessional contributions cap space on a rolling basis for a period of 5-years.

Amounts carried forward that have not been used after 5-years will expire.

Only unused amounts accrued from 1 July 2017 can be carried forward.

Defined benefit schemes

The Government has proposed to link a $100,000 cap as a pension payment from a defined benefits scheme to the $1.6m transfer balance cap.

In other words, if you receive a $110,000 pension, $100,000 will be received tax free and $10,000 will be taxed at the individual’s marginal tax rate.

If you receive a lump sum from a defined benefits scheme, then the transfer balance cap rules apply.

Older Government employees still able to take advantage of additional salary sacrifice contributions to a second super fund, will close-off after 1 July 2017.

However, the draft legislation still retains the current exemption of defined benefit employer contributions from penalty tax, when employer contributions to constitutionally protected funds and unfunded defined benefit schemes exceed the new lower $25,000 concessional contributions cap.

This means that existing members of constitutionally protected funds and unfunded defined benefit schemes will still be able to make salary sacrifice contributions above the concessional contributions cap without these contributions being treated as excess concessional contributions.

Just keep in mind that the agreed legislative changes are still in exposure draft form and may be subject to some minor tweaking.

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