From 1 July 2017 the superannuation landscape changes once again. This time we see 2 major themes:

1. Limiting the amount of tax free earnings within a superannuation fund

2. Limiting the amount of money people can put into superannuation

Although these 2 items appear quite simple, the rules surrounding how they are put in place are anything but simple.

In fact, there a levels of complexity that increase the risk of errors and mistakes which may result in tax penalties and noncompliance.

The new rules do not change the way withdrawals from superannuation are taxed in your personal name, instead focussing on how your benefits are taxed within the superannuation fund. For most people aged over 60 these withdrawals will continue to be tax free.

The following is a summary of the key changes:

 

This is the maximum amount a person can use to start a pension during their life and commences on 1 July 2017. This impacts ALL pension regardless of whether you are already receiving a pension or are starting a new pension after 1 July.

This is the measure to limit the amount of tax free earnings within superannuation, as the earnings associated with those assets funding your pension are tax free. The earnings on assets above the $1.6m cap are then subject to tax at 15%.

If you are already receiving a pension and the value of the pension is more than $1.6m, you will need to reduce the value of the pension down to $1.6m from 1 July 2017. The excess does not have to be withdrawn from the superannuation fund, instead it can simply be held in a separate “accumulation” account within the fund. This is an area where it may pay to get some advice that looks at your overall situation to determine whether retaining this excess in super is actually the best thing for your situation.

 

Like other pensions, currently the earnings on assets funding a Transition to Retirement Pension are tax free. From 1 July 2017 these earnings will now be subject to tax at the ordinary tax rate applying to superannuation funds, being 15%.

Generally, you will be receiving a TTR if you are aged under 65, still working and drawing a pension from your superannuation fund. With the earnings on these pensions now being subject to tax there is a question mark on how effective these strategies will continue to be.

If you are receiving a TTR you should seek advice to work out whether continuing with the pension is still worthwhile.

 

Here the complexity steps up a few notches and especially for people holding their superannuation through self-managed superannuation funds.

In general terms the rules are designed to create fairness in the capital gains outcome for assets that are being used to fund pensions, where the value of the pension exceeds the $1.6m cap.

If we consider the rules as they exist now, assets used to fund pensions are tax free but after 1 July 2017, if you had to reduce your pension balance, part of your superannuation benefits would now be subject to capital gains tax if you sold the asset.

Where the complexity comes in is that you have an irrevocable election to be made this financial year about how you want a particular asset to be taxed when it is sold at some point in the future. This election applies to each asset and can even go down

to parcels of assets.

In simple terms the relief, if elected, can reset the cost base of the asset to the value at 30 June 2017, as well as resetting the purchase date to 30 June 2017 (which can impact any potential capital gains discounts the fund may be entitled to). This means for those superannuation funds investing in unlisted assets such as real estate obtaining a valuation of these assets before 30 June 2017 will be important.

 

From 1 July 2017, the amount you are allowed to contribute to super and obtain a tax deduction is reducing to $25,000 per annum regardless of your age. This will impact the amount you can salary sacrifice or claim as a personal tax deduction and longer term will impact the amount you will accumulate in superannuation. Gone are the days of waiting until you’re older to make contributions because you are allowed to put more in – it is now more important than ever to make use of the limits as much as you can from as early as you can.

For the year ended 30 June 2017, the maximum limit remains at $30,000 for under 50’s and $35,000 where you are 50 or over.

 

These are contributions you make with after tax money. From 1 July 2017, there are a few changes to be aware of:

1. The maximum amount you can contribute reduces;

2. Depending on your total superannuation account balance, you may be unable to make additional contributions

If you are under 65, the maximum amount you can contribute before 30 June 2017 is $540,000 (depending on what contributions you have made in prior years). After 1 July 2017 this amount reduces to $300,000 using the 3 year bring forward rules.

There are transitional rules that apply, so if you are considering making non-concessional contributions before 30 June it will pay to get some advice around this, as getting it wrong could result in an expensive tax bill.

Where you have more than $1.6m in superannuation, after 1 July you will no longer be allowed to make non-concessional contributions. This makes managing your superannuation balances important to maximise the amount you can get into super over your life.

This is the ability for many small businesses to contribute the proceeds from selling their business into superannuation and receive some relief from capital gains tax. This can allow approximately $1.4m to be contributed over a person’s lifetime.

From 1 July 2017 these rules remain unchanged continuing to provide a good incentive to business owners that may be looking to sell. These rules are complex, so if you are considering selling you should seek advice on the ability to benefit from this exemption.

 

There are hidden complexities in these changes meaning advice on your options will be extremely valuable. Some of the areas we believe people should be taking action or seeking advice are:

1. If you have more than $1.6m in a pension, get some advice on what is your best option for reducing the balance of the pension before 1 July 2017. This includes looking at CGT consequences if you have a SMSF.

2. If you are receiving a Transition to Retirement pension seek advice to determine whether this is still of benefit to your situation.

3. If you have the ability to maximise your contributions it may be worth considering this before 30 June 2017.

4. Review existing salary sacrifice arrangements to make sure they take into account the reduced contribution limits from

1 July 2017.