SUPERANNUATION – Concessional Contribution Changes Now Law

Background

The 2016/17 Federal Budget proposed several amendments to superannuation, both in the accumulation and pension phase. A number of these measures that will change the concessional contributions (CC) that can be made, was passed through Parliament on 23 November 2016.

The changes to CCs include:

  • a reduction in the annual CC cap regardless of age to $25,000;
  • a lowering the income threshold above which the additional 15% tax is payable on CCs to $250,000;
  • introduction of the ‘catch-up contributions’ regime for certain individuals; and
  • removal of the “10% test” for personal deductible contributions.

Reduction in CC cap

From 1 July 2017, the annual CC cap will reduce to $25,000 for all individuals, regardless of age. Indexation of the CC cap to changes in Average Weekly Ordinary Time Earnings (AWOTE) will continue on an annual basis, but, in increments of $2,500. This is likely to result in more frequent increases to the cap. The table below shows the aged based CC caps that will still apply for the remainder of 2016/17.

CC caps for 2016/17

Where possible, a client can take advantage of the higher CC limits for this financial year. For an employee, this would require entering into a salary sacrifice arrangement, as only future earnings can be sacrificed to superannuation. A self-employed client has greater flexibility and can make a CC closer to the end of the financial year.

There are no changes to the assessment of excess CCs. Excess CCs are included in an individual’s assessable income and taxed at their marginal tax rate. The excess CC charge will also be payable. Where a person has made an excess CC and an election is made not to withdraw the excess from the fund, then this amount is treated as a non-concessional contribution
(NCC).

Interaction with SG

Ordinarily, an employer is required to pay the superannuation guarantee (SG) at 9.5% up to the maximum contribution base (MCB) of $51,620 per quarter. This regulation limits the mandated SG contribution for the 2016/17 financial year to $19,616 for an individual employee but does not prohibit an employer from making employer contributions above this level (e.g. salary sacrifice or employer voluntary contributions).

Impact of lower cap

The reduction in the annual CC cap clearly limits the contributions that a person can make to super. When the reduction in the annual non-concessional contribution (NCC) cap to $100,000 from 1 July 2017 is also taken into account, the overall capacity to make ongoing contributions to super is significantly reduced. The consequence is that alternative investment options outside the super environment may need to be considered.

Division 293 tax

From 1 July 2017, the income threshold above which an additional 15% tax is payable on CCs (within the annual limit) will be reduced from $300,000 to $250,000. This is known as ‘Division 293 tax’. There is no change to the definition of ‘income’ for the purpose of determining liability for the additional tax or the way in which the liability is calculated.

The ATO issues a separate notice to any person who is liable to pay Division 293 tax.

Personal deductible contributions

From 1 July 2017, all individuals under the age of 65 (and those aged 65 to 74 who meet the work test), will be able to claim a tax deduction for personal super contributions. Currently, only people who derive less than 10% of total income from employment sources are eligible to claim a tax deduction. This change will enable a range of clients, who were previously not able to make a concessional contribution, to now do so.

Key examples of people previously excluded from making CCs are those:

  • employed and receive SG contributions that are within the CC cap but whose employer does not offer salary sacrifice arrangements;
  • who switch from being a self-employed contractor to an employee during the course of a year and fail the 10% test due to employment income; and
  • residents who, for tax purposes, are working overseas for a foreign employer and their employer can’t or won’t contribute to an Australian super fund.

Care should be taken regarding the amount claimed as a tax deduction. CCs are taxed at 15% in the superannuation fund and, therefore, income should not be reduced below a level that a client will personally pay less tax compared to the superannuation fund.

Catch up CCs

From 1 July 2018, certain individuals will be able to accrue unused CCs and carry these amounts forward. This change will enable a CC in excess of the annual cap to be made in subsequent years. Amounts will be carried forward on a five year rolling basis. As the new regime will only apply to unused amounts accrued from 1 July 2018, the first year a person will be eligible to utilise a carried forward amount will be the 2019/20 financial year.

$500,000 maximum account balance

To make use of a carried forward CC, an individual’s total superannuation balance cannot exceed $500,000 on the 30 June of the previous financial year.

Accumulating unused cap amounts

Contributions made in excess of the annual CC cap, where a person has unused cap amounts from one of the five prior financial years, will be deducted from unused amounts from the earliest to the latest financial year. Unused amounts which have not been utilised within five years will not be available to carry forward.

Small business CGT contributions impact on CCs

Small business owners selling their business or business assets may be eligible to use the proceeds to contribute to
superannuation free of capital gains tax (CGT) subject to certain limits and eligibility criteria. The small business CGT cap allows for the capital gain realised on the sale of any active small business asset up to $500,000 per eligible taxpayer to be contributed to superannuation. If the asset has been held for more than 15 years, that threshold rises to $1.415 million for the 2016/17 financial year.

Once small business CGT concessions are contributed into super, these amounts will count as part of a member’s total superannuation balance. For CC catch-up contribution purposes a member’s total superannuation balance as at the previous 30 June must be below $500,000.

Contact details

For further information, please contact Campbell Flower or John Todd at Odyssey Financial Management on 1300 761 669.

 

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THE FEDERAL BUDGET 9 MAY, 2017

The Federal Treasurer, the Hon. Scott Morrison MP, delivered his second Federal Budget on 9 May 2017.

With the main focus on affordable housing, there are minor impacts on personal income taxation, superannuation and social security entitlements.

This summary provides coverage of the key issues.

Highlights

Personal income tax

  • temporary Budget Repair Levy will definitely cease on 30 June 2017
  • Medicare levy to increase to 2.5 per cent from 1 July 2019
  • removal of certain residential rental property deductions
  • increase in CGT discount to 60 per cent for qualifying affordable housing.

Foreign residents

  • lower threshold for withholding tax for residential property disposals

Business owners

  • limiting access to small business capital gains tax concessions

Superannuation

  • first home super saver scheme to commence 1 July 2017
  • home downsizing superannuation contributions where over age 65.

Social Security

  • energy assistance payment

Personal income tax

Increase in the Medicare levy

The Medicare levy will increase by half a percentage point to 2.5 per cent of taxable income from 1 July 2019. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.

Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.

Temporary Budget Repair Levy expiry

The Temporary Budget Repair Levy (TBRL) will definitely cease on 30 June 2017. This means that the top marginal tax rate (where taxable income exceeds $180,000), including the Medicare levy, will reduce from 49.0 percent to 47.0 per cent from 1 July 2017, and increase to 47.5 per cent from 1 July 2019.

Disallow certain deductions for residential rental property

From 1 July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rent property will be disallowed.

Investors will not be prevented from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.

Also from 1 July 2017, plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.

Expanding tax incentives for investments in affordable housing

From 1 January 2018, the CGT discount will increase from 50 per cent to 60 per cent for resident individuals who elect to invest in qualifying affordable housing.

To qualify for the higher discount, housing must be provided to low to moderate income tenants, with rent charged at a discount below the private rental market rate. The affordable housing must be managed through a registered community housing provider and the investment held for a minimum period of three years.

Foreign residents

Lower threshold for withholding tax for residential property disposals

From 1 July 2016, foreign investors were subject to a withholding tax where they sold a residential property for $2 million or more. The obligation to withhold falls on the purchaser of the property.

From 1 July 2017, this threshold will reduce to $750,000. As median house prices in both Sydney and Melbourne exceeded $750,000 in the December 2016 quarter 1, a far greater number of purchasers will need to be conscious of these rules to avoid any penalties for failure to withhold.

This obligation to withhold applies where:

  • the purchaser knows or has reasonable grounds to believe the vendor is a foreign resident
  • the purchaser doesn’t reasonably believe the vendor is an Australian resident and

– has a record about the purchase indicating that the vendor has an address outside Australia, or
– is authorised to provide a financial benefit (eg make a payment) to a place outside Australia (whether to the vendor or to anybody else).

Business owners

Integrity measures limiting access to small business capital gains tax concessions

Measures will be introduced to ensure that taxpayers do not arrange their affairs in a way that means ownership interests in larger businesses do not count towards the small business CGT tests.

This will ensure that the small business concessions are available to the appropriate group of taxpayers.

Superannuation

First home super saver scheme

From 1 July 2017 individuals will be able to make voluntary contributions to superannuation of up to $15,000 per year and $30,000 in total, to be withdrawn for the purpose of purchasing a first home. Both voluntary concessional and non-concessional contributions will qualify.

These contributions (less tax on concessional contributions) along with deemed earnings can be withdrawn for a deposit from 1 July 2018. When withdrawn, the taxable portion will be included in assessable income and will receive a 30 per cent offset.

Features associated with this measure include:

  • contributions will count towards existing concessional and non-concessional contribution caps
  • earnings will be calculated based on the 90 day Bank Bill rate plus three percentage points.
  • the ATO will administer this scheme, calculate the amount that can be released and provide release instructions to superannuation funds.
  • the amount withdrawn (including the taxable component) will not flow through to income tests used for tax and social security purposes, such as for the calculation of HECS/HELP repayments, family tax benefit or child care benefit.

Contributing the proceeds of home downsizing to superannuation

It is proposed that from 1 July 2018, people aged 65 and over will be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home. These contributions will be in addition to the existing contribution caps.

Features associated with this measure include:

  • the property must have been the principal place of residence for a minimum of 10 years
  • both members of a couple will be able to take advantage of this measure for the same home, meaning $600,000 per couple can be contributed to superannuation through the downsizing cap
  • amounts will count towards the transfer balance cap when used to commence an income stream
  • contributions will be subject to social security means testing when added to a superannuation account.

Contribution eligibility requirements, such as the work test and restrictions on contributions from age 75 will not apply to these contributions. The requirement to have a total superannuation balance of less than $1.6 million to be eligible to contribute will also not apply.

Example from Budget Fact Sheet 1.5

George and Jane, both retired and aged 76 and 69, sell their home to move into more appropriate accommodation. The sale proceeds are $1.2 million. They can both make a non-concessional contribution into superannuation of $300,000 ($600,000 in total), even though Jane no longer satisfies the standard contribution work test and George is over 75. They can make these special contributions regardless of how much they already have in their accounts.

Social security

Energy Assistance Payment

A one-off Energy Assistance Payment will be made in 2016-17 of $75 for single recipients and $125 per couple for those eligible for qualifying payments on 20 June 2017 and who are a resident in Australia.

Qualifying payments include the Age Pension, Disability Support Pension, Parenting Payment Single, the Veterans’ Service Pension and the Veterans’ Income Support Supplement, Veterans’ disability payments, War Widow(er)s Pension, and permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act 1988.

Additional Tax on Big Banks

The new Budget includes a 0.06 per cent levy on bank liabilities (a deposit a bank is obliged to pay interest on) for the ANZ, Commonwealth, NAB, Westpac, and Macquarie banks. Smaller banks will not be affected.

This levy will take effect from 1 July 2017 and won’t apply to customer deposits of less than $250,000.

There is a risk, however, the cost of the levy may be passed on to customers.

Some experts estimate that the five largest banks would need to raise home loan standard variable rates by 0.2 per cent to offset the earnings impact of the levy.

The Government also announced the creation of a new external dispute resolution body, the Australian Financial Complaints Authority (ACFA), designed to replace the existing Financial Ombudsman Service, the Credit and Investment Ombudsman and the Superannuation Complaints Tribunal.

“In response to the [Professor Ian] Ramsay review, we are establishing a simpler, more accessible and more affordable one-stop shop for Australians to resolve their disputes and obtain binding outcomes from the banks and other financial institutions,” Treasurer Scott Morrison said.

Contact us for further details

Should you require further information on any of the issues raised in the latest Budget, or wish to discuss how any of the proposed changes may impact on your personal circumstances, then please call or email either John Todd or Campbell Flower, Wealth Advisers and Directors of the Company.

We look forward to being of assistance to you.

Discover how the inner circle can help you. Contact us today for a financial consultation.

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs.
Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.
Odyssey Financial Management is an authorised representative of Total Financial Solutions Australia Limited.