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