The 2016-2017 Federal Budget was announced on 3 May, 2016, and it contains significant changes to superannuation.
Although this Budget has to pass through a few hoops to come into effect (least of all the double-dissolution election on 2 July, 2016), it’s important to be aware of the changes to superannuation it contains.
For people with self-managed super funds in particular, it is worth seeking financial advice now, to avoid potential repercussions if the Budget’s proposed legislation is passed.
The main proposed reforms relating to superannuation are:
- A retroactive $500,000 lifetime non-concessional cap (NCC)
- This will take into account all NCCs made since 1 July, 2007.
- $1.6 million transfer balance cap
- From 1 July, 2017, a $1.6 million cap will apply to the total amount of superannuation that can be transferred into a tax-free retirement account.
The Federal Government has released a number of Budget 2016-2017 Superannuation fact sheets with more detail about these reforms.
To better understand the implications of this Budget, we spoke with Daniel Butler from DBA Lawyers.
SP: What do people with self-managed super funds need to be aware of in this budget?
DB: Probably the biggest measure that might affect people with an SMSF is the $500,000 lifetime NCC cap. That could be restrictive for some people in terms of the amount they can put into super.
The new cap that’s been announced is retroactive. It’s stretching back to mid-2007, so whatever people have put in as non-concessional (from their own pocket, not tax-deductible contributions) since mid-2007 is affected.
This means someone who has put in $300,000 for example in the last nine years (excluding their deductible or concessional contributions) can now only contribute $200,000 more in NCCs into their superannuation before they reach their $500,000 lifetime non-concessional cap.
Super that is rolled over from another fund to a self-managed fund generally doesn’t count towards your $500,000.
Secondly, there will be a $1.6 million lifetime balance cap that can be tax exempt, although, you can earn money on this without it exceeding the cap.
This lifetime balance cap will give people more incentive to buy sound growth assets, especially suitable property investments. However, with limits to the money that can come into a super fund, it’s likely that people will need to seek out more borrowings to access the required funds to purchase property. Building super into the future is going to be more focused on leveraging from borrowing.
SP: What’s the significance of the retroactive legislation?
DB: This retroactive legislation is pretty ugly stuff. When the government does go retroactive, it’s generally for measures such as tax avoidance and is usually retroactive only for a period of 12 or 24 months. However, this legislation is going back for nine years.
Naturally, a lot of people are caught up in the superannuation system, and it’s quite a regulated environment once you’re in. You’re stuck in there. Most people can’t just withdraw money until they’re over 60 and retire. So we’ve got a system where retroactive law in respect to superannuation is not very welcomed at all.
If the current government remains in power after the election, the opposition will not be supporting the retroactivity, however, they haven’t yet opposed the $500,000 lifetime cap.
SP: What implications could these lifetime limits have if there is another global financial crisis (GFC)?
DB: If we had a big slide in value, and you lost half your super savings, you can’t then work back up to it. You would have a limited lifetime cap that you’ve already burnt up, so you can’t do it again.
This would also apply if people found themselves victims of investments schemes and fraudulent arrangements like Storm Financial, where people get their money ripped off them or embezzled. Again, they could be out of superannuation for good if they had used up their lifetime cap.
Similarly, with separation and divorce, you might be in a position where you would be worse off. A spouse who splits their super on divorce and who has used their lifetime cap cannot make any more NCCs to super.
SP: How will Concessional Contributions be affected?
DB: For most people, the concessional contributions cap is currently $30,000, or $35,000 for those 49 and over. From 1 July, 2017, it’s reducing to $25,000 pa for everyone. You’ll be able to claim the balance of your concessional contribution amount (ie, $20,000) personally if your employer only makes $5,000 of contributions. However, you can only claim a personal deduction to the extent of your taxable income.
This will bring about more of a focus on concessional contributions to build up your super balance.
This change is aimed at small business owners, or parents with a broken work pattern. When they return to the workplace, they will be given a chance to catch up. The concessional contributions cap can be averaged over a five year rolling period, provided the member has less than $500,000 in super.
Whether it’s tax effective will depend on individual tax rates, and it’s recommended to seek financial advice on this.
SP: What will change for those with a taxable income over $250k?
DB: Currently, those who have an adjusted taxable income over $300,000 pay an extra 15% contributions tax when they have concessional contributions made by an employer or themselves to their superannuation fund. This is known as the Division 293 tax threshold.
Under the 2016-2017 Budget, the adjusted taxable income for Division 293 will be lowered to $250,000 from 1 July, 2016. Concessional contributions are then taxed at 30% rather than 15%.
Both political parties are adopting the $250,000 threshold.
To learn more about how the 2016-2017 Budget could affect your personal situation, we encourage you to speak with a financial planner.Tags: Federal Budget