Draft super legislation (tranche 2) released
The recently announced changes to the Budget proposals impacting the non-concessional contributions cap were not included in this release. The Government has indicated that this measure would be addressed in draft legislation within the coming weeks. The further measures introduced in this second tranche seek to:
- introduce a $1.6 million transfer cap on amounts that can be transferred to pension phase
- reduce the concessional contributions cap to $25,000 for all individuals from 1 July 2017
- reduce the income threshold above which an additional 15% tax is payable on concessional contributions from $300,000 to $250,000
- implement a ‘catch-up concessional contributions regime’, and
- abolish anti-detriment payments.
Note: The following is intended to broadly summarise the new measures, and highlight concepts that will be important for clients. Over the coming weeks, MLC Technical will provide a more comprehensive explanation and analysis of these measures, including the extension to defined benefit and constitutionally protected funds.
$1.6m transfer cap
From 1 July 2017, a $1.6 million ‘transfer balance cap’ will be introduced to limit the amount of capital that an individual can transfer to the pension phase of superannuation. Pensions in existence on 1 July 2017 will also be subject to the new rules. Pensions that have transition to retirement status will not be counted until a full condition of release is met.
This measure does not limit the total amount a person can hold in an accumulation account. Amounts in excess of the transfer balance cap can remain in accumulation phase and will continue to have earnings taxed at the concessional rate of up to 15%.
Indexation is proposed to work as announced in the Budget. The cap will be indexed in line with CPI, in increments of $100,000. Further, a person who has already transferred an amount to retirement phase, but who has not fully utilised their transfer balance cap, will be entitled to a proportion of any indexation to the cap. Entitlement to indexation will be calculated proportionately based on the percentage of the person’s previous transfer balance cap that was ‘unused’.
Broadly, a person’s total transfers to retirement phase will be assessed against their cap, modified to reflect certain activities on retirement phase accounts, such as lump sum commutations. The measures will operate to ensure that there will be no double-counting of transfers in the instance where a person changes pension providers, or refreshes a pension, which requires a person to commute back to accumulation, after which a new pension is commenced.
Modifications to the general application of the rules will apply to:
- child account based pensions
- income streams commenced with the proceeds of structured settlements
- cases where commutations are made due to family law splits, and bankruptcy.
Death benefit income streams will not be exempt from the new measures, and will count towards the recipient’s transfer balance cap. Child pensions will be treated separately. Reversionary pensioners will be afforded 6 months to consider how their receipt of a death benefit pension will impact their transfer balance cap and may take steps to partially or wholly commute amounts in excess of their transfer cap.
Breaching the transfer balance cap
A person who breaches their transfer balance cap will receive a determination from the ATO, and the superannuation provider will be instructed to commute their retirement phase interest by an amount equal to the excess transfer, plus an amount that represents ‘notional earnings’ on the excess amount transferred. Similar to the way in which excess NCCs are dealt with, actual earnings on excess amounts transferred will be ignored, and earnings will be calculated based on a formula. Notional earnings will be subject to tax at 15% for a person’s first breach of the cap. Excess transfers made in subsequent financial years will have notional earnings on excess amounts taxed at a higher rate of 30%.
The concessional cap
From 1 July 2017, the annual concessional contributions (CC) cap will be reduced to $25,000 for all individuals regardless of age. Indexation of the CC cap will continue to be indexed in line with AWOTE, and will be increased in increments of $2,500.
This measure will be broadened to capture certain members of unfunded defined benefit schemes and constitutionally protected funds.
Additional 15% tax for high income earners
From 1 July 2017, the income threshold above which an additional 15% tax is payable on CCs, will be reduced from $300,000 to $250,000. This is known as ‘Division 293 tax’. There is no suggested change to the definition of ‘income’ for the purpose of determining liability for the additional tax, or the way in which liability is calculated.
Catch-up concessional contributions
If certain conditions are met, individuals will be able to make CCs above the annual cap, where they have not fully utilised their CC cap in any of the previous five financial years. Unused amounts may be accrued from 1 July 2018. This means that the first year in which a person may be eligible to utilise a carried forward ‘unused CC cap amount’ will be the 2019/20 financial year.
Eligibility to utilise carried forward amounts will also require that a person’s superannuation balance on 30 June of the prior financial year not exceed $500,000. ‘Superannuation balance’ for this purpose will include:
- the value of all accumulation and TRIS pension interests
- the value of any other pension interests, and
- ‘in-transit’ rollover benefits.
Contributions made in excess of the annual concessional cap, where a person has unused cap amounts from a prior financial year, will first be deducted from unused amounts from the earliest financial year, to the latest.
Eligible beneficiaries who receive superannuation lump sum death benefits will no longer be entitled to receive an anti-detriment payment in respect of a person who passes away on or after 1 July 2017.
Other income stream measures
Transition to retirement pensions
From 1 July 2017 the current exemption which applies to tax on earnings in pension phase, will be removed where the income stream is a transition to retirement income stream (TRIS). Earnings in a TRIS will be taxed in a similar method to accumulation accounts, at a rate of up to 15%. There will be no change to the way in which an individual is taxed personally on payments received from a TRIS.
Income stream- lump sum elections
From 1 July 2017, there will no longer be an ability to make an election to assess an income payment made from an account based pension as a lump sum commutation.
For further information, please contact us.