Donegal Update


GHOSTS OF SUPERANNUATION PAST

20 July 2017



It has been a decade since the most significant reforms to superannuation took place - deemed 'Simplified Superannuation' the changes were designed to reduce complexity of superannuation and make it easier to accumulate and plan for retirement.

Now, on 1 July 2017, we ushered in a new era of superannuation with a hint of ghosts of superannuation past.

The biggest talking point is the new Pension Transfer Balance Cap (similar to the old Reasonable Benefit Limits) which is now in effect.

However, there are other changes, some large, some more subtle, which will have wide ranging impacts for many individuals.

Below we cover off on the major, and minor, changes which are now in effect.

$1.6 MILLION PENSION TRANSFER BALANCE CAP

From 1 July 2017, the maximum amount that can be used to start a retirement income stream is $1,600,000 per individual.

This is a lifetime limit - once the full balance is used, you are unable to add more or commence any further pension accounts.

The value of investments supporting the pension can grow beyond $1,600,000 without penalty.

All earnings within your account-based pensions (retirement pension) are still tax free. Any income withdrawn from the pension after age 60 also remains tax free.

Transition to Retirement Income streams are exempt from this cap (i.e. where an individual is still working but under age 65) as they no longer qualify for a full tax exemption on earnings.

What about amounts above $1,600,000?

Any balance above $1,600,000 can remain in an accumulation account and be taxed at a maximum rate of 15%.

TREATMENT OF DEFINED BENEFIT INCOME STREAMS

One of the more difficult areas that has arisen from the changes is how Defined Benefit income streams will be treated moving forward.

These income streams will count to the pension Transfer Balance cap - the amount is calculated at 16x the annual payment (on 1 July 2017 or when you become entitled).

For defined benefit pensions in excess of $100,000 per annum, additional tax will apply to income above $100,000, however there will be no forced cashing of defined benefit income streams.

Where a client holds a defined benefit and an accumulation/ pension interest, there will need to be adjustments made to ensure no breach of the new legislation.

REDUCED CONTRIBUTION LIMITS

From 1 July 2017 the following contribution limits will apply:

-    Concessional (Employer, pre-tax, salary sacrifice etc): $25,000 per annum;
-    Non-Concessional (after tax, personal): $100,000 per annum, or up to $300,000 using the 3 year 'bring forward' provisions before age 65.

$1.6 MILLION NON-CONCESSIONAL CONTRIBUTION LIMIT

From 1 July 2017, individuals who have $1,600,000 or more in superannuation (accumulation or pension phase), will no longer be able to make non-concessional contributions (after tax).

Concessional (pre-tax) contributions will still be permitted (maximum $25,000 per annum).

Individuals with balances below $1,600,000 can continue to make non-concessional (after tax) contributions, up to the point where their balance reaches $1,600,000.

(ALMOST EVERYONE CAN CLAIM A TAX DEDUCTION FOR SUPER CONTRIBUTIONS

Previously, only self-employed, or those with less than 10% of their income from employment could claim a tax deduction for contribution to super.

Now, all individuals under the age of 75 can claim a tax deduction for super contributions, up to the concessional contribution limit.

This simplifies the process, particularly for employees who have large commission/ bonus structures, or receive irregular income throughout the year, as they are able to wait until May/ June to make a 'top-up' contribution.

It also means employees who did not have access to salary sacrifice arrangements, can now make additional deductible contributions.

This is an extremely positive change, as it will allow greater flexibility in making contributions for individuals, ensuring they can maximise their concessional contributions.

TRANSITION TO RETIREMENT PENSION - REDUCED BENEFITS

Individuals who have a transition to retirement (TTR) pension (i.e. under 65, but still working) will no longer benefit from the tax exemption within the pension on earnings.

From 1 July 2017, these will be treated the same as an accumulation account (15% tax gross on earnings within the account).

This reduces the benefit of TTR strategies for those under 65, however the balance of your TTR pension will not be counted for the Pension Transfer Balance Cap.

DIV 239A TAX FOR HIGH INCOME EARNERS - REDUCTION IN THRESHOLD

The threshold for additional tax on concessional contributions is reduced from an income of $300,000 down to $250,000 effective 1 July 2017.

This means any individual with an adjusted taxable income above $250,000 could face an additional 15% tax on their pre-tax (concessional) super contributions.

The option to pay this additional tax from your super fund or personally will still be available.

WHAT DO THESE CHANGES MEAN FOR YOU?

ACCUMULATORS

The need for a clear and considered accumulation strategy has become even more important.

Where previous rules allowed for large 'catch up' contributions closer to retirement, under new rules, it will be difficult to accumulate a substantial balance for retirement without taking steps to start regular additional savings much earlier on.

This is especially pertinent for those in their 30s to early 40s - a smaller sacrifice earlier can negate the need for a much larger sacrifice later on.

In many cases, it will need careful consideration to determine the optimal strategy which will be subject to a wide array of factors, in particular the juggling of outstanding mortgage commitments versus additional contributions to super. 

Ensuring equal balances for couples will also be extremely important to maximise the use of the new limits.

RETIREES

Compliance with the $1.6million pension balance at 1 July is a primary concern - for those with Self Managed Super Funds, optimising the use of capital gains tax reset provisions will be an important step over the coming months.

For those already retired, the consideration of starting to distribute to adult children may become more attractive in later years as part of a longer term estate planning strategy.

Ensuring binding nominations and reversionary pensions are in order and up to date is also important, as well as reviewing overall estate plans.

Those with excess balances above $1.6million who require additional income will need to consider the order of draw down if they have multiple pensions, or if a lump sum should be taken from accumulation accounts.

INSURANCE VIA SUPERANNUATION

Whilst holding Life cover via superannuation has always been an attractive strategy due to the tax deductibility, the new contribution restrictions may mean those who have already exhausted their contributions limits and have sufficient personal cash flow, could benefit over the long term by restructuring part of their cover.

Similarly, those in a position to take advantage of the reduced contribution caps may also wish to re-consider their cover arrangements to avoid unnecessary impacts on their superannuation balances.

SUMMARY

Unfortunately, it is clear that the new rules have added far more complexity, to what is for many, an already confusing system.

The value of obtaining clear and considered advice is greatly increased.

As always, if you have any concerns in relation to the changes, or other aspects of your financial situation, please do not hesitate to contact us.

Similarly, if you know anyone who may benefit from our assistance in managing these changes, we would be more than happy to help.

This material is current as at 20 July 2017 and is provided for general information only and should not be taken as general or personal advice. Whilst all care has been taken in the preparation of this report (using sources believed to be reliable and accurate at the time). This publication has been prepared without taking into account a potential investor's objectives, financial situation or needs. Before making a decision based on this publication, consider its appropriateness based on your objectives, financial situation and needs. Donegal Wealth Pty Ltd holds an Australian Financial Services License (AFSL) No. 230184, granted by the Australian Securities and Investments Commission (ASIC).