To help you prepare your clients, we’ve compiled a list of the major changes and five tips to help navigate through them.
Major changes in a nutshell
Lower limits on concessional contributions
From 1 July 2017, the annual cap on concessional contributions (pre-tax) will be limited to $25,000 for everyone. Until then, clients aged 49 or over on 30 June 2016 can still contribute up to $35,000 and clients under 49 up to $30,000.
Lower (non-concessional) after-tax contributions
The annual cap on non-concessional (after-tax) contributions will fall from $180,000 to $100,000 from 1 July 2017. Clients under 65 will still be able to ‘bring forward’ three years’ worth of non-concessional contributions in a single year (bring-forward rule), but this will be limited to $300,000 as compared with the current cap of $540,000. Clients with a total super balance of $1.6 million or more on 30 June 2017 (and subsequent years) will have their non-concessional cap in the following year reduced to nil from 1 July 2017. Clients with a total super balance of more than $1.4 million on 30 June 2017 (and subsequent years) will also have their ability to use the bring forward rule restricted.
Tax increases for high income earners
For clients earning between $250,000 and $300,000 including super contributions, the tax paid on concessional contributions will double from 15% to 30% from 1 July 2017.
New $1.6 million pension cap
The total amount of super that can be transferred into (or retained in) the tax-free pension phase will be restricted for the first time, to $1.6 million.
Capital gains tax relief (CGT)
As a transitional measure, clients with more than $1.6 million in pension phase who transfers assets back into an accumulation account may be able to reset the cost base of those assets to their current market value.
Tax changes for Transition to Retirement (TTR) pensions
Earnings on superannuation assets used to pay a TTR pension will no longer be tax-free. Instead they will be taxed at 15%. Pension payments will continue to be tax free for clients over 60, or taxed at the marginal rate with a 15% offset for those aged 56-60. Capital gains tax relief (see above) will also apply to these pensions.
Five-point action plan
Here are some tips to help your clients make the most of the changes and avoid any potential pitfalls.
1. Maximise non-concessional contribution under the current rules prior to 30 June
Clients under 65 at some time during the year may be able to make non-concessional contributions of up to $540,000 this financial year; from 1 July 2017, the non-concessional cap will reduce.
“This is a last opportunity to get up to $540,000 into super, especially if your clients’ total super balance will be over $1.6 million on 30 June. In this case, your client’s non-concessional cap for 2016-17 will be zero,” says Craig Day, Head of FirstTech, Colonial First State.
2. Maximise concessional contributions
“Clients on an average tax rate of more than 15% will benefit from maximising concessional (pre-tax) contributions this tax year”, says Day. Self-employed people can claim a tax deduction for contributions; employees will be required to set up a salary sacrifice arrangement with their employer before 30 June 2017.
3. Check your clients’ account balance
Clients with more than $1.6 million in pension phase will need to transfer the excess back into a super accumulation account or out of super entirely. If their pension account balance exceeds $1.6 million by less than $100,000, they will have six months’ grace to get the excess out. But the ATO has a stick to encourage people to act sooner rather than later. “If your clients are over by more than $100,000 or don’t get the excess out within six months, the ATO will deem the excess earned income at the General Interest Charge rate (currently approximately 9%) and tax those earnings at 15% (or 30% for repeat offenders) regardless of the level of income actually earned,” says Day.
4. Seek capital gains tax relief
Those clients with a TTR pension paid from an SMSF or Super Wrap or who need to transfer assets from an account based pension back into accumulation phase to meet the $1.6 million pension cap may be wise to consider getting advice on whether they should apply the CGT relief to reset the cost base of the fund’s assets. Doing so could save the SMSF a lot of tax in future, but the rules are complex; whether or not the relief can be applied will depend on the fund’s circumstances.
5. Review your clients’ transition to retirement (TTR) strategy
For those clients who already have a TTR pension and satisfy a condition of release, such as retiring or changing jobs after turning 60, it may be worth considering moving to a normal account-based pension.
“If your clients’ have a TTR pension you should review them prior to 30 June this year,” says Day. While TTR pensions will still be suitable for many clients, the super reforms may mean that some clients may need to modify them or will be better off turning them off after 30 June.
The new super rules are complex and their impact depends on each client’s overall financial situation.
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Disclaimer: This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Past performance is not an indication of future performance. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. CommSec Adviser Services is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.