The 2016 Federal Budget measures announced on 3 May 2016 represent some of the most dramatic changes to the superannuation system since the 1 July 2007 reforms.
The industry was largely blind-sided by the Government’s proposed $500,000 lifetime limit on non-concessional contributions from 3 May 2016 (backdated to 1 July 2007). Combined with the proposed $25,000 cap for concessional contributions and the $1.6m transfer balance cap for retirement accounts from 1 July 2017, those aspiring to build large superannuation balances will need to review their retirement savings plans.
Pension $1.6m transfer balance cap
All those with a pension balance over $1.6m at 1 July 2017 will be required to “roll back” the excess amount to accumulation phase by 1 July 2017 (where it will be subject to 15% tax on future earnings). Alternatively, the excess above $1.6m can be withdrawn from super altogether. Writing in Thomson Reuters Weekly Tax Bulletin Issue 20 (13 May 2016), Meg Heffron and Leigh Mansell, of Heffron SMSF Solutions, have mapped out various planning considerations for superannuation contributions and pension strategies. For example, how to keep amounts separate (to isolate specific tax components) even after they have been rolled back from a pension into accumulation phase.
Transition to retirement pensions
Heffron and Mansell set out the circumstances in which individuals may still wish to start a transition to retirement income stream (TRIS), despite the proposal to remove the tax exemption for fund earnings on assets supporting such pensions. This change will not start until 1 July 2017, leaving the 2015-16 and 2016-17 income years for eligible individuals to access the current advantages of a TRIS. Heffron and Mansell also note that advisers will need to be more vigilant in identifying the moment when a TRIS stops being a TRIS (subject to 15% tax on fund earnings from 1 July 2017) and becomes an income stream for which the fund is entitled to the tax exemption.
Of course, the legislation required to implement the proposed measures has a long way to go before becoming law, and the Government must first survive the Federal election on 2 July 2016. On a positive note, superannuation (and the flexibility and level of control afforded within a SMSF) will remain important options for most people regardless of the proposed changes.
Further insights on the operation of the proposed Budget measures will be covered as part of Heffron SMSF Solutions Advanced SMSF Training Days in August / September 2016. Register online via the Heffron SMSF Solutions Website.
Thomson Reuters Weekly Tax Bulletin will continue to track the development of the proposed Budget superannuation measures, and any resulting legislation.