Issue 04 - Self Managed Superannuation Fund (SMSF)
The superannuation changes announced in the Federal Budget on Tuesday 3 May were significant, therefore, we are in the process of looking at what the budget announcements mean to each of our clients specifically, but in the interim we provide the following overview and commentary.
New lifetime cap for non-concessional superannuation contributions
A lifetime non-concessional contributions cap of $500,000 has been proposed.
The lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007 and commences from 7.30pm (AEST) on 3 May 2016.
This has replaced the existing annual caps which allowed annual non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65).
This measure is available to all Australians up to age 74.
We are currently reviewing all of our Self Managed Superannuation Funds and will be in contact with clients individually to let them know how they are affected by this measure.
After-tax contributions made into defined benefit schemes (those that pay benefits based on length of service and final salary) and constitutionally protected funds will be included in an individual's lifetime non-concessional cap. If a member of a defined benefit scheme exceeds their lifetime cap, ongoing contributions to the defined benefit scheme can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold. The amount that could be removed from any accumulation accounts will be limited to the amount of non-concessional contributions made into those accounts since 1 July 2007. Contributions made to a defined benefit scheme will not be required to be removed.
The Government has advised they will ensure broadly commensurate and equitable treatment of individuals for whom no amount of post 1 July 2007 non-concessional contributions are available to be removed.
Changes to the 'high income contribution rules' (Division 293)
The income threshold at which high income earners pay an additional 15% contributions tax (Div 293 tax) will be lowered from $300,000 to $250,000 from 1 July 2017.
However, a 30% tax rate on superannuation contributions still remains a better option than paying 49% tax outside of superannuation.
The lower Division 293 income threshold will also apply to members of defined benefit schemes and constitutionally protected funds currently covered by the tax. Existing exemptions (such as for State higher level office holders and Commonwealth judges) for Division 293 tax will be maintained.
Reducing the concessional contributions cap
The annual cap on concessional superannuation contributions will also be reduced from 1 July 2017 to $25,000, currently $30,000 if under age 50 or $35,000 for ages 50 and over or uncapped for Super SA Triple S accounts.
From 1 July 2017, the Government will include estimated and actual employer contributions in the concessional contributions cap for members of unfunded defined benefit schemes (those that pay pensions that are taxed at the member's marginal tax rate less a 10% tax offset) and constitutionally protected funds. Members of these funds will have opportunities to salary sacrifice commensurate with members of accumulation funds (that is a maximum of $25,000). For individuals who were members of a funded defined benefit scheme (those that are taxed on contributions and earnings but pay tax-free benefits) as at 12 May 2009, the existing grandfathering arrangements will continue.
Taxing earnings on assets supporting a Transition to Retirement Income Stream
The tax exemption on earnings of assets supporting Transition to Retirement Income Streams will be removed from 1 July 2017.
This will affect all superannuation funds that have started pension streams for individual members over preservation age who are not yet retired. The income earned on fund assets supporting the income streams will start to be taxed at 15% from 1 July 2017.
Changes to the contribution rules for those aged 65 to 74
The current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement will be removed from 1 July 2017.
Those members under the age of 75 will no longer have to satisfy a work test to contribute or to be able to receive contributions from their spouse.
Allow catch-up concessional superannuation contributions
Individuals with a superannuation balance less than $500,000 will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years, with effect from 1 July 2017.
Amounts will be carried forward on a rolling basis for a period of five consecutive years with only unused amounts accrued from 1 July 2017 being carried forward.
This measure would allow members with lower contributions, interrupted work patterns or irregular capacity to make contributions (for example, individuals who work overseas for a year or two or parents returning to the workforce after parental leave) to boost their superannuation savings.
This measure will also apply to members of defined benefit schemes.
Tax deductions for personal superannuation contributions
From 1 July 2017 all individuals up to age 75, regardless of their employment circumstances, will be allowed to claim an income tax deduction for personal superannuation contributions up to the concessional cap.
This means that individuals who are partially self-employed and partially salary earners or whose employers do not offer salary sacrificing arrangements will benefit from these changes.
Individuals that are members of certain prescribed funds would not be entitled to deduct contributions to those schemes. Prescribed funds will include all untaxed funds, all Commonwealth defined benefit schemes, and any State, Territory or corporate defined benefit schemes that choose to be prescribed.
Introducing a Low Income Superannuation Tax Offset (LISTO)
A low income superannuation tax offset (LISTO) up to $500 will be introduced to reduce tax on superannuation contributions for low income earners, with an adjusted taxable income up to $37,000, from 1 July 2017.
This measure effectively avoids the situation in which low income earners would pay more tax on their superannuation contributions than on their income outside of superannuation.
It will replace the low income superannuation contribution when it expires on 30 June 2017.
Improve superannuation balances of low income spouses
The income threshold for the receiving spouse (whether married or de facto) of the low income spouse tax offset will be increased from $10,800 to $37,000 from 1 July 2017.
This measure will improve the superannuation balances of low income spouses because it extends the current spouse tax offset to assist more families to support each other in accumulating superannuation.
Introduction of a $1.6 million 'superannuation transfer balance cap'
A balance cap of $1.6 million on the total amount of accumulated superannuation an individual can transfer into the tax-free retirement phase will be introduced from 1 July 2017.
This measure will limit the extent to which the tax-free benefits of retirement phase accounts can be used by high wealth individuals.
Where a member accumulates greater than $1.6 million in funds, they will be able to keep the excess amount in an accumulation phase account where any earnings will be taxed at 15%.
Members who are already in retirement phase with balances in excess of $1.6 million will need to reduce their balance to $1.6 million by 1 July 2017. The excess balances can be converted back to accumulation accounts.
Commensurate treatment for members of defined benefit schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000 from 1 July 2017.
Please keep in mind that these measures are yet to become law (they are proposals only) and are required to go through the passage of legislation. As such, we recommend you wait on the final outcome before making any decisions or changes to your financial circumstances. If last year's budget proposals are any indication, these measures may be subject to change throughout the implementation process.
There has been a recent case, FCT v Ryan  FCA 1037, where the Federal Court imposed civil penalties of $20,000 on each individual trustee of a self-managed superannuation fund (SMSF) for breaches of the superannuation legislation involving loans to themselves as members over a four year time frame.
Superannuation law prohibits lending money or giving any other financial assistance to members, or any relatives of members, from making withdrawals (as loans or payments) from the SMSF, even if the fund does so on commercial terms.
This decision is a timely reminder of the costly consequences for SMSF trustees / members who treat money held in the fund as being their own money prior to meeting a condition of release.
One of the ATO's responsibilities as the regulator of SMSFs is to ensure the trustees comply with the superannuation legislation. Traditionally, the main courses of action available to the ATO to deal with breaches of the legislation by SMSF trustees include:
- Making the fund non-complying – the fund's income (and assets other than non-concessional contributions in the year the fund became non-complying) is taxed at the top marginal rate rather than the complying fund tax rate of 15%
- Accepting an enforceable undertaking from an SMSF trustee to rectify a breach
- Disqualifying the trustee(s)
- Seeking court imposed civil or criminal penalties for certain breaches
- Imposing administrative penalties - as an example, an administrative penalty of 60 penalty units per breach, per trustee applies to a breach of the lending ru
les or the in-house asset rules. From 31 July 2015, a penalty unit equates to $180, therefore, a penalty of $10,800 applies for a breach that attracts 60 penalty units
It is important to note that SMSF administrative penalties are imposed per trustee. Therefore, if an SMSF has multiple individual trustees, a penalty can be imposed on each individual trustee. By contrast, the same breach by a single corporate trustee will result in the penalty being imposed once only. However, directors of a corporate trustee are jointly and severally liable for the penalty. Also, penalties are payable by the trustee and cannot be paid or reimbursed by the SMSF.
This is one of the many reasons we recommend a corporate trustee for your SMSF rather than appointing individual trustees of the fund.
The following rates and thresholds will be current from 1 July 2016 to 30 June 2017 (that is, the 2017 financial year) before some or all of the budget changes may apply if legislated from 1 July 2017.
A contributions reserving strategy essentially involves the making of a concessional superannuation contribution in one income year (being deductible in the year made), but not allocating the contribution to the particular member's accumulation balance until the following income year. The member may make the concessional contribution personally, and / or their employer may make a contribution on their behalf (whether compulsory, salary sacrificed or otherwise).
When the contribution is made to the SMSF, it is 'parked' in an unallocated contributions account or reserve, before the trustee allocates the contribution to the member's account. The contribution is required to be allocated to a member's account within 28 days after the end of the month in which the contribution was made. For example, where a superannuation contribution is made in June 2016, it would generally need to be allocated to the member's account by 28 July 2016. The ATO accepts that the contribution is only counted for capping purposes in the income year in which it is allocated.
Please note, the benefit of using a contributions reserving strategy to make deductible contributions equal to twice the member's concessional cap (without breaching the cap), is only available for one income year. As a result, the strategy is most beneficial for taxpayers who plan to retire from the workforce and wish to do a final 'top up' of their superannuation, particularly where they will fail the work test in the subsequent income year. Also, a taxpayer with abnormally high levels of taxable income for a particular income year (for example, due to a realised capital gain), may also benefit in maximising super deductions (including salary sacrificed contributions) in this year by implementing such a strategy.
We suggest that if you are approaching retirement or will have an unusually high income due to a once off event, you call us to discuss whether the concessional contributions reserving strategy will work in your particular circumstances this year.
Obviously due to the recent budget announcements, if legislated, some of these thresholds will change from 1 July 2017.