Super reforms hurdles after July 2017


Super reforms are off and running, but there are more hurdles ahead

The most substantial superannuation amendments in a decade are here, with over a dozen separate measures requiring attention for existing super strategies.

With the 1 July 2017 start date now behind us, most individuals and self managed superannuation fund (SMSF) trustees will be breathing a sigh of relief, having cleared the initial hurdles that required action by 30 June.

However, the scale of the reforms means that dealing with the changes is not a sprint race or a set-and-forget event. Rather, it requires ongoing and regular attention throughout the normal cycle of the financial year.

Having cleared the first hurdles on 30 June, it is now time to look down the track and start thinking about the next looming obstacles.

This article outlines some of the issues that should be front-of-mind during 2017–2018.

Pension transfer balance cap of $1.6 million

One of the biggest changes is the $1.6 million cap on tax-free pension balances. The limit, which will mainly affect wealthy individuals, applies to the total lifetime amount of accumulated superannuation a person can transfer into the tax-free retirement phase.

Subsequent earnings on balances in the retirement phase from July 2017 will not be capped.

Individuals with a retirement phase balance that exceeds the $1.6 million limit have to roll back the excess amount to accumulation phase within their super (where it will be subject to the concessional 15% tax rate) or remove the excess amount from the pension system by paying themselves a lump sum (known as “commutation”) – or combine these actions – to bring their retirement phase balance to $1.6 million or less.

If you have an excess transfer balance in the 2017–2018 year, it will be taxed at 15%. From 1 July 2018, the rate will be 15% for a first-year breach of the cap and 30% for later breaches.

Transitional relief for excess up to $100,000: act before 30 December 2017

If the total of your retirement phase income streams at 1 July 2017 was between $1.6 million and $1.7 million (that is, you have an excess transfer balance of up to $100,000), you may be glad to hear there is a six-month transitional period.

You can avoid penalties if you notify the ATO by 31 December 2017 and take action to roll back or commute the excess amount.

SMSF borrowings

The ultimate exit plan for existing limited recourse borrowing arrangements (LRBAs) should be reviewed to consider when the borrowing will be repaid and the underlying asset will be transferred from the custody trust to the SMSF. The reduced non-concessional cap of $100,000 (or $300,000 over three years), and the $1.6 million total superannuation balance limit for making contributions (see ‘Contribution caps’), could impact on the SMSF’s ability to finance the ultimate loan repayment.

A measure has also been recently legislated (with effect from 1 July 2017) that treats certain repayments of LRBAs from an accumulation account as a credit in a member’s pension transfer balance account. The government’s intention with this measure is to prevent SMSF members from circumventing the $1.6 million transfer balance cap by transferring money from an accumulation fund to retirement phase.

If you are concerned about these changes, please talk to us about your existing borrowing arrangements.

Pension balance reporting

Trustees of SMSFs are required to lodge an electronic transfer balance account report (TBAR) with the ATO. The ATO needs this data about individuals’ existing and newly started superannuation income streams to administer the pension cap regime, so the TBAR requirement likely to be strictly enforced.

This pension reporting obligation is set to commence from 1 October 2017, but a transitional event-based reporting approach will apply for SMSFs. Reporting will be deferred until 1 July 2018 for SMSF income streams that existed on 30 June 2017, and for newly commenced income streams. However, certain commutations that are rolled over to another fund, or required to correct an excess transfer balance, will need to be reported 10 days after the month in which it occurs.

Contribution caps

The concessional (before-tax) contribution cap has been lowered to $25,000 for the 2017–2018 financial year (down from $35,000 or $30,000, depending on your circumstances).

If you have salary sacrifice and/or voluntary pre-tax contribution arrangements in place, it is important to review them and adjust your contribution amounts so you don’t inadvertently breach the new, lower limit. Be mindful, too, that your employer’s 9.5% Super Guarantee contributions are counted within the concessional cap amount. Before-tax contributions in excess of the $25,000 cap, regardless of whether you make them or your employer does, will be considered part of your assessable income and taxed at the relevant marginal tax rate.

The main shift regarding non-concessional (after-tax) contributions is that individuals with a total super balance above $1.6 million are now prevented from making further non-concessional contributions. Note that although the $1.6 million figure is the same, this is a different cap from the transfer balance cap (which, as already described, applies to super amounts in retirement phase).

If your individual total super balance is approaching or above $1.6 million and your super fund allows it, you may consider splitting your concessional contributions with your spouse.

Finally, individuals with a total superannuation balance of less than $500,000 on 30 June of the previous financial year can make additional catch-up concessional contributions for unused cap amounts from the previous five years, starting from 1 July 2018. This measure may benefit people with interrupted work patterns, who are likely to end up with unused amounts within the concessional cap some years but may have more money available to contribute in others.

The rest of the super reform measures

There are a number of other measures that may require consideration and attention, like the reduction of the threshold for high income earners from $300,000 to $250,000. And other aspects of the super reforms – ranging from the spouse contribution offset to incentives for making deductible personal contributions, thanks to the removal of the 10% test for employment activity earnings – offer opportunities for some people to maximise their contributions.

Please contact us to discuss your circumstances and find out how we can assist.

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