This blog considers some actions that may need to be taken before 30th June, 2017
CONTRIBUTIONS BEFORE JUNE 2017
The Concessional contribution cap in 2016/17 is $30,000 for people aged under 49 and $35,000 for those 49 and over. From 1 July, 2017 this will reduce to $25,000 p.a. for all taxpayers. The Division 293 extra contribution cap will have the threshold reduced from $300,000 to $250,000.
Likewise, the non-concessional contribution cap will reduce from $180,000 p.a. to $100,000 p.a. with no non-concessional contribution allowed for taxpayers with more than $1.6m in superannuation. The $540,000 bring forward will apply for those eligible i.e. under age 65 and not previously triggered in the relevant period. One needs to be careful with transitional rules for not full bring forwards and also for taxpayers approaching the $1.6m limit.
If a taxpayer wants to get extra contributions – including in specie transfers – into a superannuation fund, consideration should be given to using the opportunity to make higher contributions that apply until 30 June, 2017.
TRANSFER BALANCE CAP (TBC)
From 1 July, 2017 superannuation fund members will be subject to a $1.6 million transfer balance limit on assets eligible for tax exemption for funding superannuation pensions. Amounts in excess of this will need to be held in accumulation phase and taxed at 15% or withdrawn from the superannuation system.
Existing superannuation steams will count but TTR pensions, the Age Pension and overseas pensions are excluded. A transfer balance account operates. Account based pensions result in a credit to the account at market value. Lifetime defined pensions are valued as 16 times 2017/18 income. Life expectancy and market linked pensions are valued as the annual entitlements times the remaining term. If the excess is not commuted, the entire income stream will not be eligible for the tax exemption for earnings from assets supporting the income stream. Also attracts “notional earnings” of the bank bill rate plus 7%.
Some non-commutable income streams have special rules. The additional income tax consequence is determined by reference to a taxpayer’s “defined benefit income cap” which is the general transfer cap divided by 16 i.e. $100,000 in 2017/18. Untaxed elements are not eligible for the 10% tax offset and taxed at full marginal rate. The taxed element or tax free element has 50% of the amount exceeding the defined benefit income cap included in assessable income.
One needs to identify if the TBC is going to be relevant and what course of action will be adopted. Taxpayers in excess of $1.6 million in superannuation will be required to use the unsegregated method to calculate the tax the fund must pay on earnings. Another change from 1 July, 2017 is that partial commutations will not count towards a person’s minimum drawdown requirement under the new rules.
TRANSITION TO RETIREMENT PENSIONS
From 1 July, 2017 superannuation fund members will lose the tax exemption of earnings on assets that support a transition to retirement pension (TTR). Members will still be able to start or maintain existing TTRs, but they should be reviewed. Whether it is worthwhile to continue with this strategy will depend on age and objectives of the strategy.
Capital Gains Tax (CGT) relief has been introduced to provide amelioration for individuals who will have to reduce the assets currently supporting superannuation income streams in order to comply with the TBC or TTR reforms. The relief effectively “locks-in” the CGT treatment of these assets up to 30 June, 2017.
The concept is simple, but the implementation is surprisingly complex. It may not be in the taxpayer’s interest to claim the relief.
Certain eligibility conditions must be met. The assets must have been held at 9 November, 2017 and continue to be held. There are different measures for segregated versus unsegregated assets methods of working out tax. Mostly, the unsegregated method will be used. The trustee can choose relief for some or all eligible assets. The assessable proportion is based on the fund’s exempt current pension income proportion for 2016/17. The trustee has the option to pay the tax on the notional gain in 2016/17 or defer the tax on the notional gain until the asset is sold. If this issue is relevant, I suggest you start to evaluate the issues without delay, even though the final aspects can’t be finalised until year end.