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Changes to Superannuation
The 2016 changes to superannuation are designed to improve the sustainability, flexibility and integrity of our superannuation system. As Australia’s population ages and fiscal pressures increase, it is important that superannuation tax concessions are affordable and well-targeted, and that all Australians are encouraged to save for their own retirement.
From 1 July 2017, a $1.6 million transfer balance cap will limit the amount of superannuation a person can move into his or her tax-free earnings ‘retirement phase’ account. Amounts in excess of $1.6 million can remain in a superannuation ‘accumulation account’ and continue to be taxed at a concessional rate of 15 per cent (10 per cent on capital gains). There will continue to be no limit on the funds that an individual can hold in superannuation overall. If a person’s superannuation ‘retirement phase account’ exceeds $1.6 million on 1 July 2017, they will need to transfer the excess into their superannuation ‘accumulation phase’ account, or they can withdraw it from super and make alternative investments. Importantly, if a person’s ‘retirement phase’ savings grow beyond $1.6 million they will not be required to remove the excess amounts as the cap only applies to the balance that is transferred to the ‘retirement phase’ account.
Superannuation will continue to attract very generous tax concessions. Earnings in the ‘retirement phase’ account will continue to be totally tax-free. Additionally, earnings in superannuation accumulation accounts (but not the capital in the account) will continue to be subject to the 15 per cent concessional tax rate , and amounts withdrawn from these accounts will continue to be tax-free (after the age of 60).
Following extensive consultation, the Government recently announced refinements to the reform package. The $500,000 lifetime non-concessional cap will not proceed; it will be replaced by a new measure to reduce the existing annual non-concessional (after tax) contributions cap from $180,000 per year to $100,000 per year from 1 July 2017. Additionally, individuals will continue to be able to ‘bring forward’ three years’ worth of non-concessional contributions. People with a superannuation balance of more than $1.6 million will no longer be eligible to make non-concessional (after tax) contributions from 1 July 2017. By limiting eligibility to make non-concessional contributions to those with less than $1.6 million in superannuation, these measures target tax concessions at those who have an aspiration to maximise their superannuation balance and reach the transfer balance cap of $1.6 million.
This change will cost the Budget $400m over the forward estimates. In order to pay for this change, we will not proceed with the Budget measure to harmonise contribution rules for those aged 65 to 74. The Government will instead keep the current arrangements that allow people to contribute to their superannuation up to 75 years if they are working. The Government will also defer the commencement date of the proposed catch-up concessional superannuation contributions by 12 months - this will now start on 1 July 2018. Overall, the costs of the changes to the Government’s reforms are more than offset over both the forward estimates and the next ten years.
The Government is also better targeting tax concessions by reducing the concessional contributions cap so that individuals can contribute up to $25,000 per annum pre-tax to superannuation. From 1 July 2018 flexibility will be improved by allowing the ‘catch up’ of unused portions of concessional contributions on a rolling five year basis for individuals with balances under $500,000. This will help people with interrupted work patterns.
From 1 July 2017, individuals with incomes (including superannuation) greater than $250,000 will be required to pay 30 per cent (rather than 15 per cent) tax on their concessional contributions; this is consistent with current treatment for people with incomes over $300,000. The Government will also make broadly commensurate changes to the rules applicable to members of defined benefit schemes and constitutionally protected funds.
Australia needs a well-targeted superannuation system that supports and encourages all Australians to save for their retirement. Better targeting superannuation tax concessions will improve the sustainability and integrity of the superannuation system, giving greater confidence and certainty. Further information regarding the Government’s changes is available at http://www.treasury.gov.au/Policy-Topics/SuperannuationAndRetirement/Superannuation-Reforms