SMSFs with related party borrowings under ATO scrutiny By Charis Liew on 01/10/16 - Mins to read: 6 minutes The Federal Government has watered down many of the most controversial reforms in its latest round of changes to superannuation policy. On the 15th of September, Treasurer Scott Morrison, announced a number of further changes to the superannuation system, modifying aspects of what had previously been announced as part of the 2016-17 Federal Budget. The announcement follows extensive public consultation and debate regarding the impact of the proposed changes, in particular the retrospective nature of the $500,000 lifetime non-concessional contribution cap. Continuous tinkering of the superannuation system makes future planning a challenge for self-funded retirees. To help you navigate the superannuation reform proposals, we’ve prepared a summary of what’s currently still on the table, and what’s out. Contributions Pre-Budget Non-concessional contributions are contributions for which no tax deduction is claimed. Prior to Budget night these contributions were limited to $180,000 per year (or $540,000 every three years for individuals aged under 65 utilising the “bring forward” rule). Proposed Budget Measure A $500,000 lifetime limit on non-concessional contributions. The most controversial of measures, it was proposed the cap be retrospective from 1 July 2007. Status Scrapped Based on the Treasurer’s announcement, this has been replaced with an annual $100,000 non-concessional contribution cap (subject to $1.6M superannuation balance limit) effective from 1 July 2017. Pre-Budget Annual limits to concessional (tax deductable) contributions are broadly: $30,000 for those aged under 50 $35,000 for those aged 50 and over Proposed Budget Measure The Concessional Contribution limit to be reduced to $25,000, regardless of the individual’s age. Status Legislation drafted Introduced 27 September 2016. Pre-Budget There is currently no provision for making additional ‘catch-up’ concessional contributions. Proposed Budget Measure Individuals with superannuation balances of less than $500,000 will be permitted to make additional concessional contributions every 5 year rolling period from 1 July 2017, if they have not exhausted their concessional contribution limit in prior income years. Status Modified This has now been deferred to a start date of 1 July 2018. Pre-Budget Division 293 imposes an additional 15% tax on concessional contributions for individuals with adjusted taxable income of $300,000 or more. Proposed Budget Measure The reduction of the Division 293 tax income threshold from $300,000 to $250,000, effective 1 July 2017. Status Legislation drafted Introduced 27 September 2016. Pensions Pre-Budget Income earned by a superannuation fund on assets supporting a pension(s) is tax free. Proposed Budget Measure A cap of $1.6M on the transfer of your super balance from accumulation to pension phase. Status Legislation drafted Introduced 27 September 2016. Pre-Budget Individuals can only claim a personal tax deduction for super contributions if less than 10% of total assessable income (including reportable fringe benefits and reportable employer super contributions) is attributable to ‘employment’ related activities (the “10% test”). Proposed Budget Measure Removal of the “10% test” to claim a tax deductible concessional contribution, effective 1 July 2017. Status Legislation drafted Introduced 8 September 2016. Pre-Budget Transition to Retirement Income Streams are income streams (pensions) paid to members who have reached their preservation age (currently 56) but who have not yet retired. The income earned is tax-free. Proposed Budget Measure Removal of the tax-free status of income earned on assets supporting Transition to Retirement Income Streams, effective 1 July 2017. Status Legislation drafted Introduced 27 September 2016. Pre-Budget To be eligible to make personal contributions or to receive additional employer (salary sacrifice) contributions, individuals aged between 65 and 74 must satisfy a “work test”. Proposed Budget Measure Removal of the “work test” effective 1 July 2017. Status Scrapped This was part of the draft legislation introduced 8 September 2016, but based on the Treasurer’s announcement, will be removed entirely. Low Income offsets Pre-Budget No low-income offset provisions. Proposed Budget Measure Introduction of a Low Income Superannuation Tax Offset, effective 1 July 2017. Status Legislation drafted Introduced 8 September 2016. Pre-Budget A low-income spouse (with taxable income of less than $10,000) may receive a tax income offset. Proposed Budget Measure Increase to the Low Income Spouse Offset from $10,800 to $37,000, effective 1 July 2017. Status Legislation drafted Introduced 8 September 2016. Other Pre-Budget The anti-detriment provisions allow a superannuation fund to receive a refund of contributions tax paid in the event of a member’s death, which is then paid as a lump sum to an eligible beneficiary. Proposed Changes Removal of the anti-detriment provisions, effective 1 July 2017. Status Legislation drafted Introduced 27 September 2016. The Good The retrospective impact of the $500,000 lifetime limit on non-concessional contributions has been removed. This measure would have significantly impacted on some individual’s ability to build, or rebuild, their superannuation. Small business owners, divorcees and women returning to the workforce were likely to be the most affected. The increase in the Low Income Spouse Offset will benefit a large number of individuals with a lower income who would otherwise pay a higher rate of tax on superannuation contributions than their other income. The Bad The increased restrictions on contributions (concessional and non-concessional) as compared to the pre-Budget situation will make it harder for many people to make the contributions necessary to fund their retirement. This means that you will need to start focusing on building your superannuation at a much earlier age, if you are to use it to full effect. The changes will hit individuals who are nearing 65 (but were relying on making large contributions to build their superannuation) the hardest. The deferral of some of the measures adds more uncertainty and complexity to the system, as does the pattern of continual change to the superannuation law from both sides of the political divide. The Opportunity Individuals should look at non-concessional contributions strategies, in particular for anything up until 30 June 2017 which (apart from the ‘bring-forward’ non-concessional contributions cap) will not be affected by the changes outlined above. Treasury has since released further information regarding the proposed operation of the transitional rules for the bring-forward non-concessional contributions caps which have been triggered in the 2015-16 or 2016-17 financial years. Based on the announcements, the transitional bring-forward cap for the current year could be limited to $380,000 or $460,000, subject to the individual’s circumstances. Additionally, because the $500,000 limit on non-concessional contributions has been lifted, the popular “re-contribution strategy” is now a possibility again for the current (and potentially future) financial year. The re-contribution strategy allows you to convert the taxable component of your superannuation benefits into a tax-free component. For a review of your superannuation strategy and more information on how the proposed changes may impact you, please contact your local William Buck advisor. The information provided in this article is based on our interpretation of relevant superannuation and taxation laws and guidance from Treasury as at 22 September 2016.