The 2017 financial year saw significant super changes to both pensions and contributions. These changes caused considerable confusion, with many struggling to implement strategies and take steps to comply with the new requirement before 30 June 2017. But now that 30 June 2017 has come and gone, it begs the question, “where to next for super?”
Clearing up the confusion
As the dust settles, and we look to super planning for 2018 and beyond, particularly for those people with self-managed super funds (“SMSFs”), it’s worth clearing up some common misunderstandings regarding the recent super reforms.
1. You can still make contributions, with certain exceptions
You can still make non-concessional (after tax) contributions, but the caps have reduced to $100,000 per year (or $300,000 every 3 years for those under 65 years). However, you will need to take extra precautions if your total super balance nears $1.6 million, with no further non-concessional contributions allowed once your total super balance exceeds $1.6 million.
If you’re eligible, you can also continue to make concessional (tax deductible) contributions, although the cap has been reduced to $25,000 per year for everyone.
A lesser known fact is that you may be able to contribute up to an additional $1.445 million to super from the sale of eligible small business assets. Known as the “CGT cap”, the additional contributions could potentially be made without counting towards your concessional or non-concessional caps. But beware, the ability to access the CGT cap on the sale of small business assets is based on very intricate laws and interpretations, and specialist tax advice from your trusted tax adviser would be required.
2. You don’t need to pull out your superannuation if it exceeds $1.6 million
This has been one of the biggest misconceptions I’ve encountered with clients – you don’t need to pull out any excess super balance above $1.6 million! Fundamentally, the $1.6 million threshold is limiting the amount of assets in super whose earnings are taxed at 0% (or in other words, capping the amount that you can hold in ‘pension phase’).
By limiting the amount you can move into pension phase, any super balance above $1.6 million is held in ‘accumulation’, and therefore any earnings attributable to the accumulation balance taxed at 15% (or 10% for capital gains).
Nonetheless, super is still an attractive vehicle for wealth and retirement savings, and remains one of the most concessionally taxed structures for investments.
3. Action is still required for pensions, even if you don’t have $1.6 million in super
The amount you put into pension phase (or take out of pension phase) still needs to be reported on a timely basis. Just because you have less than $1.6 million in pension phase, does not mean you’re free from the reporting rules – every time you put an amount into pension phase (other than a transition to retirement pension), super funds continue to have a reporting obligation to the Australian Taxation Office.
4. The tax benefits of transition to retirement pensions have changed
A pension is available where you have attained a minimum age (typically between 55 and 60) and are transitioning into retirement. Prior to 30 June 2017, these transition to retirement pensions were an attractive way to partially access your super, with little to no tax cost to you or the super fund.
From 1 July 2017, these pensions are no longer as tax effective as they once were, with earnings on a transition to retirement pension in super taxed at 15% (and no longer at 0%). The tax for the recipient, however, has not changed (and could be nil in some circumstances).
5. Capital Gains Tax relief for the 2017 year is still available for eligible super funds
As a result of the $1.6 million cap on the amount that can be transferred into pension phase, the future sale of some assets in super may result in a capital gains tax (“CGT”) liability arising for the fund. Under the former rules, this may not have been the case as there was no cap on the amount that could be held in pension phase (and thus no limit on the amount of gains that could be taxed at 0%).
Under the 2017 super changes, CGT relief was introduced to defer (or potentially disregard) tax that may be payable on a future sale of super fund assets to the extent that the gain in the value of the asset had accumulated up to 30 June 2017 (i.e. to defer or disregard the unrealised gains at 30 June 2017).
The transitional CGT relief works by resetting the cost base of your super fund’s assets to market value, usually as at 30 June 2017. Application of the relief can be confusing, so seeking out help from your super fund accountant and administrator can assist you with making the election.
Super fund trustees did not have to take action before 30 June 2017 to opt in – the irrevocable election to apply the transitional CGT relief must be made when your super fund lodges its 2017 tax return, provided it does so before its due date (and if you are using a tax agent, this due date could be as late as 15 May 2018).
Superannuation: the future and beyond?
In 2007, major reforms were introduced to make super ‘simpler’ – ten years on, the 2017 changes have well and truly turned ‘Simpler Super’ on its head, which presents interesting challenges for super fund trustees and members, together with their advisors, going forward.
Added to the 2017 changes is the push towards more timely reporting of certain events relating to your super fund, such as the amounts you move in and out of pension phase. From 1 July 2018, some SMSFs will need to report to the ATO on a quarterly basis regarding any changes to pension arrangements. Many SMSFs will be eligible for an exemption from the reporting changes, but it is important you check with your William Buck advisor.
The complexity of the super reforms sees an increasing need for trusted advisors who can help super fund trustees and members navigate these new rules. Not only will super funds require a super accountant and administrator, but the expertise of a financial advisor, estate planning lawyer, and other super specialists. Reaching out to your trusted advisors will not only ease the stress of trying to understand these super reforms, but will allow for planning opportunities to be spotted and appropriate strategies put in place.
The information provided in this article is based on our interpretation of relevant superannuation and taxation laws and guidance from Treasury as at 25 October 2017.
Disclaimer: The contents of this article are in the nature of general comments only, and are not to be used, relied or acted upon with seeking further professional advice. William Buck accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. Liability limited by a scheme approved under Professional Standards Legislation.