At the time of writing, the new Parliament released the first batch of proposed changes to the superannuation regime, and among these was the announcement that the proposed $500,000 lifetime non-concessional cap is to be scrapped.
(Non-concessional contributions are the most common type of superannuation contribution and are personal contributions made by the superannuation fund member for which no income tax deduction is claimed. From 1 July 2014 non-concessional contributions are subject to a yearly cap of $180,000 for members 65 or over but under 75 or $540,000 over a three-year period for members under 65. These are being changed.)
These proposed changes are still in exposure draft form and may be subject to further tweaking.
The Government also revealed that:
- The non-concessional contributions cap is going to be $100,000 per year, starting from July 1, 2017 (instead of the current $180,000 cap)
- Taxpayers with a superannuation balance of more than $1.6 million will no longer be eligible to make non-concessional contributions from the same date.
Also, these previously announced measures will not proceed, and have been postponed or abandoned:
- commencement of catch-up contributions using the unused caps from the prior five years for people with balances of $500,000 is postponed and to start from July 1, 2018 and
- harmonization of acceptance of contribution rules for those aged 65 to 74 will not proceed at all
The proposed rules that remain intact and will continue:
- the rule allowing fund members to “bring forward” three years’ worth of non-concessional contributions for individuals aged under 65, and
- the requirement to meet the “work test” for individuals over the age of 65 in order to make non-concessional contributions.
IMPLICATIONS OF THESE CHANGES
Trustees required to finalise contracts that depended on large non-concessional contributions can be at ease now, as the caps and rules regarding non-concessional contributions will operate as is currently the case. The same applies to trustees who are required to restructure their limited recourse borrowing arrangements (LRBAs) in order to comply with the ATO’s benchmark terms.
The work test continues to apply to taxpayers over the age of 65 seeking to make non-concessional, personal concessional, and salary sacrifice contributions.
CHANGES TO ELIGIBILITY FOR DEDUCTIONS FOR PERSONAL CONTRIBUTIONS
At present, the eligibility for a tax deduction for personal super contributions is subject to a maximum earnings condition. Among other proposed amendments is one that will remove the requirement that less than 10% of the sum of an individual’s
- Assessable income
- Reportable fringe benefits total, and
- Reportable employer superannuation contributions
…was attributable to employment or similar activities of the individual in the financial year in which a deduction for the personal contribution is sought.
Removing this condition will mean that a taxpayer will be able to claim a deduction for making personal super contributions to a complying fund irrespective of their employment circumstances.
This will enable employees to claim a deduction for personal contributions without resorting to salary sacrifice arrangements. Note however that salary sacrifice agreements will continue to be relevant because they reduce the PAYG withholding amounts from salary and wages hence increasing the take-home pay.
Contractors and self-employed, who are essentially providing labour, will also be able to claim a deduction for personal super contributions. This is a significant improvement over the current state of affairs, where contractors are disadvantaged in terms of choosing how much of their pre-tax pay is going into superannuation.
Certain contributions to defined benefit as well as untaxed superannuation funds will not entitle the contributing taxpayer to a deduction.
Please contact us if you have more questions regarding these proposed changes, and also about further reforms expected in the SMSF arena.
Disclaimer: All information provided in this newsletter is of a general nature only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information