Further changes to apply from 1 July 2017
As highlighted within a previous blog by one of my colleagues in December 2016, a majority of the superannuation reforms initially announced within the 2016/17 Federal Budget have now become law.
The new reforms include significant changes to the superannuation contributions caps with most taking effect from 1 July 2017.
Superannuation contributions caps have already been subject to numerous changes over the last 10 years, both in terms of the specific cap amounts and the implications of exceeding them. Whilst the dynamic nature of superannuation laws has inevitably created confusion and uncertainty, it is vital that the upcoming changes are understood and considered well in advance of 30 June 2017 to ensure that:
- Opportunities to access the significant tax concessions available via the superannuation system are maximised;
- Penalties for exceeding contributions caps are avoided where possible; and
- Retirement goals that have been developed based on current superannuation laws are still achievable.
Concessional vs Non-Concessional Contributions - What's the difference?
Initially it is important to understand that superannuation contributions are generally classified as either “concessional” or “non-concessional”.
Concessional contributions (known as before-tax, deducted contributions) are generally made from pre-tax sources (tax-deductible) and are subject to 15% contributions tax. Examples include employer contributions (superannuation guarantee and salary sacrificed amounts) and personal contributions claimed as a tax deduction. Division 293 Tax can also apply to concessional contributions for high income earners.
Non-concessional contributions (known as after-tax, undeducted contributions) are generally personal contributions made from after-tax sources (not tax-deductible) and are not subject to contributions tax. Excess concessional contributions can also be treated as non-concessional contributions. However it is important to note that some contributions are specifically excluded from being non-concessional contributions (i.e. government co-contributions, contributions arising from small business CGT concessions within CGT caps and contributions arising from certain personal injury compensation payments).
Separate caps apply to both concessional and non-concessional contributions to limit the amounts that can be contributed tax-effectively into superannuation. The caps are intended to maintain the equitability and sustainability of the superannuation system.
Key changes from 1 July 2017
Below is an overview of the key changes to the superannuation contributions caps, and other related contribution reforms, that will apply from 1 July 2017:
- The concessional contributions cap will reduce to $25,000 per annum for all individuals (regardless of age). Below is a comparison to the concessional contributions caps that currently apply for the 2017 financial year:
|AGE (as at 30 June of preceding year)||2016/17||2017/18|
|Under 49 years||$30,000||$25,000|
|49 years +||$35,000||$25,000|
- The ‘substantially self-employed’ 10% test for claiming a tax deduction for personal contributions will be removed (currently subject to the level of employment earnings). This change will reduce the need for superannuation salary sacrifice arrangements with employers.
- The adjusted annual threshold for Division 293 Tax (additional 15% contributions tax on concessional contributions for high income earners) will reduce from $300,000 to $250,000.
- From 1 July 2018, individuals with superannuation benefits of less than $500,000 (as at 30 June of the preceding year) will be allowed to carry forward unused concessional contributions cap amounts for up to 5 years.
- The non-concessional contributions cap will reduce to $100,000 per annum for all individuals (subject to a modified 3-year bring forward rule and new $1.6 million cap detailed below). The current non-concessional contributions cap of $180,000 will continue to apply up to 30 June 2017.
- Individuals with superannuation benefits in excess of $1.6 million (as at 30 June of the preceding year) will have a non-concessional contributions cap of nil and will no longer be entitled to government co-contributions.
- The 3-year bring forward rule for individuals aged under 65 years will continue to apply facilitating non-concessional contributions of up to $300,000 in a single year. However modified rules will apply for individuals with superannuation benefits in excess of $1.4 million. Transitional rules will also apply for individuals who made non-concessional contributions within either the 2016 or 2017 financial years which triggered the current bring forward rules.
Limited time to act!
Given that a majority of the above changes are to apply within the next 5 months, there is a limited time to reassess your current and planned superannuation contribution levels and to take action if required. Accordingly, we recommend that you review your personal financial position in light of the above changes as soon as possible (in conjunction with other superannuation reforms that will also apply from 1 July 2017).
If you are unsure of how the above changes will impact on your personal circumstances, please do not hesitate to contact BLG Business Advisers on (02) 4229 2211 or online to arrange an appointment with one of our experienced advisers.