Several of the superannuation changes announced in the May 2016 Federal Budget are scheduled to take effect in July 2017. The impact these changes will have on estate planning will depend on how assets are currently structured and the role superannuation is playing in that structure.
Some of the most important changes are around the amounts we can have in superannuation and how we get that money into a super fund.
$1.6million Transfer Balance Cap
A $1.6 million cap is being placed on the total amount that can be transferred from an accumulation account into a retirement phase pension account. Each person will have one cap regardless of how many super funds they belong to.
The cap will be indexed periodically in $100,000.00 increments in line with the CPI and the cap applies to each member of the superannuation fund.
If at 1 July 2017 there is more than $1.6 million in the pension account the excess will need to be withdrawn or transferred back into an accumulation account where any earnings are subject to 15% tax.
On death the transfer of the pension phase account balance to a spouse or other entitled beneficiary either as a lump sum death benefit or as a revisionary pension may have the effect of pushing their account balance over the $1.6 million cap. Recipients in these circumstances are required to reorganise their affairs “as soon as practicable”. The ATO has indicated that they expect any reorganisation to be done within 6 – 12 months of the date of death. Whether this time frame is achievable remains to be seen. A grieving spouse might not be able to deal with the reorganisation of the super fund or there might be a challenge to the distribution of the death benefit which causes a delay. Hopefully the specific circumstances of each case will be considered before any penalties are applied.
People with account balances at, or close to, the $1.6 million cap will need to consider whether they should be revising their Death Benefit Nominations.
Annual Concessional Contributions Cap Reduced to $25,000.00
Concessional Contributions are the “before-tax” contributions made to superannuation. These include employer superannuation guarantee contributions and salary sacrificed contributions as well as self-employed tax deductable contributions. From July 2017 the concessional contributions cap will reduce from the current rate of $30,000.00 per year, $35,000.00 for over 50’s, to $25,000.00 per year.
The cap will be indexed periodically in $2,500.00 increments in line with increases in average weekly earnings.
From July 2018 people with an account balance of less than $500,000.00 will be able to carry forward any unused portion of the concessional contributions cap for a period of 5 years without penalty.
The ability to make concessional contributions will be improved with all workers under the age of 65, and those up to the age of 75 who meet the work test able to claim a tax deduction for personal contributions to super up to the cap. This will apply even if their employer is not allowing the employee to make pre-tax contributions through salary sacrifice.
Annual Non-Concessional Contributions Cap Reduced to $100,000.00
The ability to make after tax contributions to super is also being restricted. Currently there is an annual cap of $180,000.00 which can be carried forward over three years.
As of July 2017 the amount of non-concessional, after tax, contributions you can make will be reduced to $100,000.00 per year. Any unused balance can still be carried forward over three years.
The ability to make non-concessional contributions ceases if the members account balance exceeds $1.6 million.
If you consider that before these changes $540,000.00 could be paid into super over a three year period and now that has been reduced to $300,000.00 this will have a significant impact on people who were planning to make substantial contributions to superannuation in the last few years leading up to retirement.
Often people have spent the early part of their working life paying off the home mortgage, raising children and generally not having a lot of extra money to contribute to super. In later life when the demands of family are less onerous, spare cash can be funnelled into retirement savings. In the past an inheritance received prior to retirement might have been paid into super as a non-concessional contribution. All of this will still be possible but the new caps will apply.
As you can see the impact these various changes will have on estate planning will depend on the individual. It will certainly mean that additional contributions to superannuation (apart from the superannuation guarantee amounts paid by employers) will have to start from an earlier age to ensure sufficient funds are available for retirement. Lump sum contributions will have to be managed carefully to make sure that the contribution caps are not breached. The distribution of death benefits will also have to be considered carefully to make sure that the recipient does not inadvertently breach the various caps and limits. Ongoing discussions with financial planners and accountants will be essential so that any changes that are required can be managed in a timely manner.
Unfortunately given that governments of both persuasions have been unable to resist the urge to tinker with our superannuation these changes are unlikely to be the last we see.