The Government has released for public consultation the second round of draft legislation to implement the following measures announced in the 2016/17 Federal Budget:
- Introduce a $1.6m transfer cap
- Lower the Division 293 tax income threshold from $300,000 to $250,000
- Reduce the concessional contributions cap to $25,000
- Allow catch-up concessional contributions
- Improve the integrity of Transition to Retirement Income Streams
- Remove the anti-detriment provision
- Remove barriers to innovation in the creation of retirement income stream products
The draft legislation provides detail on the operation of these measures and provides answers to many questions that arose following the release of the Budget papers in May.
Summary of key measures
The key measures relating to SMSFs are listed below.
Transfer balance cap
From 1 July 2017, it is proposed that a $1.6 million cap (the transfer cap) be imposed on the amount of capital that can be transferred to the retirement phase of superannuation. This cap is intended to limit the extent to which the tax-free income earned by the fund on retirement phase accounts can be used by high wealth individuals.
What we know
- If an individual breaches their transfer balance cap, the Commissioner of Tax will direct their super fund to commute (reduce) their retirement phase interests by the amount of the excess (including notional earnings on the excess) to rectify the breach. The individual will also be liable for excess transfer balance tax on their notional earnings to neutralise the benefit received from having excess capital in the tax-free retirement phase. The tax rate on notional earnings increases for second and subsequent breaches.
- The transfer balance account will operate in a similar way to a bank account balance or the balance of a general account ledger. Amounts transferred by an individual to the retirement phase will give rise to a credit in their transfer balance account. Certain transfers out of the retirement phase give rise to a debit in their transfer balance account.
- Generally, a credit arises in an individual’s transfer balance account when they become the recipient of a retirement phase income stream. Transition to Retirement Income Streams will not be classified as retirement phase income streams and therefore will not be added to an individual’s transfer balance account. However, the value of a reversionary superannuation income stream at the time the reversionary beneficiary becomes entitled to the income stream is added to the beneficiary’s transfer balance account.
- An individual’s transfer balance account is debited when they commute capital from the retirement phase of superannuation. This facilitates roll-overs and ensures that an individual’s transfer balance account reflects the net amount of capital an individual has transferred to the retirement phase of superannuation. An individual’s transfer balance account also receives a debit for certain other events that reduce the value of the individual’s retirement phase assets. These events will include contributions of structured settlement payments, certain losses suffered as a result of fraud or dishonesty, bankruptcy where the contribution has been made with the intent to defeat creditors and Family Law payment splits.
- The legislation will be amended to facilitate the ability for individuals to make partial commutations and receive a debit for the full value of that commutation against their transfer balance account. This will ensure that partial commutations do not count towards the minimum annual payment requirement for superannuation income streams. The change is being made to prevent situations which may be inconsistent with the object of the minimum draw down requirements (i.e. individuals being able to cycle their minimum superannuation income stream benefits back into their income stream without breaching the cap).
- Children who receive a superannuation income stream from a deceased parent will be subject to modifications. The modifications will generally allow the child to receive their share of the deceased’s retirement assets without impacting the child’s future retirement benefit entitlements. This recognises that most children are currently required to commute a superannuation income stream by age 25.
- The value of lifetime pensions and other defined benefit income streams will be counted towards an individual’s transfer balance cap. Excess transfer balance tax will not be imposed for a breach of the transfer balance that relates to certain defined benefit income streams but the income received from these pensions will be subject to additional income tax.
- Transitional rules apply to transfer balance cap breaches of less than $100,000 that occur on 30 June 2017. Such breaches will not give rise to notional earnings or an excess transfer balance tax liability if they are rectified within 60 days. The rationale for this relief is that it may be difficult for individuals with existing superannuation income streams to predict their retirement phase balances as at 30 June and ensure they are not in breach of their $1.6 million transfer balance cap. Small breaches of less than $100,000 are likely to be unintentional.
- Transitional provisions provide Capital Gains Tax (CGT) relief. Superannuation providers will be able to reset the cost base of assets reallocated from the retirement phase to the accumulation phase prior to 1 July 2017. This relief will be available for providers in respect of the assets held for individuals who choose to transfer amounts from the retirement to the accumulation phase to comply with the transfer balance cap or new Transition to Retirement Income Stream (TRIS) arrangements.
- Where these assets are already partially supporting accounts in the accumulation phase (i.e. a non-segregated fund), tax will be paid on this proportion of the capital gain made prior to 1 July 2017. This tax may be deferred until the asset is sold, for up to 10 years.
From 1 July 2017, the annual cap applying to concessional contributions will be reduced to $25,000 (from $30,000 for those aged under 49 at the end of the previous financial year – and $35,000 otherwise).
From 1 July 2017, the income threshold at which high-income earners pay additional tax (Division 293 tax) on their concessionally taxed contributions will be reduced from $300,000 to $250,000.
What we know
- From 1 July 2017, the $25,000 concessional contributions cap will apply to all individuals regardless of age.
- Currently, increases in the cap are rounded down to the nearest multiple of $5,000. Amendments will be made so that increases are instead rounded down to the nearest multiple of $2,500, which means there will be more frequent increases in the concessional and non-concessional caps as a result of indexation.
- Division 293 tax applies to an individual for an income year if the total of the individual’s combined income for surcharge purposes and concessionally taxed contributions exceeds $250,000.
- Amendments will be made to ensure concessional contributions to constitutionally protected funds and unfunded defined benefit schemes will count towards an individual’s concessional contributions cap. Currently, contributions to constitutionally protected funds do not count towards an individual’s concessional contributions cap. This amendment will ensure concessional contributions included as a result of the changes are not treated as excess concessional contributions. However, counting such contributions towards an individual’s concessional contributions cap will limit their ability to make further concessional contributions.
Catch-up concessional contributions
Individuals will be permitted to make additional concessional contributions in a financial year by utilising unused concessional contribution cap amounts from the previous five financial years, provided that their total super balance at 30 June of the previous financial year was below $500,000.
What we know
- An individual cannot have an unused concessional contributions cap for a financial year earlier than the 2018/19 financial year. This means that the first year in which an individual will be able to make additional concessional contributions by applying their unused concessional contributions cap amounts is the 2019/20 financial year.
- Individuals will be entitled to make catch-up contributions only if they have a total super balance of less than $500,000 on 30 June of the previous financial year, and have unused concessional contributions cap amounts from one or more of the previous five financial years.
- An individual’s total super balance includes the value of their superannuation interests in the accumulation phase, the balance of their transfer balance account (adjusted for the value of the individual’s interests in account-based income streams in the retirement phase), and ‘in transit’ rolled-over superannuation benefits.
Innovative income streams and integrity
From 1 July 2017, the earnings tax exemption that currently applies to Transition to Retirement Income Streams (TRISs) will be removed and, to support the operation of the transfer balance cap, new integrity measures will apply to SMSFs and small APRA funds.
What we know
- The earnings tax exemption provisions will be reframed so that the tax exemption will only apply where the superannuation income stream is in the ‘retirement phase’. A superannuation income stream will not be considered to be in the retirement phase if it is a TRIS – therefore no tax exemption will apply to the assets supporting the payment of a TRIS.
- SMSFs and small APRA funds will not be able to use the segregated method to determine their earnings tax exemption for an income year if at least one member of the fund has a total super balance that exceeds $1.6 million, and that person is in the retirement phase. This change is being made to stop members in both the pension and accumulation phase moving assets between the segregated pools to avoid capital gains tax.
- The legislation will be amended to ensure individual’s in recipient of a TRIS will not be able to elect to treat superannuation income stream benefits from the TRIS as lump sums.