02/06/2016

By Mark Chapman, Director of Tax Communications, H&R Block

There were a number of major changes made in the recent Budget which will impact many people. Broadly, the winners are low-income earners and those with lower super balances whilst those with high super balances (or those who hope to make large future contributions based on high incomes) will be the losers in the new arrangements.

The government wants to give Australians with super balances under $500,000 the flexibility to make extra contributions, particularly concessional contributions. It is also believes that those with balances over $1.6 million should no longer enjoy the same tax benefits as they do today. It also wants to refocus super as a scheme to fund retirement, not as a vehicle to avoid tax or facilitate estate planning.

So, what are the specific measures and what will they mean for you?

Lifetime non-concessional cap

The most controversial change in the Budget proposes a $500,000 lifetime cap on non-concessional super contributions. These are contributions that you make out of your post-tax income. This proposal has created quite a fuss because some allege that the change is retrospective since it takes into account all such contributions already made right the way back to 1 July 2007 (meaning that you could already have hit the $500,000 threshold so you can make no future non-concessional contributions). 

This is a significant reduction from the current cap ($180,000 per year) and will force many to revisit their savings strategy heading into retirement, especially for those who were looking to sell a rental property or downsize their family home in order to pay the proceeds into their super fund.

There is some good news however; you will now be able to make these types of contribution all the way to the age of 75. Currently, if you want to make non-concessional contributions over the age of 65 you need to meet a work test to be eligible. This test is being abolished.

Reduction in the concessional cap

The annual concessional cap, which is currently $30,000 for those under the age of 50 and $35,000 for those over 50, will be reduced to $25,000 from 1 July 2017. Concessional contributions are those made out of pre-tax income (such as the super contributions paid into your fund each pay by your employer).

However, for the first time, it will be possible to make personal tax-deductible contributions into super. This provides added flexibility if you have a year with a significantly higher income and have some cash spare to put into super. It presents a particular opportunity for women who may have may have taken time out of the workforce and others with irregular earnings patterns.

Other beneficiaries of this change include:

  • individuals who are partially self-employed and partially wage and salary earners; and
  • individuals whose employers do not offer salary sacrifice arrangements.

In addition, if your super balance is less than $500,000 any unused concessional limit can be carried forward for up to five years, starting on 1 July 2017.

Major changes affect those with transition to retirement (TTR) pensions

For those with, or planning to set up, a TTR, there were some unwelcome changes in the Budget. The tax benefits currently received on the earnings from such pensions will be taken away from 1 July 2017.

Introduction of Low Income Superannuation Tax Offset (LISTO)

This replaces (and is very similar to) the current Low Income Superannuation Contribution, which was due to be abolished as of 30 June 2017. The LISTO is designed to support low income earners to save for their retirement by ensuring they don't pay more tax on their contributions than they do on their take-home pay.

The LISTO is a non-refundable tax offset, based on the tax paid on concessional contributions made on behalf of low income earners. The offset will be capped at $500.

The LISTO will apply to fund members with an adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf and will be applied automatically by the ATO.

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Find your nearest H&R Block office and book an appointment online.

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