Federal Budget Q&A
Following the May budget, the IOOF TechConnect team answer some of the most common questions they get.
Is it appropriate to provide advice based on the Budget announcements?
It is important to appreciate that the Budget announcements are not law, they are proposals only. It may be appropriate to consider future strategies for clients based on the announcements, and every client will be impacted differently.
$1.6 million pension threshold
How was the figure of $1.6 million per person determined?
We understand that this is the maximum amount that the Government believes is required to provide a comfortable retirement.
What happens if the earnings rise above the $1.6million cap?
According to the announcement, earnings of the pension account that cause the balance to exceed the $1.6 million cap will not be affected. They will continue to benefit from the tax exemption. The cap applies to the 'amount transferred', and the investment earnings on the amounts once transferred in, will not affect the cap.
Importantly, if the account balance reduces due to negative investment returns (or pension payments) the cap will also not be affected. This means that once the $1.6 million cap has been used it is unlikely that further amounts can be transferred to a pension account.
If clients make a lump sum withdrawal from an account-based pension after 1 July 2017, will this reduce their used cap?
No. The cap relates to the maximum amount that can be converted to a pension. Subsequent draw downs and investment returns are not relevant.
Does the $1.6 million retirement cap relate to transition to retirement pensions?
We do not believe so, although this is not clearly identified in the announcement. Given the intention to tax all earnings of transition to retirement pensions as well as the intention to limit tax free earnings on pension accounts via the $1.6 million transfer balance cap, it suggests that transition to retirement pensions will not be included as part of the $1.6 million cap.
Does the $1.6 million retirement cap relate to term allocated pensions and complying pensions?
The wording in the Budget papers and supporting material does not provide sufficient detail. However, we expect that it is intended to.
Lifetime non-concessional contributions cap
How do you find out the lifetime cap used so far?
The ATO will be the source of truth for a person’s non-concessional contributions cap. At this stage it is unclear how a person will contact the ATO to retrieve this information.
Many super funds will hold accurate records however they will not be able to identify the non-concessional contributions component since 1 July 2007 of monies rolled in.
If someone has made a $540,000 non-concessional contribution already this financial year, and when counting back the non-concessional contribution to July 2007, they are obviously over the proposed $500,000 cap, do the excess contributions need to be withdrawn?
Based on the wording in the announcement, if a person has exceeded the $500,000 lifetime cap before the budget announcement they will not be required to withdraw any excess.
However, their cap will be fully utilised and they will not be able to make any future non-concessional contributions.
Can the lifetime non-concessional contribution be made in one year?
The context of the super amendments would suggest the lifetime cap can be used all in one contribution.
Is the $500,000 lifetime cap coming with an annual limit?
There was no mention of any limitations other than the $500,000 since 1 July 2007.
Will a transfer into super from an overseas super fund be treated as a member contribution within the $500,000 lifetime limit?
All international transfers are non-concessional contributions, with the exception of any growth component that the client elects to have taxed at 15 per cent in the fund. We do not expect there to be any changes in this respect
Based on the current announcement, any excess will need to be withdrawn once an ATO release authority is received, though clients will have the opportunity to withdraw any excess. Any excess not withdrawn will be subject to the excess non-concessional contributions regime.
The release of any amount transferred from a UK fund may have severely adverse consequences as it would likely constitute an unauthorised payment.
How does the lifetime cap link to the small business CGT concessions?
There is no specific discussion of this in the Budget announcement thus we expect the arrangements to remain. Currently, the CGT cap is a separate cap to the non-concessional contributions cap and we expect that this will continue.
$25,000 concessional contributions cap and five year catch up
How will the ATO track the concessional contribution cap?
Currently the ATO receives contributions data from superannuation funds and matches this data with a person's income tax return. This process will continue and the ATO will have ongoing responsibility for monitoring contribution caps.
To be eligible for "catch up" concessional contributions, does the $500,000 superannuation balance cap include super balances in accumulation and pension phase?
The wording in the Budget papers and supporting material does not provide sufficient detail. However, we expect that all superannuation accounts will be included, accumulation accounts and pension accounts.
If someone has less than $420,000 in super, can they use 5 years of $25,000 and therefore place $125,000 into their super or are they limited up to the $500,000 limit?
The wording in the Budget papers and supporting material does not provide sufficient detail. However, we expect that integrity measures will be incorporated to ensure that a person cannot make a contribution using the catch-up provisions that will result in their account balance exceeding $500,000.
The catch-up provisions will be retrospective. A person will need to have made no contributions for five years in order to make a $125,000 contribution in year five.
Does one need to be employed to use the catch up?
The wording in the Budget papers and related material indicates that anyone who is able to make concessional contributions can take advantage of the rule, provided that they meet the other required conditions such as super balance not exceeding $500,000.
The government is also proposing to remove the work test for those age 65 to 74, so this implies that a person between those ages does not have to be working to make the catch-up contributions. If a person is 75 or over, the contributions rules will remain the same - currently for such people only superannuation guarantee contributions can be accepted by the super fund - so they will need to be employed.
The work test is proposed to be removed for those over age 65 but under 75. Can these clients contribute up to the non-concessional amount of $500,000 as well as the concessional contribution of $25,000 and can they also utilise the five year catch-up?
Yes, individuals will be able to use both the non-concessional contributions cap and the concessional contributions cap. The catch-up provisions will be retrospective, a person will need to have made no contributions for five years after legislation is introduced in order to make a $125,000 contribution in year five.
Tax deductible contributions
If a client is retired and holds investment properties with rental income can they now make a personal super contribution of the rental income into an accumulation account?
The announcement was that anyone under 75 with taxable income will be able to make a personal contribution up to the proposed cap of $25,000 per annum and claim a tax deduction.
Division 293 tax
What is the definition of income on the $250,000 income cut off for extra tax on concessional contributions?
The definition of adjusted taxable income remains unchanged and includes:
- taxable income
- reportable fringe benefits
- total net investment losses
- reportable superannuation contributions.
Transition to retirement
When can taxpayers no longer elect to treat transition to retirement payments as lump sums for tax purposes?
The proposal applies from 1 July 2017.
In addition, the proposal will apply to all pensions and it will no longer be possible to make a withdrawal from a pension and have it taxed as a lump sum payment. It will be possible to make lump sum withdrawals from accumulation accounts.
What if you have CGT tax losses carried forward regarding the 15% tax.
The proposal is that the taxation is the same as in accumulation phase. Accordingly, CGT losses will continue to be able to be carried forward and offset future capital gains.