Monday 30 May 2016
Post-Budget super contribution advice issues
The proposed superannuation measures announced in the 2016 Federal Budget will have a significant impact on the advice financial services professionals provide to their clients, both in the coming weeks and throughout the year in the lead up to 1 July 2017. Some of the measures, most notably the introduction of the $500,000 lifetime non-concessional contributions (NCCs) cap from 3 May 2016, have immediate effect on advice provided. But other measures, such as the lower annual CC cap, although not effective until 1 July 2017, may cause renewed focus on maximising immediate superannuation contribution capacity.
This article examines a range of issues in providing superannuation contribution advice which contemplates both the existing superannuation laws and the Federal Budget proposals. The challenges for financial services professionals are not trivial when balancing the likelihood of the proposals ultimately becoming law, with the potentially diminishing opportunities for those clients who are approaching various thresholds imposed by the current law (for example, their 65th birthday).
The lifetime NCC cap
The sudden impact of the introduction (with immediate effect) of the $500,000 lifetime NCC cap was a shock to many. All NCCs made from 1 July 2007 will be included in the assessment against the lifetime NCC cap, although any NCCs made prior to the Budget announcement which are in excess of the lifetime cap will not be treated as excessive. NCCs in excess of the threshold that were made post-Budget will be treated as excessive.
1. Current NCC position
The first challenge is to understand a client’s NCC position from 1 July 2007. Financial services professionals may recall this date as the commencement of the Simpler Super reforms and, according to Budget 2016 Superannuation Fact Sheet 04, is the time from which the Australian Taxation Office (ATO) has reliable contribution records. Subsequent statements from the ATO indicate that they can generally calculate NCC amounts for the period 1 July 2007 to 30 June 2015 if the individuals and superannuation funds concerned have met their reporting obligations. The ATO has also indicated that individuals will be able to access an online summary of their NCC position from the ATO Super accounts section of their myGov portal, but the service was not available at the time of publishing this article.
An accurate understanding of a client’s current NCC position is essential when making recommendations for NCCs up to the proposed $500,000 lifetime cap. But while the current super laws remain in place, they may also have impact on the advice provided. For example, the proposed removal of the work test for those aged 65 to 74 years will not apply until 1 July 2017. Prior to that time, if the work test has not been satisfied by clients over age 65, a superannuation fund will only be able to accept mandated employer contributions.
2. Position for the contingencies
The second challenge (assuming eligibility to make NCCs) is the possibility that the lifetime NCC cap proposal does not become law and the existing NCC rules continue to apply. Financial services professionals may wish to contemplate the operation of the existing rules when making their recommendations, as illustrated in the following hypothetical example.
Jane is age 60 and is hoping to maximise her NCCs after the recent sale of an investment property. Her financial adviser determines that Jane has not made any NCCs since 1 July 2007. She provides two contribution strategy options for Jane to consider, which contemplate whether or not the Budget proposal proceeds.
Table 1: NCC options for Jane
|NCC in 2015/16||NCC in 2016/17||Total NCCs made in 2015/16 and 2016/17|
|If Budget proposals proceed||If Budget proposals do not proceed||If Budget proposals proceed||If Budget proposals do not proceed|
Jane considers the pros and cons of making the larger contribution earlier under Option 1, with the flexibility that Option 2 provides if the Budget proposal doesn’t proceed, and makes a decision based on her personal preferences.
3. Understanding the impact of making excess-NCCs
The third challenge is assessing the impact of potentially exceeding the $500,000 cap as a result of NCCs made after 3 May 2016. Excess-NCCs can be refunded from a superannuation fund, so does it make sense to contribute in excess of the $500,000 cap in the hope the Budget proposal will not proceed? Consider Colin’s situation, which illustrates a number of issues.
Colin is age 64 and is also hoping to maximise his NCCs after receiving $540,000 from a recent windfall. He has made $600,000 of NCCs prior to 1 July 2013, so if the Budget proposals proceed he will have used up his lifetime NCC cap. He will not however be penalised due to those pre-3 May 2016 NCCs exceeding the lifetime cap, but any further NCCs made after 3 May 2016 will be excessive. Nonetheless Colin contributes $540,000 as a further NCC to his self managed superannuation fund (SMSF) on 20 May 2016.
His taxable income is expected to be $90,000 in 2015/16.
Scenario 1 – Budget proposals do not proceed
Colin’s $540,000 NCC in 2015/16 will be subject to the existing NCC rules, triggering the ‘bring forward’ provisions as the NCC exceeds $180,000. The NCC will not be excessive.
Scenario 2 – Budget proposals proceed
Colin’s $540,000 NCC will be in excess of the new lifetime NCC cap. Assuming the current rules continue to apply, the ATO will assess the NCC as excessive and provide Colin with a release authority regarding the excess NCC and its associated earnings. If Colin chooses, his SMSF can use the release authority to refund the NCC and 85 per cent of the associated earnings. Note that the superannuation preservation rules will generally prevent any refund prior to the fund receiving the ATO release authority. Alternatively if a refund does not occur, the full amount of the excess-NCC will be subject to tax at the top marginal tax rate.
Associated earnings are calculated using the ATO’s General Interest Charge (GIC) rate, which ranged from 9.15 to 9.28 per cent per annum in 2015/16. Assuming the GIC rate for the June 2016 quarter (9.28 per cent per annum) continues unchanged in future quarters, and that the ATO makes an assessment on 1 September 2017, the associated earnings will be $120,060.
The release authority would allow Colin’s SMSF to release $540,000 plus 85% of the associated earnings of $120,060, or $642,051 in total.
Given the uncertainty of the Budget proposals, upon receipt Colin’s SMSF invests the NCC funds in cash. Assuming the cash account returns 2.0 per cent per annum pre-tax, by 1 September 2017 the $540,000 will grow to $551,850 (after tax).
Table 2: Impact of $540,000 on Colin’s SMSF assets
|Date from:||Date to:||Accrual rate||Gross Accrual ($)||85% of accrual (ie after tax) ($)|
|ATO Associated Earnings||1 Jul 2015||1 Sep 2017||9.28% pa (GIC rate for June 2016 quarter)||120,060||102,051|
|SMSF actual earnings||20 May 2016||1 Sep 2017||2.0% pa (illustrative cash rate)||13,947||11,850|
|SMSF funding deficit:||90,201|
So there will be a $90,201 deficit ($642,051 less $551,850) in the SMSF resulting from the refund.
From a personal taxation perspective, Colin will be subject to tax at his marginal tax rate and Medicare levy on $120,060, but will be entitled to a 15 per cent tax offset on this amount. Colin’s additional tax and Medicare liability will be $31,820, as shown in Table 3.
Table 3: Colin’s personal income tax and Medicare levy impact
|Position with no excess-NCC ($)||Position with excess-NCC of $540,000 ($)||Additional tax and Medicare ($)|
|Add 85% of ATO Associated Earnings||N/A||120,060|
|Less: 15% tax offset||18,009|
|Tax + Medicare||23,047||54,867||$31,820|
So Colin will receive $642,051 from his SMSF, but will pay $31,820 in additional tax, so his net receipt is $610,231, which is $70,231 more than he contributed ($540,000).
The SMSF deficit of $90,201, less the extra amount Colin will receive from the fund ($70,231), means an overall cost of $19,970 resulting from the excess-NCC.
The example demonstrates the generally unattractive position (a cost of almost $20,000 in this case) of making an excess-NCC if the Budget proposal proceeds. However, in some isolated circumstances this cost may be tolerable to SMSF trustees.
For example, consider the impact of the ATO’s recently released Practical Compliance Guideline PCG 2016/5 relating to arm’s length terms for Limited Recourse Borrowing Arrangements (LRBA) established by SMSFs. The original release of PCG 2016/5 imposed a compliance deadline of 30 June 2016, but the ATO announced an extension on 30 May 2016 to a new deadline of 31 January 2017. Some SMSF trustees may determine that a greater cost will result from the potential fire-sale of the LRBA asset, or the ATO’s possible application of the non-arm’s length income provisions in relation to related party loans and limited recourse borrowing arrangements, than the cost which would result from making an excess-NCC to provide liquidity for loan repayments to meet the PCG 2016/5 requirements.
4. The timing of in specie contributions
Some superannuation fund members may have had NCCs in progress at the time of the Budget announcement. The ATO’s Taxation Ruling TR 2010/1 provides guidance on the timing of a superannuation contribution – a contribution is generally made when it is received by the superannuation fund.
In regard to in specie transfers of real property and listed shares or units in listed trusts, the ATO accepts that the contribution is made when the superannuation fund provider (typically the trustee in the SMSF context) has received all the documentation it needs to register the transfer of ownership. For an in specie transfer of real property, the timing will be the moment when the trustee holds a properly executed transfer form, the title deeds and any other required documents. For listed shares or listed units in a unit trust, the timing is when the trustee receives the properly executed off-market share transfer form.
Lower CC caps
Concessional contributions (CCs) will be capped at $25,000 from 1 July 2017, if the Budget proposal proceeds. This lower cap will apply to all age groups, including the over-50s, as illustrated in Table 4.
Table 4: Concessional contribution caps
|Age||2015/16 ($)||2016/17 ($)||2017/18 ($)||Thereafter: indexation|
|Up to 50||30,000||30,000||25,000||No announced change: indexed with AWOTE in $5,000 increments|
Many clients, especially those age 50 and over, may seek to maximise the use of their CC cap in the 2015/16 and 2016/17 years, if this arrangement is not already in place. For those in a position to, salary sacrificing year-end bonus payments may be effective in 2015/16 if actioned immediately and plans to establish a more regular salary sacrifice arrangement in the 2016/17 year may be investigated also.
Small business CGT cap
It is notable that there was no announced change in the Budget to the lifetime small business capital gains taxation (CGT) contribution cap, which is $1,395,000 in 2015/16 and will be indexed to $1,415,000 from 1 July 2016.
If the proposed lifetime NCC cap and lower CC cap proceed, there will be significantly reduced scope to accumulate large superannuation account balances going forward, so the existing small business CGT cap becomes an even more significant opportunity to build the superannuation account balances of relevant small business owners and certain associates.
Financial services professionals and tax advisers may have a renewed focus on the eligibility criteria for the small business CGT concessions. Monitoring of the $2 million asset turnover threshold and the $6 million net assets test threshold will be prudent, and timing the sale of active assets prior to exceeding these thresholds may help to ensure that small business clients maximise their opportunity to transfer wealth into superannuation.
Contribution splitting and spouse contributions
The proposed cap ($1.6 million) on transfers into the pension phase of superannuation will cause renewed focus on equalising the superannuation balances of spouses. Although this measure will not be effective (even if enacted) until 1 July 2017, some clients may wish to start taking action immediately.
The opportunity to transfer 85 per cent of CCs made in the 2014/15 year from one spouse’s superannuation account to another’s is dependent on the transferring spouse’s fund receiving a spouse contribution splitting request by 30 June 2016.
Similarly, transferring 85 per cent of CCs made in 2015/16 will require the documentation to be received by the transferring superannuation fund by 30 June 2017.
The motivation to equalise superannuation balances may also result in more focus on spouse contributions. Although the Budget proposal to increase the receiving spouse’s income threshold (from $13,800 to $40,000), which affects the eligibility of the contributing spouse to the spouse contribution tax offset, will not be effective until 1 July 2017, nonetheless spouse contributions in the current income year may have renewed attraction.
The 2016 Federal Budget announcements are likely to be cause for increased interactions between financial services professionals and their clients.
There are a number of contribution issues that may require immediate discussion with clients, limited not only to the lifetime NCC cap issues. Clients may also wish to maximise their CC cap over the 13 months prior to 1 July 2017, understand their potential to make small business CGT contributions in the future, make spouse contributions and split contributions with their spouse.
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