Federal Budget 2018: Key Changes To Your Super

The change to the work test means an extra year to contribute for those aged 65 to 74.

With so much change in the superannuation landscape in recent years, it's a relief to have a reprieve from further big shifts in this year's federal budget. There are, however, a number of measures in the budget that will affect your retirement savings.

These range from tweaks to self-managed superannuation funds (SMSFs) and life insurance to potential changes to the effectiveness of concessional contributions and added opportunities to contribute if you're older.

While it's important to get across these, it's well worth using the "reprieve" to make sure you're up to speed with the huge changes to super last year, some of which are still in the pipeline.

To start with, let's look at the budget proposals and their potential impact on you.

Concessional (pre-tax) contributions less tax-effective for some: removing the 37 per cent income tax bracket from July 1, 2024 means that the tax saving of making concessional contributions for people currently earning between $87,000 and $180,000 will reduce from 24 per cent to 19.5 per cent.

Change to work test means an extra year to contribute: from July 1, 2019, people aged 65 to 74 with a total superannuation balance (TSB) below $300,000 will be able to make voluntary contributions for 12 months from the end of the financial year in which they last met the work test. In other words, voluntary contributions will be permitted in the first year you fail to meet the work test.

Three-year audit cycle for certain SMSFs: from July 1, 2019, the annual audit for SMSFs will change to every three years for funds with a history of good record-keeping and compliance. This will reduce the burden on trustees who have a history of three consecutive years of clear audit reports and have lodged their fund's annual returns on time.

High earners and compulsory super: from July 1, 2018, people earning more than $263,157 who have multiple employers will be able to nominate their wages from certain employers are not subject to the Superannuation Guarantee. This will help them avoid breaching the concessional contributions cap of $25,000 and have the potential to negotiate higher income.

Inactive super accounts: from July 1, 2019, inactive accounts under $6,000 will be transferred to the Australian Tax Office to protect them from further erosion and data matching will be used to connect with a member's active accounts.

Super costs: fees on super accounts under $6,000 will be capped at 3 per cent and exit fees will be banned on all accounts.

Insurance focus: life insurance in large super funds will be an opt-in arrangementfor members who are under 25, whose balances are less than $6000 and whose accounts have not received a contribution in 13 months and are inactive.

SMSF member increase: the maximum number of SMSF members is going up from four to six. This increase in membership will help small business owners and families comprising, say, mum and dad and up to four children (or two children with their spouses) operate an SMSF, especially involving a family business, including a family farm, operating over several generations. This won't, however, be without problems and complexity. While the Cooper Review years ago recommended increasing the number of members to 10, the government's initiative to increase membership could be seen as a means of combating the ALP's proposal to stop franking credit refunds. Less than 5 per cent of SMSFs have three or four members.

Rollovers: Superstream will be extended to include SMSFs, which means that members can initiate rollovers between mainstream funds and their SMSF electronically – making it easier and faster.

Changes still in the pipeline

In May 2016, Treasurer Scott Morrison announced the most significant changes to retirement savings in a decade. We're only just embarking on a regime that's going to take time to digest. While most of the super changes kicked in on July 1 last year, there are certain areas you will need to watch.

Personal contributions

Don't be lulled into a super snooze - make sure you're up to speed with the changes that started last year, some still in the pipeline. Sam Bennett

Previously the non-concessional (after-tax) contributions cap was relatively straightforward. You could contribute $180,000 a year or, for people under 65 at July 1 in a financial year, $540,000 over a three-year period – and people still got it wrong! Whether you can make an after-tax contribution now depends on how much you've got in super. If your TSB at June 30, 2017 is less than $1.6 million then you may contribute, provided you're eligible.

The cap is $100,000 a year or up to $300,000 over three years. The bring-forward rule – your ability to increase your current year's contribution by utilising the cap otherwise applicable in the next few years – depends on your age and how close your super is to $1.6 million. Also, what you've contributed in the past two years may come into play. Understandably, there are going to be mistakes if you're not extremely careful or you don't seek expert advice.

Employees who ceased making salary-sacrifice contributions to instead make their own personal deductible contributions for the first time will need to get their finances in order to do so before June 30. Not only must you make a contribution but you must also provide the fund trustee with a notice of intent (NOI) to claim a tax deduction for it. Be careful not to touch the contribution – ie, roll it over to another fund, withdraw it or start an income stream – before first lodging your NOI.

CGT relief

Accountants and advisers are still grappling with capital gains tax (CGT) relief in the lead up to June 30 when many SMSF annual returns are due for lodgement – another important but complex measure arising from the super reforms.

CGT relief is the opportunity, where certain conditions are met, to reset the cost base of fund assets to market value where a member was required to reduce their retirement phase pension balance to $1.6 million by July 1, 2017 or they had a transition to retirement pension (of any value).

Unused concessional contributions

There is one final favourable measure from the 2016 budget still to come into play. It's the ability to carry forward any unused concessional contributions cap amount from July 1, 2018. Any unused amount can be carried forward on a rolling five-year basis but can only be used if your TSB is less than $500,000.

For example, if you or your employer only make concessional contributions of, say, $20,000 in 2018-19 – a shortfall of $5,000 from the $25,000 concessional cap – you can carry forward $5,000. Then in 2019-20 you or your employer could, if you choose, make concessional contributions up to $30,000, provided your TSB is under $500,000.

This measure was implemented primarily to help people – especially women – temporarily off work to top up their super savings once they re-enter the workforce. However, carrying forward unused amounts into future years may now reduce the tax effectiveness of those contributions given the proposed reduction in tax rates.

Super and housing

In May 2017, the Treasurer introduced certain measures to address housing affordability. Two such measures were thrown into the superannuation arena which will soon take traction.

The First Home Super Saver Scheme allows people to save for a first home in the concessionally taxed super system. Since July 1, 2017, people saving for their first home could make voluntary contributions into their super fund. From July 1, 2018, people can apply, provided they're eligible, for the release of these contributions together with earnings to help purchase their home.

Under the "downsizer contributions" strategy, from July 1 this year you can under certain conditions boost your super savings. If you sell a home that you or your spouse owned for a continuous period of at least 10 years and you are aged 65 or more, you may be able to contribute some or all the sale proceeds into super (up to $300,000 each or $600,000 beetween a couple). You can make these contributions even if you're otherwise ineligible to contribute under superannuation law due to your age, work status or TSB.

By Colin Lewis

Financial Review

11 May 2018

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