Tax with Max: The budget edition

Super changes and our SMSF

I have had an SMSF since the 1990s and where possible have maximised tax-deductible and after tax super contributions. In the lead up to the introduction of the current superannuation system my wife and I made undeducted contributions of $1 million each. Since 2007 we have contributed another $800,000 each as undeducted contributions. Our SMSF is in pension phase and the balances of our accounts are in excess of $2 million each. Can you advise how the superannuation changes in the 2016 budget will affect us?

Answer: You are unfortunately in one of the groups that will be most affected if the Turnbull government is re-elected and the superannuation changes become legislation. The changes that will most affect you are:

• the introduction of a limit of $1.6 million on superannuation that can be transferred into pension phase, and
• a new lifetime limit of $500,000 on non-concessional/undeducted contributions.

One of the pieces of good news to come from the budget that will affect you is that non-concessional contributions made up until 7:30 PM on May 3, 2016 will not have to be removed from your superannuation fund.

If the budget measure is passed, any non-concessional contributions that exceed the $500,000 lifetime limit must either be withdrawn from superannuation or subject to a penalty tax at the top marginal tax rate plus Medicare Levy.

The practical effect of the $500,000 limit, if it becomes legislation, is that you and your wife will not be able to make any further non-concessional super contributions.

The other good news from the budget is that with the current restrictions on making tax-deductible self-employed super contributions being removed, you will still be able to increase your superannuation.

There are currently two sets rules that apply to tax-deductible personal super contributions. The first limits tax deductible personal super contributions to anyone that either does not receive or is not entitled to receive employer SGC contributions, or their salary and wages income including reportable employer super contributions and fringe benefits is less than 10 per cent of their total taxable income.

The second set of rules applies to people once they turn 65 and are less than 75. These rules require a person to pass a work test of at least 40 hours in a period of 30 consecutive days in the financial year that they make any super contribution.

If the removal of the two sets of rules for personal super contribution becomes legislation, anyone wanting to make tax-deductible personal contributions will be able to do so up to the age of 75. This change will particularly help people who are retired and cannot meet the work test that make assessable capital gains on the sale of investments and property.

Under the current legislation if a retired person makes a capital gain on the sale of shares or a holiday home that was purchased after September 1985, half of the gain is assessable. Because the work test could not be passed by a retired person, there has been no way to decrease the tax payable on the gain.

If the new legislation is passed a couple under 75 could reduce the tax payable on these gains by making personal tax-deductible super contributions of up to $25,000 each. The ability to make a tax-deductible personal super contribution will also be extremely tax effective for those retirees that have significant investment taxable income.

You may also be affected by another budget measure that will lower the threshold at which high income earners pay 30 per cent tax, as opposed to the general 15 per cent contributions tax, from $300,000 per year down to $250,000 per year.

The way that this tax works now is that when employer or individual concessional contributions are added to a person's taxable income, adjusted to include reportable employer super contributions and fringe benefits, exceeds the $300,000 limit, tax is paid on that excess at an extra 15 per cent – making a total of 30 per cent on the excess.

If this measure is passed, the extra tax will be payable when super contributions, when added to the adjusted taxable income amount, exceeds $250,000.

The new $1.6 million limit on the value of a person's superannuation pension account will also have an effect on you. Unlike the lifetime limit on non-concessional super contributions this limit would not apply until July 1, 2017. This means no action needs to be taken now and people have until June 30, 2017, if this budget measure is also passed, to get their superannuation affairs in order.

This retrospective piece of superannuation legislation will not only apply to amounts transferred into a superannuation pension account from July 1, 2017, it will also apply to all existing superannuation accounts.

Under the proposed changes anyone with a pension account balance exceeding $1.6 million must either transfer the excess back into an accumulation account, or withdraw the excess from superannuation altogether.

This new $1.6 million pension account balance limit will effectively mean that from July 1, 2017, anyone that has superannuation exceeding the new limit, should receive a pension from their super fund at the minimum pension payable and the balance of income required would be met by lump sum payments from their accumulation account.

If the Turnbull government is re-elected and the superannuation changes become legislation you should seek professional advice from someone who specialises in tax and superannuation planning. There will be a number of strategies developed over the next 12 months to help reduce the adverse tax and superannuation impact of these changes.

Property and the budget

I am 62, retired, receiving income from my SMSF, and have had an investment property for the last 20 years. I am getting sick of dealing with tenants and, as a result of the boom in house prices, have decided to sell it. From what the real estate agent has told me on what the property is worth, and from what is originally cost me, I will make a profit when it is sold of at least $300,000.

I had previously thought I would put all of the proceeds into superannuation but now, as a result of the superannuation changes announced in the budget, I am not sure what I can be doing. Can you help?

Answer: The changes to superannuation are actually a mixture of good and bad news in this instance. The good news is that the reduction in the concessional contribution limits down to $25,000 will not apply until July 1, 2017. This means someone selling property, for instance, will be able to reduce the tax payable on the capital gain by making a $35,000 tax-deductible self-employed personal super contribution.

The bad news is depending on how much you have made as non-concessional contributions up until budget night, you may not be able to contribute any further from the proceeds of the sale of the property.

If no non-concessional super contributions have ever been made, you will be able to have $500,000, plus the $35,000 tax-deductible contribution, go into your SMSF. If you have been making non-concessional contributions you will be limited to the difference between what they total and the $500,000 limit. In other words if you have made non-concessional contributions of $300,000, an individual in this situation will be limited to contributing only $200,000.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers' questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au.