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2017 SUPERANNUATION (WEALTH ACCUMULATION TIPS) BONUS ISSUE

WHAT’S NEW IN 2017/18?

New Australian Financial complaints authority
Superannuation fund mergers – extended tax relief
Housing affordability measure: reduced barriers to downsizing – contributing proceeds into super
Housing affordability measure: first home super saver scheme.
Regarding
Last year’s changes we outline how these have played out
-Higher SMSF penalties
-SMSF borrowings to count towards $1.6 million balance cap
-Stricter rules for non-arms length transactions

We also include five new case studies.1.

New Australian Financial Complaints Authority

From 1.7.2018, the Superannuation Complaints Tribunal (SCT), the Financial Ombudsman Service (FOS) and the Credit and Investments Ombudsman (CIO), which
deal with disputes regarding superannuation, banking, finance, insurance and trustee services, and financial services, respectively, will be replaced
by a single external dispute resolution body, the Australian Financial Complaints Authority (AFCA). This follows a review of the current external dispute
resolution framework.

The AFCA will be supervised by ASIC and all Australian Financial Services licensees will be required to be members. While decisions of the AFCA will be
final and binding on all members, the new regime will refer back to the relevant financial organisation or superannuation trustee for resolution by
means of internal dispute resolution.

To allow existing matters to be cleared, the SCT, FOS and CIO will keep operating until 1.7.2020.

2.Superannuation fund mergers – extended tax relief

The tax relief available for merging superannuation fund has been extended until 1.7. 2020. The relief allows superannuation funds to transfer capital
and revenue losses to the successor fund, and to defer tax implications on gains and losses where there is a merger. This is intended to encourage
consolidation of funds as it removes adverse tax consequences as a deterrent to mergers.

3.Incentive for over-65s to downsize by permitting extra super contributions

From 1.7.2018, Australians aged 65 years or over will be able to contribute the proceeds of a house sale (up to $300,000 for an individual, or $600,000
for a couple) without having to satisfy a work test, and without having to worry about the annual $100,000 non-concessional contributions cap. In addition,
individuals with a total superannuation balance of more than $1.6 million will still be able to make a superannuation contribution under this downsizing
policy.

4.Superannuation measures
§Introduction of the First Home Super Saver Scheme

From 1.7.2017, eligible individuals can make voluntary superannuation contributions of up to $15,000 a year, and up to $30,000 in total, which can be saved
for the purposes of buying a first home. The contributions are treated as concessional (before-tax) contributions and taxed at 15%. Withdrawals (which
include earnings) are permitted from 1 July 2018, and will be taxed at the person’s marginal tax rate less a 30% tax offset. Alternatively, an individual
can make non-concessional (after-tax) contributions, and such contributions are not taxed when withdrawn from the super fund.

On 7.9.2017 legislation relating to the First Home Super Saver Scheme and downsizing the family home was introduced into parliament.

5.SMSF borrowings to count towards $1.6 million transfer balance cap, and $1.6 million total superannuation balance

From 1.7.2017, the outstanding balance of an LRBA will be included in a member’s annual total superannuation balance and the repayment of the principal
and interest from a member’s accumulation account will be recorded as a credit in the member’s transfer balance account.

6.Higher SMSF penalties from 2017/2018 year

The size of administrative penalties has increased from July 2017 for SMSFs doing the wrong thing.

7.Non-arm’s length transactions subject to stricter rules

From 1.7.2018, SMSFs using related party transactions on non-commercial terms aimed at increasing super savings will need to take into account expenses
that normally apply to a commercial transaction when assessing whether the transaction is on a commercial basis.

SUPERANNUATION REFORM: INTRODUCING A $1.6 MILLION TRANSFER BALANCE CAP

The Government has introduced a $1.6 million cap on the total amount of superannuation savings that can be transferred from a concessionally-taxed ‘accumulation
account’ to a tax-free ‘retirement account.’

From 1.7.2017 there has been a $1.6 million cap on the total amount of superannuation that can be transferred into a tax-free retirement account.

The cap will index in $100,000 increments in line with the consumer price index, just as the Age Pension assets threshold does.
Superannuation savings accumulated in excess of the cap can remain in an accumulation superannuation account, where the earnings will be taxed at 15
per cent.
A proportionate method which measures the percentage of the cap previously utilised will determine how much cap space an individual has available at
any single point in time.
-For example, if an individual has previously used up 75 per cent of their cap they will have access to 25 per cent of the current (Indexed) cap.
Subsequent fluctuations in retirement accounts due to earnings growth or pension payments are not considered when calculating cap space.

Consequences for breach

Individuals who breach the cap will be required to remove the excess capital from their retirement phase account and are liable to pay tax on the notional
earnings attributable to the excess capital. The amount removed from the retirement phase can be transferred into an accumulation account, where the
earnings will be concessionally taxed at 15 per cent, or withdrawn from superannuation.

Those individuals already in retirement as at 1.7.2017 with balances in excess of $1.6 million were required to either:

Transfer the excess back into an accumulation superannuation account; or
Withdraw the excess amount from their superannuation.

Transitional arrangements applied for existing account holders.

Individuals can also apply to the Commissioner of Taxation to replenish their transfer balance cap space for anomalous situations that cause their retirement
balance to be depleted, such as fraud, bankruptcy or family law splits.

Example – Jason

Jason is 60 and plans to retire during the 2017-18 financial year. Jason expects he will have an accumulated superannuation balance of less than $1.6 million.
This measure does not affect Jason.

Example – Agnes

Agnes 62 retires on 1 November 2017. Her accumulated superannuation balance is $2 million.

Agnes can transfer $1.6 million into a retirement income account. The remaining $400,000 can remain in an accumulation account where earnings will be taxed
at 15 per cent. Alternatively, Agnes may choose to remove this excess amount from superannuation.

While Agnes will not have the ability to make additional contributions into her retirement account, her balance will be allowed to fluctuate due to earnings
growth or drawdown of pension payments.

$1.6 Million Transfer Balance Cap Common Questions and Answers

Does the cap limit how much I can hold in my retirement phase account? What happens if my retirement account grows in excess of $1.6 million?

Answer- The cap only limits the amount you can transfer into a retirement phase account it does not apply to the balance on that account.

Your balance can grow above $1.6 million in your retirement phase account. The cap does not apply to this subsequent growth.

Once my retirement phase account balance falls below $1.6 million, can I transfer more?

Answer- An individual can transfer more into a retirement phase account only if they have not previously exceeded the cap. The amount
of the cap space an individual has available will be determined by the proportionate method which measures the percentage of the cap previously utilised.

If, for example, an individual transfers the full $1.6 million into a retirement phase account which subsequently decreases the individual will not be
able to transfer any more into the retirement phase as they have utilised 100 per cent of their cap space.

If an individual transfers $800,000 into a retirement phase account, they will have utilised 50 per cent of the cap space. If the cap is later indexed
to, for example, $1.7 million, they will be able to transfer an additional 50 per cent of the indexed cap, being $850,000.

What happens if I make a transfer in excess of the cap after 1 July 2017?

Answer- If an individual transfers amounts into a retirement phase account in excess of the cap they will be required to remove the excess
(including notional earnings on the excess capital). If they choose not to, their fund will be required to remove the excess on their behalf.

These amounts can be transferred back into an accumulation account, where the earnings on the excess will be taxed concessionally at 15 per cent. Alternatively,
the excess can be withdrawn from superannuation.

Individuals will be subject to a 15 per cent tax on the notional earnings.

What happens if I am already retired before 1.7.2017 and have a retirement phase balance in excess of $1.6 million?

Answer- Individuals already in retirement with retirement phase balances in excess of the cap at 1.7.2017 will be required to either:

-Withdraw these excess amounts from superannuation; or
-Transfer these excess amounts back into an accumulation account.

The earnings on funds in an accumulation account will be taxed at the 15 per cent concessional tax rate.

Transitional arrangements will apply for those above $1.6 million but below $1.7 million – the Australian Taxation Office will issue a warning letter advising
the individual they have 60 days to remedy the breach. If they comply, no further penalty is applicable.

Those who do not comply with the warning letter and those with balances above $1.7 million will be subject to the consequences of their fund removing the
excess and a tax on notional earnings on the excess capital.

What if I retired before 1.7.2017 and transferred less than $1.6 million at that time, but my balance has grown to $2 million through investment returns?

Answer- You will still need to comply with the cap. If your balance prior to 1.7.2017 is in excess of $1.6 million, you will need to remove
the excess amount from your retirement account.

How will this cap apply to defined benefit pensions?

Answer- Different arrangements involving changes to the taxation of defined benefit pension payments will be adopted to achieve broadly
commensurate treatment with accumulation schemes.

Defined benefit pensions will not be required to be commuted and rolled-back if they are valued at over $1.6 million. Rather, defined benefit pension payments
over $100,000 per annum will be subject to additional taxation to broadly replicate the effect of the $1.6 million transfer balance cap.

How will this cap apply to non-commutable pensions (commenced prior to 1 July 2017)?

Answer- Non-commutable pensions that commenced prior to 1.7.2017 will be treated the same as defined benefit pensions.

How will this cap apply to non-defined benefit, non-account-based income streams (started after 1 July 2017)?

Answer- Products such as lifetime annuities, market-linked pensions and annuities and term/life expectancy pensions and annuities will
be valued using their purchase price.

How will this cap apply to future ‘innovative’ income stream products?

Answer- These products will be valued using their purchase price.

If a product is purchased with instalments during the accumulation phase or deferred from the point of purchase, it will be valued using an existing method
requiring actuarial certification.

Collective defined contribution scheme pensions will be valued at the amount of the collective pool of fund assets attributed to the member on the day
the pension commences and certified by an actuary.

Do transition to retirement income streams count towards the transfer balance cap?

Answer- No. As transition to retirement income streams (TRIS) will no longer receive an earnings tax exemption from 1.7.2017 they do not
count towards the transfer balance cap.

Can I still split my retirement phase interests to purchase or diversify my retirement income streams?

Answer- Yes. Once you have transferred your superannuation income streams to the retirement phase, they are not counted again towards
your transfer balance cap.

To achieve this outcome, your transfer balance account will receive a ‘debit’ equal to the value of the amount commuted. This amount, plus any unused cap
space, may then be used to purchase a new income stream or retirement product.

To ensure the integrity of this approach, you will no longer be able to use partial commutations to satisfy minimum drawdown requirements.

If you choose to commute your income streams (either in part or in full) you will receive a debit equal to the value of the commutation.

Do I need to pay tax on income from my retirement account? Or on the amounts that I withdraw from my accumulation phase account?

Answer- No. The Government has not changed the taxation treatment of amounts drawn down from superannuation accumulation accounts by people
who have reached their preservation age. Superannuation benefits paid, either as an income stream or as a lump sum, from a funded source (that is,
one in which taxes have been paid on contributions and earnings such as in an accumulation scheme or a funded Defined Benefit scheme), are generally
tax-free for people aged 60 and over.

The earnings on amounts in an accumulation phase account are taxed at the concessional 15 per cent tax rate. Withdrawn funds are not taxed, providing the
individual has reached age 60. There is no minimum (or maximum) drawdown requirements from accumulation accounts.

Will the $1.6 million transfer balance cap be indexed?

Answer- Yes. The cap will index in $100,000 increments in line with the consumer price index, just as the Age Pension assets threshold
does.

Do structured settlements or personal injury payouts count towards the cap?

Answer- These amounts will not count towards an individual’s transfer balance cap. This will ensure that individuals can continue to access
these arrangements which support them in meeting their healthcare and living costs.

For couples where one spouse either does not have a superannuation account or has a low balance in their account/s can they have a joint $3.2 million cap?

Answer- The transfer balance cap is an individual cap. Each individual can transfer $1.6 million into their retirement phase account/s
from their accumulation account/s.

An individual with more than $1.6 million in the retirement phase will need to either transfer the excess to an accumulation account where earnings will
be taxed, or withdraw the excess from the superannuation system. Subject to the contribution caps, excess amounts withdrawn could be contributed to
their spouse’s account.

In the superannuation system, and most areas of tax, people are taxed and treated as individuals not as families or households.

REFORMING THE TAXATION OF CONCESSIONAL CONTRIBUTIONS

The Government has lowered the annual cap on concessional (pre-tax) contributions to $25,000 and reduced the income threshold above which high income individuals
are required to pay 30 per cent tax on their concessional superannuation contributions – commonly referred to as the Division 293 threshold – to $250,000
per annum.

From 1 July 2017, the Government has lowered the annual concessional contributions cap to $25,000 for all individuals. The cap will index in line with
wages growth.

Until this time the existing concessional caps ($30,000 for those aged under 50 and $35,000 for those people aged 50 and over) applied.

Additionally, from 1.7.2017, the Government reduced the income threshold, above which individuals will be required to pay an additional 15 per cent tax
on their concessional contributions, from $300,000 to $250,000 per annum.

The additional tax is imposed on the whole amount of the contributions, up to the concessional cap, if your salary and wages are above the threshold. Otherwise,
the additional tax is only imposed on the portion of the contribution that takes you over the threshold.

To be liable for a total of 30 per cent tax, a person needs to have at least $250,000 in combined income and concessional superannuation contributions.

In 2017-18 approximately one per cent of fund members are expected to pay additional contributions tax as a result of this measure.
These individuals will have an average taxable income of $270,000 and an average superannuation balance of $550,000.

Existing processes for the administration of the concessional contributions caps and the imposition of the additional 15 per cent tax on contributions
will be maintained, although some processes will be streamlined.

Example – Madeline

In 2017-18, Madeline earns $260,000 in salary and wages. In the same year she has concessional superannuation contributions of $30,000.

Madeline’s fund will pay 15 per cent tax on these contributions. Madeline will pay an additional 15 per cent tax on the $25,000 of concessional contributions
resulting in these amounts effectively being taxed at 30 per cent.

The $5,000 of contributions in excess of the cap will be included in Madeline’s assessable income and taxed at her marginal rate. Madeline pays $1,600
income tax on her excess contribution.

SUPERANNUATION REFORM: ANNUAL NON- CONCESSIONAL CONTRIBUTIONS CAP

From 1 July 2017, the Government has lowered the annual non-concessional (post-tax) contributions cap to $100,000 and introduced a new constraint such
that individuals with a balance of $1.6 million or more will no longer be eligible to make non-concessional contributions.

Individuals under age 65 will be eligible to bring forward 3 years of non-concessional contributions. The new annual cap with the eligibility threshold
replaces the lifetime $500,000 non-concessional contributions cap announced in the 2016-17 Budget.

This will better target tax concessions to ensure that the superannuation system is equitable and sustainable, ensuring those who have saved well in excess
of what is required to be self-sufficient in retirement are not able to continue to access further concessional tax treatment. It will also provide
flexibility recognising that non-concessional contributions are often made in large lump sums.

From 1 July 2017, the Government has lowered the annual non-concessional contributions cap to $100,000, which is four times the annual concessional contribution
cap, with a three year bring forward ($300,000) for those aged under 65. Where an individual’s total superannuation balance is $1.6 million or more
they are longer be eligible to make non-concessional contributions.

The $1.6 million eligibility threshold is based on an individual’s balance as at 30 June the previous year. This means if the individual’s balance at the
start of the financial year (the contribution year) is $1.6 million or more they will not be able to make any further non-concessional contributions.
Individuals with balances close to $1.6 million are only able to bring forward the annual cap amount for the number of years that would take their
balance to $1.6 million.

Transitional arrangements applied. If an individual did not fully used their non-concessional bring forward before 1 July 2017, the remaining bring forward
amount was reassessed on 1.7.2017 to reflect the new annual caps.

As was formerly the case, individuals aged between 65 and 74 are eligible to make annual non-concessional contributions of $100,000 if they meet the work
test (that is they work 40 hours within a 30-day period each income year), but are be able to access the bring forward of contributions.

The annual cap is linked to indexation of the concessional contributions caps. The $1.6 million eligibility threshold will be indexed as per the transfer
balance cap.

Non-concessional contributions to defined benefit schemes and constitutionally protected funds will also be subject to the revised caps.

Eligibility Threshold

Individuals are eligible to make non-concessional contributions where their total superannuation balance is less than $1.6 million. Where their balance
is close to $1.6 million, they will only be able to make a contribution in that year and access the bring forward of future years contributions that
would take their balance to $1.6 million.

Superannuation Balance	Contribution and bring forward available
Less than $1.3 million	3 years ($300,000)
$1.3 – <$1.4 million	3 years ($300,000)
$1.4 – <$1.5 million	2 years ($200,00)
$1.5 – <$1.6 million	1 year ($100,000)
$1.6 million	Nil

Transitional ArrangementsWhere an individual has made a non-concessional contribution in 2015-16 or 2016-17 and that triggers the bring
forward, but has not fully used their bring forward before 1 July 2017, transitional arrangements will apply so that the amount of bring forward available
will reflect the reduced annual contribution caps. Where the non-concessional contribution bring forward was triggered in 2015-16, the transitional cap
will be $460,000 (the annual cap of $180,000 from 2015-16 and 2016-17 and the $100,000 cap in 2017-18). If the bring forward was triggered in 2016-17,
the transitional cap will be $380,000 (the annual cap of $180,000 in 2016-17 and $100,000 cap in 2017-18 and 2018-19).

2015-16	2016-17	2017-18	2018-19	2019-20
More than $460,000		Nil	End of transition period $100,000 or 3 year bring forward	–
More than $180,000 but less than $460,000	Cannot exceed $460,000 from 2015-16 to 2017-18	End of transition period $100,000 or 3 year bring forward	–
–	More than $380,000	Nil	Nil	End of transition period $100,000 or 3 year bring forward
–	More than $180,000 but less than $380,000	Cannot exceed $380,000 from 2016-17 to 2018-19	End of transition period $100,000 or 3 year bring forward

For example, if you made a contribution to access the bring-forward in 2016-17, the bring-forward amount available in later years is $380,000 (see example
1 and 2). If you made a contribution in 2015-16, the bring-forward amount will be $460,000 (see example 3).

	2015-16	2016-17	2017-18	2018-19	2019-20
1		$200,000	$180,000	Nil	$100,000
2		$200,000	$90,000	$90,000	$100,000
3	$200,000	$200,000	$60,000	$100,000	Nil

Example – KylieKylie’s superannuation balance is $500,000. She sells an investment property and makes a non-concessional contribution to her superannuation
of $200,000 in October 2017. As Kylie has triggered her bring forward, she would be able to make a further non-concessional contribution of $100,000 in
2018-19. In 2020-21 her non-concessional contributions caps would reset, and she could make further contributions from then.

Example – Molly

Molly is 40 and has a superannuation balance of $200,000. In September 2016, she receives an inheritance of $250,000, which she puts into her superannuation.
This triggers her three year bring forward. From 1 July 2017, as the cap has been lowered, Molly would be able to make further non-concessional contributions
of up to $130,000, taking her to the new bring forward amount of $380,000. Molly makes a non-concessional contribution of $110,000 in 2017-18 and $20,000
in 2018-19. She can then access the new bring forward from 2019-20 and contribute up to $300,000 in non-concessional contributions.

Example – Eamon

Eamon has a total superannuation balance of $1.45 million. He can make a non-concessional contribution in 2017-18 of $200,000. He cannot access the full
three year bring forward as this would take his balance over $1.6 million. Eamon would also not be able to make any further non-concessional contributions.

Example – Gary

Gary is a 72-year-old retiree who works around 40 hours in September every year and has a superannuation balance of $450,000. As Gary meets the work test,
he can make a non-concessional contribution of $100,000 in2017-18. However, as Gary is aged over 65 he cannot access the three year bring forward.

SUPPORTING AUSTRALIANS TO SAVE FOR THEIR RETIREMENT BY INTRODUCING THE LOW INCOME SUPERANNUATION TAX OFFSET

The Government has introduced a Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution. This will provide continued
support for the accumulation of superannuation for low income earners and ensure they do not pay more tax on their superannuation contributions than
on their take-home pay.

The issue

The superannuation system is designed to encourage Australians to save for their retirement. This is why superannuation is taxed at a lower rate than income
outside of superannuation. However, for low income earners, the 15 per cent tax on superannuation contributions means they pay more tax on their superannuation
contributions than on their other income.

The details

From 1 July 2017, the Government has introduced the Low Income Superannuation Tax Offset.

Those with an adjusted taxable income up to $37,000 will receive a refund into their superannuation account of the tax paid on their concessional superannuation
contributions, up to a cap of $500.

In effect, this means that most low income earners will pay no tax on their superannuation contributions.

Low income earners, who are disproportionately women, will benefit from the Low Income Superannuation Tax Offset. This is important because women, on average,
had lower superannuation balances than men, despite having higher life expectancies. It is expected that in 2017-18 around 3.1 million people (almost
two-thirds of whom are women) will benefit from the Low Income Superannuation Tax Offset.

The Low Income Superannuation Tax Offset will effectively avoid the situation in which low income earners would pay more tax on savings placed into superannuation
than on income earned outside of superannuation.

Implementation

The Australian Taxation Office will determine a person’s eligibility for the Low Income Superannuation Tax Offset and this will be paid into the person’s
superannuation account.

Example – Katherine

In the 2017-18 financial year Katherine worked part-time as a nurse and earnt $35,000. Her employer made superannuation contributions of $3,325 on her
behalf.

Katherine is eligible for the Low Income Superannuation Tax Offset. She receives $498.75 of Low Income Superannuation Tax Offset in her account.

Katherine would have received the same amount of Low Income Superannuation Contribution.

EXTENDING THE SPOUSE TAX OFFSET

The Government also extended the current spouse tax offset to assist more couples to support each other in saving for retirement. This will better target
superannuation tax concessions to low income earners and people with interrupted work patterns.

From 1 July 2017, the Government has extended the eligibility rules for claiming the tax offset for superannuation contributions partners make to their
low income spouses.

The current 18 per cent tax offset of up to $540 will be available for any individual, whether married or de facto, contributing to a recipient spouse
whose income is up to $37,000. This is an increase from $10,800. As was formerly the case, the offset is gradually reduced for income above this level
and completely ph

Issue 90 – Superannuation Edition