The superannuation changes announced by the Government in its Federal Budget in May 2016 (and reported in our newsletter in June 2016) were recently revised. The revision is significant in some areas and below is a summary of the current proposed changes to super with tips on strategies clients may wish to consider this financial year and from 1 July 2017 (when many of the changes are set to apply).
The Government’s current proposed changes to super are to:

Concessional contributions

1. Retain the proposed reduction to the annual cap on Concessional Contributions (CC) to $25,000 from 1 July 2017. Clients can still utilise the current CC cap (being $30,000 for those under age 50 and $35,000 for those ages 50 and over) for the 2016-17 financial year.

2. Postpone the proposed start date for catch-up CCs from 1 July 2017 to 1 July 2018. That is, individuals with a super balance of up to $500,000 and unused CC caps can carry forward such caps on a rolling basis for a period of five consecutive years.

3. Modify the proposed improved access to CCs – in that from 1 July 2017, all individuals up to age 64 and also those aged 65 and 74 who meet the work test will be able to claim an income tax deduction for CCs (on Budget night it was proposed that all individuals up to age 75 would be able to claim the deduction).
   • TIP: All clients under age 64 and between ages 65 and 74 who meet the work test should be advised of the opportunity to make CCs.

4. Retain the proposed lowering of the Division 293 tax income threshold to $250,000 from 1 July 2017 (currently the threshold is set at $300,000). This means that clients with an adjusted taxable income of $250,000 or above will pay 30% (rather than 15%) tax on CCs above $250,000.

Non-concessional contributions

5. Modify the Non-Concession Contributions (NCC) cap by withdrawing the proposed $500,000 lifetime NCC cap and introducing from 1 July 2017 an NCC cap of $100,000 per year for individuals with superannuation balances under $1.6 million (the NCC cap is currently $180,000 per year). Individuals under age 65 will still be eligible to use the Bring Forward Rule (BFR) to bring forward 3 years of NCCs, being $300,000.
   • TIP: The BFR will reduce from $540,000 to $300,000 from 1 July 2017. This means that:
     • fully utilising the BFR before 1 July 2017 will maximise an individual’s contributions into super;
     • if an individual has not fully utilised the BFR by 1 July 2017, transitional provisions will apply so that the bring forward available will reflect the reduced annual NCC cap:
       

       Year BFR triggered	Transitional BFR cap*
       2015-16	$460,000
       2016-17	$380,000
       2017-18	$300,000

       *The transitional BFR cap is still subject to the $1.6 million eligibility threshold (discussed below)

   • TIP: The $1.6 million eligibility threshold (indexed in line with the transfer balance cap discussed below) will be based on an individual’s balance as at 30 June the previous year and will include earnings and growth. If the individual’s balance at the start of a financial year (i.e. the contribution year):
     • is more than $1.6 million, that individual cannot make NCCs for that year;
     • drops below $1.6 million in subsequent years, that individual (subject to any Government clarification to the contrary) can make further NCCs; and
     • is close to but not exceeding $1.6 million that individual will only be able to use the BFR for the number of years it would take to bring their balance up to $1.6 million. The government has provided the following table to illustrate this point and, subject to any Government clarification, it may be possible to exceed the $1.6 million cap to just under $1.7 million:
       

       Superannuation Balance	Contribution and BFR 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 ($200,000)
       $1.5-<$1.6 million	1 year ($100,000)
       $1.6 million	Nil

   • TIP: Clients implementing any of the following strategies should be notified of the new caps to apply from 1 July 2017 and to consider maximising their NCC cap of $180,000 for the 2016-17 financial year and BFR of $540,000 by 30 June 2017:
     • Clients planning to use or are in the middle of using the re-contribution strategy to increase the tax free component of their benefits in their fund; and
     • Clients planning to transfer or are in the middle of transferring large NCCs (including the BFR) or real property in specie into their SMSF.
   • TIP: Other super caps (i.e. the CGT cap and contributions from personal injury payments) will remain the same.

6. Withdraw the proposed removal of the work test from 1 July 2017 meaning that individuals between ages 65 to 74 must still be gainfully employed for at least 40 hours in a 30 day period in a financial year to make a NCC.
   • TIP: Any plans for retired clients to withdraw and re-contribute benefits to increase their tax free component should be discontinued.
   • TIP: Individuals aged 65 to 74 can make NCC of $100,000 each year provided they meet the work test. They will still not be able to access the BFR.

The $1.6M transfer balance cap

7. Retain the implementation of a $1.6 million ‘transfer balance’ cap from 1 July 2017. The cap will be indexed in $100,000 increments in line with CPI and a proportionate method will determine how much cap space an individual has at any point in time (e.g. if an individual previously used 75% of their cap, they will have access to 25% of the current indexed cap). Fluctuations in accounts die to earnings growth or pension payments will not be considered when calculating the cap space.
   • TIP: Reversionary pension amounts are set to be counted against a beneficiary’s $1.6 million transfer balance cap. The reversionary pensioner will have a six month period on receiving a reversionary pension to decide how to deal with it. Advisers should remind clients who receive a reversionary pension that they may need to commute any amount over the cap to escape breaching their transfer balance cap and receiving excess transfer balance tax. CGT relief arrangements will apply to asset transfers before 1 July 2017 (including assets supporting a TRIS).
   • TIP: Clients should still consider the impact that transferring benefits will have on their death benefit nominations. For example, adequate death benefit nominations should be in place for excess benefits moved from a reverting pension account into an accumulation account (as these benefits will no longer be governed by the rules applicable to the pension).

Transition to retirement income streams

8. Retain the removal of the tax exemption on earnings of assets supporting transition to retirement income streams (i.e. on income streams of individuals over preservation age but not retired) from 1 July 2017. The rule allowing individuals to treat certain income stream payments as lump sums for tax purposes will also be removed.

Other measures

9. Retain the proposed removal of the anti-detriment provision in respect of death benefits;

10. Retain the proposed introduction of the Low Income Superannuation Tax Offset;

11. Retain the proposed improvement of super balances of low income spouses;

12. Retain the proposed increase in choice in retirement products; and

13. Retain the proposed legislation of the objective of super.

You should consider and discuss the impact of these changes with your clients to determine whether any changes need to be made to existing arrangements – including placing a rush on some contribution strategies prior to 1 July 2017!

If you require help with advising clients on these changes and/or preparing any necessary documentation to effect a change in arrangements, please contact Thalia Dardamanis on 1300 267 529.

Despite only being introduced earlier this year, changes are already being made to the foreign resident CGT withholding rules. The change described below is sensible and should help affected taxpayers where the transfer of land is due to the death of the owner.

The new foreign resident CGT withholding rules generally apply to acquisitions of Australian real property, with a value of at least $2 million, from foreign residents on or after 1 July 2016. They can also apply in certain circumstances to acquisitions of shares in a company or units in a unit trust that owns Australian real property.

A brief summary of the new rules was included in our March 2016 newsletter.

In practical terms, 10% withholding tax must be retained by the purchaser from the purchase price and remitted to the ATO by the settlement date unless the vendor has provided a ‘clearance certificate’ to the purchaser. The clearance certificate issued by the ATO certifies that the ATO considers the vendor is not a foreign resident. Clearance certificates are required even where the vendor is clearly an Australian resident.

The rules also apply to non-cash transactions such as gifts, in-specie distributions from trusts, matrimonial property settlements and in-specie distributions form deceased estates.

Where the transfer may qualify for CGT roll-over relief, such as a matrimonial property settlement or a distribution from a deceased estate, the vendor may apply for a variation notice from the ATO that the amount of CGT withholding be reduced to nil.

The ATO has issued a legislative instrument which varies to nil the amount that an acquirer of Australian real property must pay to the ATO where they acquired land from a deceased in any of the following situations:

•  as the deceased’s legal personal representative;
•  as a beneficiary of the deceased; or
•  as a surviving joint owner under the rules of survivorship.

This means the above acquirers will not be required to withhold tax or apply to the ATO for a variation notice.

The proposed super changes announced in this year’s Federal Budget are the most radical in over a decade. How these changes will impact your clients’ SMSFs and retirement plans if implemented requires careful consideration and planning. Below is a summary of the key changes and tips on strategies clients may wish to consider. It is noted that these changes are not yet law.

Concessional contributions: lowering the annual cap, allowing catch-ups and widening the eligibility for a tax deduction

1. The annual cap on concessional contributions (CC) will reduce to $25,000 from 1 July 2017.

   Clients will still be able to utilise the current CC cap (being $30,000 for those under age 50 and $35,000 for those ages 50 and over) for the 2015-16 and the 2016-17 financial years.

   • TIP:  Clients receiving CCs under effective salary sacrifice arrangements may wish to consider whether the arrangements need to be reviewed to ensure that their CCs do not exceed the reduced cap.

2. From 1 July 2017, individuals with a super balance less than $500,000 will be able to make additional CCs where they have not reached their CC cap in previous years. Unused cap amounts accrued from 1 July 2017 will be carried forward on a rolling basis for a period of five consecutive years.

   Clients with interrupted work patterns (e.g. women or carers) will be able to choose to carry forward their unused CC and ‘catch-up’ on CCs.

   • TIP:  Clients may wish to review their employment contracts to allow for catch-up CCs following periods of leave. Affected clients may also wish to make catch-up contributions themselves (discussed immediately below).

3. From 1 July 2017, all individuals up to age 75 will be able to claim an income tax deduction for personal super contributions.

   All individuals, regardless of their employment circumstances (including those partially self-employed and partially salary and wage earners and those whose employers do not offer salary sacrifice arrangements), will be able to make CCs.

   • TIP:  All clients under age 75 should be advised of the opportunity to make CCs.

Non-concessional contributions: Introducing a lifetime cap and harmonising the rules for those aged 65 to 74

4. A $500,000 lifetime non-concessional contributions (NCC) cap will commence from 7.30 PM (AEST) on 3 May 2016 (the commencement time) and take into account all NCCs made on or after 1 July 2007.

   Excess NCCs made after the commencement time will need to be removed or subject to penalty tax. NCCs made before commencement cannot result in an excess and so do not need to be removed or subject to penalty tax. The lifetime NCC cap can be utilised by individuals up to age 74 and will be indexed in line with wages. It will replace the existing annual NCC cap which allows annual NCCs of up to $180,000 per year (or $540,000 every three years for individuals aged under 65).

   • TIP:  Clients implementing any of the following strategies should be notified of the potential for penalty tax to be imposed if they exceed their lifetime cap:
     • Clients who plan to use or are in the middle of using the re-contribution strategy to increase the tax free component of their benefits in their fund;
     • Clients who are in the middle of transferring large NCCs to their super fund (e.g. by way of bank transfer made before 7.30 PM on 3 May 2016 but not received in the fund’s bank account until a few days later);
     • Clients who plan to use or are in the middle of using the bring forward rule to bring forward the next 2 years of NCCs (i.e. $540,000) this financial year (2015-16) and/or the next (2016-17);
     • Clients who plan to transfer or are in the middle of transferring real property in specie into their SMSF;
     • Clients who plan to purchase or have signed a contract to purchase an asset which needed to be financed by NCCs;
     • Clients who plan to enter into or have already entered into a limited recourse borrowing arrangement where NCCs (or even CCs) are required to meet loan repayments; and
     • Clients who plan to initiate or have already initiated a transfer from a recognised overseas pension scheme where some/all of the amount transferred will count as NCCs.

   • TIP:  Other investment vehicles (e.g. family trusts and companies) may become more appealing to your clients. Ensuring adequate wealth succession plans exist for the alternative vehicle(s) is essential.

   • TIP:  Utilising other super caps (i.e. the CGT cap amount of $1,415,000 for 2015-16 and contributions from personal injury payments) will become even more important now.

5. From 1 July 2017, individuals under age 75 will not have to satisfy the work test to make NCCs and can receive contributions from their spouse.

   Currently, individuals aged 65-74 must satisfy the work test to be able to make NCCs. Clients of yours in this age group will soon be able to increase their retirement savings from sources not previously available to them (e.g. surplus money received on downsizing their home during retirement).

   • TIP:  Retired clients may wish to withdraw and re-contribute benefits to increase the tax free component of their benefits. Such contributions would count towards the lifetime NCC cap.

Lowering the Division 293 tax threshold

6. From 1 July 2017, the Division 293 tax income threshold will be lowered to $250,000 (currently the threshold is $300,000).

   Clients with an adjusted taxable income of $250,000 or above will pay 30% (rather than 15%) tax on concessional contributions above $250,000.

   • TIP:  Given the definition of ‘adjusted taxable income’, a surprising number of clients could be caught by this threshold.  For example, clients selling investment properties or shares (in the year they sell) and those in receipt of ‘lumpy’ income (such as small business owners and those working more to catch up on missed earnings after a period of leave) may be caught.

Introducing a $1.6M transfer balance cap

7. From 1 July 2017, a $1.6 million transfer balance cap will apply on the total amount of accumulated super an individual can transfer into pension phase (subsequent earnings on these balances will not be restricted) and amounts above $1.6 million can be maintained in an accumulation phase account (where earnings will be taxed at 15%). Individuals already in the retirement phase with balances above $1.6 million must reduce their retirement balance to $1.6 million by 1 July 2017 and any excess balances can be converted to accumulation accounts.

   A tax on amounts not transferred in excess of the $1.6 million cap (including earnings on such amounts) will apply, similar to the tax treatment on excess NCCs. The amount of cap space remaining if making more than one transfer into a retirement phase account will be determined by apportionment.

   • TIP:  Subject to the detail in the legislation introducing this change, clients may wish to transfer excess amounts on 30 June 2017 rather than 1 July 2017 to help ensure the 2017-18 minimum pension payments are calculated on the reduced (i.e. post-transfer) balance.

   • TIP:  Clients should consider the impact that transferring benefits will have on their death benefit nominations. For example, adequate death benefit nominations should be in place for excess benefits moved from a reverting pension account into an accumulation account (as these benefits will no longer be governed by the rules applicable to the pension).

Removing the tax free treatment of assets in transition to retirement income streams (TRIS)

8. From 1 July 2017 the tax exemption on earnings of assets supporting transition to retirement income streams (TRIS) will be removed (i.e. on income streams of individuals over preservation age but not retired).

   This rule will apply to existing and new TRIS. A rule that allows individuals to treat certain income stream payments as lump sums for tax purposes will also be removed.

Other proposed measures

Other proposed measures in the Budget that may affect your clients include:

9. Removing the anti-detriment provision in respect of death benefits;
10. Introducing the Low Income Superannuation Tax Offset;
11. Improving super balances of low income spouses;
12. Increasing choice in retirement products; and
13. Legislating the objective of super.

You should consider and discuss the impact of these changes with your clients to determine whether any changes need to be made to existing arrangements.

If you require help with advising clients on these changes and/or preparing any necessary documentation to effect a change in arrangements, please contact Thalia Dardamanis on 1300 267 529.

Restructuring trusts with capital demands

The distributions of trust income that must be made in June this year will be the 7th distribution since the ATO changed its interpretation of Division 7A and its application to distributions by trusts to companies.  It is an opportune time to consider whether using a trust to hold assets is always the best approach.

Trusts that need working capital or that have large borrowings may benefit from lower tax costs if they restructure.  

Division 7A of Part III of the Income Tax Assessment Act 1936 operates to deem certain loans and payments by private companies as dividends.

If a private company has retained profits and makes a loan to a shareholder or an associate of a shareholder, the loan is treated as a dividend unless there is a written loan agreement that has:

• a minimum interest rate,
• a maximum term of 7 years (25 years for some loans secured by a mortgage over real property), and
• a minimum yearly repayment each year.

To make matters worse, a loan deemed to be a dividend under Division 7A cannot be franked.

Prior to December 2009, the practice of a trust distributing income to a corporate beneficiary had obvious attractions – essentially the trust was able to access the company tax rate of 30% on income, but retained the benefit of a more concessional basis for taxing capital gains.

In December 2009 the ATO announced a change in its interpretation of Division 7A.  From December 2009, a trustee of a trust that made a distribution of income to a company must physically distribute the income to the company or the company will be treated as making a loan to the trust of an amount equal to the amount of the distribution.  

Therefore, trusts distributing income to companies now usually put Division 7A complying loan agreements in place.  It is now fairly common to see financial statements for companies and trusts that have a “pre-December 2009” entitlement and a series of loans for each of the years after that.

If a trust distributes income to a company each year, Division 7A operates so that the trust must obtain the funds to repay these loans from a source other than the company.  Generally this means that the trust will need to obtain the funds from individual beneficiaries who have paid tax at high marginal rates of tax.  

Therefore, although the practice of a trust distributing income to a corporate beneficiary appears attractive on its face, ultimately it only operates to defer the payment of high marginal rates of tax.

By the time a trust and company have used this approach for 7 years, there generally is no further deferral available.  

Trusts that rely on distributing income to companies but retaining the income to use as working capital or to repay debt, may now be using funds that have been taxed at the top marginal rate of 49% to do so.   

If a trust owns a growing business that has an ever increasing need for working capital, this can be a major problem.  Likewise, there can be a problem if a trust must repay money borrowed to acquire an income producing asset.  It can be galling to have to fund working capital or loan principal payments from income that has been taxed at a 49% tax rate.

For such trusts there may be merit in restructuring the business or the ownership of the asset so that the working capital or loan principal amounts are funded from amounts that have been taxed at the 30% company tax rate.  

If this is an issue for you, contact Patrick Cussen or Rob Warnock to organise a time to discuss possible restructuring opportunities.