The federal budget included significant changes to the superannuation system; I thought I’d send all my clients a quick outline on the financial planning impact of these changes.

Limit of Contribution Levels

A life time Non-Concessional contribution (after tax) limit of $500,000 has been introduced; this includes all contributions made since 1 July 2007. This replaces the current yearly limit of $180,000 per annum that also allowed for a 2 year “bring forward” provision.  This will reduce the capacity to build assets outside the superannuation system and make contributions once nearing retirement. 

The concessional limit has been capped at $25,000 per annum; currently the limit is $30,000 and $35,000 for those over 50. This will affect those nearing retirement trying to accelerate savings by contribution heavily. It also limits the extent we can use the TTR strategy.

These limits are further complicated, unused contribution cap can be used in later years for those with Superannuation balances under $500,000. It seems that the unused caps will be measured on a rolling 5 year basis.

At this point I have not been able to determine whether these limits are indexed, I’m sure these details will be released shortly.

High Earners Increase in contribution tax

Those earning more than $250,000 per annum will pay 30% contributions tax, instead of 15%. This used to be for those earning more than $300,000.

Removal of Work Test

The work test will no longer be relevant for contributions, those under age 75 will be able to make contributions whether or not they are working. This allows greater flexibility in making contributions to super.

Taxation of TTR (NCAP) Pensions

Currently earnings on Transition to Retirement Pensions are tax free, they will now be taxed the same as Superannuation savings; 10% of Capital gains or 15% on income. This reduces the attractiveness of Transition to Retirement strategies. The income swap strategy benefit is now limited to the tax savings from increased concessional contributions. The TTR is still an effective strategy, but has been somewhat limited with these changes.

Introduction of Transfer Limit Cap

The maximum accumulated Superannuation that can be transferred to pension phase is $1.6 mil, furthermore those with in excess of $1.6 mil currently have to reduce their pension funds below this limit by July 1.

Other Changes

There are also some other changes in relation to Spouse contributions, Personal deductions for self-employed and changes around the treatment of defined benefit schemes.