Staying ahead of the curve – super changes at 1 July 2023

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What are the changes to superannuation that came into effect on 1 July 2023 and how these changes might impact their clients?

In the ever-evolving world of finance, few sectors experience transformations as regularly as superannuation. Each year, as the calendar ticks over to 1 July, the superannuation landscape witnesses a series of changes, ranging from subtle adjustments to profound overhauls. This article, proudly sponsored by Russell Investments, outlines this year’s changes and how they can impact your clients.

With every passing year, the governments and related bodies implement changes to the superannuation sector with varied objectives in mind. Some of these changes may be driven by economic factors, others by policy adjustments or the need to address societal challenges. Financial year 2024 is no different.

As superannuation becomes an increasingly large component of retirement savings, the importance of staying informed about all changes, large and small, cannot be overstated. Superannuation holds the potential to shape retirement plans and financial security for the estimated five million retired Australians – and the wave of baby boomers approaching this next phase of life.

A number of changes were made to superannuation rules, effective from 1 July 2023. These include rules to increase the ATO’s visibility over unpaid super and changes to the transfer balance caps. From this date, superannuation guarantee contributions rose to 11% and minimum pension withdrawals reverted to normal levels.

Let’s explore some of these changes in greater detail.

Annual drawdown requirements

Each tax year, super fund members in retirement phase are required to be paid at least the minimum legislated pension from their pension account. This annual minimum amount is based on each client’s age and expressed as a percentage of the balance of their pension account as at 1 July or when they commence their pension (whichever occurs later).

In response to Covid-19, the federal government temporarily reduced superannuation minimum drawdown requirements for Account Based Pensions and similar products by 50%. From 1 July 2023, minimum drawdown rates revert to prior levels (figure one); as this affects the year ahead, you or your clients may need to revisit any reoccurring pension amounts that were established or adjusted in the 2019–20, 2020–21, 2021–22 or 2022–23 financial years.

Drawdowns and SMSFs

SMSF trustees who plan to receive income from more than one pension account must ensure they have clear documentation to demonstrate that they’re meeting the minimum pension payment requirements for all pensions involved. A failure to do so may make them ineligible for exempt (tax free) pension income on the pension that does not meet the minimum pension requirement.

Increasing the ATO’s visibility

The ATO’s visibility across unpaid super entitlements will be enhanced under the ‘Securing Australians’ Superannuation Package’. The federal government has allocated $27 million to the ATO to improve its data capabilities, which includes matching employer and super fund data to readily identify instances of underpayment of the superannuation guarantee by employers.

In addition, the ATO has been allocated a further $13.2 million to co-design a new compliance system to proactively identify occurrences where the superannuation guarantee contribution is underpaid.

To further demonstrate the government’s commitment to ensuring payment of superannuation guarantee entitlements, it has set targets to assess the ATO on the recovery of unpaid superannuation.

Those of your clients who run businesses and have employees should be aware that the ATO has increased its resources to detect non-compliance with the superannuation guarantee regime and ensure they have established schedules to ensure inadvertent non-payment.

Transfer caps

The Total Super Balance (TSB) Cap, which determines eligibility to make non-concessional contributions in any given year for individuals up to the age of 75, increased from $1.7m to $1.9m. Those of your clients with balances less than $1.9m have the opportunity to contribute further to their superannuation fund.

The Transfer Balance Cap (TBC), a lifetime limit on the total amount of super that can be transferred into tax-free retirement phase income streams, also increased from $1.7m to $1.9m. Clients with super funds in retirement phase that have utilised the full transfer balance amount in prior years are not entitled to this indexation increase. However, those clients yet to enter retirement phase have the opportunity to transfer up to the new cap limit.

All transfer balance events, such the commencement of a pension, must be reported to the ATO on a quarterly basis from 1 July 2023.

Transfer caps and SMSF reporting

SMSFs that have members in the retirement phase will be required to report certain events that affect their members’ Transfer Balance Accounts (TBA) on a quarterly basis from 1 July 2023.

This requires SMSF trustees to lodge a Transfer Balance Account Reporting (TBAR) form 28 days after the end of the quarter in which a reportable event has occurred. Events that occurred in the 2023 financial year are also captured; all reportable events that occur from 1 July 2022-30 September 2023 will have a reporting date of 28 October 2023.

Reportable events include those that affect a member’s transfer balance account[1]:

  • Details of when a member starts a retirement phase income stream, including death benefit income streams.
  • Details of limited recourse borrowing arrangement (LRBA) payments if the arrangement was entered into, on, or after 1 July 2017 or a pre-existing LRBA was re-financed on or after 1 July 2017 and the payment results in an increase in the value of the member’s interest supporting their retirement phase income stream.
  • Compliance with a commutation authority issued by the ATO.
  • The details, including value, of personal injury (structured settlement) contributions.

If there is no event, your client has nothing to report.

Non-reportable events include[2]:

  • Pension payments
  • Investment earnings and losses
  • When an income stream ceases because the interest has been exhausted
  • Death of a member
  • Family law payment splits
  • Debit events including fraud, dishonesty, or bankruptcy.

Any client who acts as a trustee of an SMSF needs understand these obligations and ensure their TBAR reporting is accurate and timely. An SMSF may be subject to compliance action and penalties from the ATO if they do not make TBAR lodgements on time or respond to an ATO commissioner commutation authority.

Non-compliance with a commutation authority may result in denying exempt pension income claims, which can impact the tax position of your client or another member of the SMSF in retirement phase.

The ATO describes this change as one intended to provide members and the ATO with more timely and accurate information in managing transfer balance accounts and caps and warns of adverse consequences that may be costly to the SMSF trustee if timely reporting is not complete.

Contribution caps

Both the concessional and non-concessional contribution caps remain unchanged for the 2024 financial year.

Concessional contribution cap at $27,000

It’s important to remind clients that concessional contributions include employer superannuation guarantee contributions (now at 11 percent), salary sacrifice contributions and other voluntary contributions. If a client’s employer subsidises administration costs or pays insurance premiums on the client’s behalf, these amounts also count towards their concessional contribution limit.

Carry-forward concessional contributions allow clients to carry forward their unused contributions caps from prior years, as long as their super balance did not exceed $500,000 at the prior 30 June. Unused amounts are available for a maximum of five years.

Non-concessional contribution cap at $110,000

These contributions are those made by your client from their after tax earnings. The work test no longer applies to non-concessional contributions, meaning eligible clients can make such contributions until they turn 75.

However, the work test must still be met for personal deductible contributions. So, if a client aged 67 and above wants to claim a tax deduction for a personal contribution made to their super this financial year, work test requirements remain in place.

Government co-contribution income thresholds

The government co-contribution scheme is an incentive for individuals to make personal contributions to their super account. In the situation where a client has a non-working or low income spouse, it’s a good way to build up that individual’s super fund.

The government co-contributes up to 50c for every $1 that the individual contributes, capped at $500 and paid when the individual lodges their tax return. The co-contribution decreases progressively as the income increases.

For the 2024 financial year, the lowest income threshold has increased to $43,445 p.a. and highest income threshold has increased to $58,445 p.a.

Reduced tax concessions

Although it does not come into effect until 1 July 2025, the ‘Better Targeted Superannuation Concessions’ measures need to factor into client plans for those with a high super balance. From this date, any clients with a super balance exceeding $3 million will be subject to an additional 15 percent tax on investment earnings on that portion of their super balance which exceeds $3 million. This takes the tax rate on those earnings to 30 percent.

Investment earnings on assets below $3 million will continue to be taxed at 15 percent if held in an accumulation or defined benefit account, and 0 if held in a retirement pension account.

Downsizer contribution

Introduced on 1 July 2018, the federal government’s downsizer contribution allows older Australians to top up their super with some of the proceeds of selling their main residence. The contribution does not count toward their annual non-concessional cap.

From 1 January 2023, eligibility age was lowered from age 60 to 55. Proceeds from the sale of a client’s main residence can be contributed to super – up to $300,000 for singles or $600,000 for couples. No work test or upper age limits apply to downsizer contributions.

By lowering the qualification age, the government had two aims: to enable more pre-retirees to use the downsizer contribution to get a greater amount of savings into super earlier, thereby benefiting from investing in the tax effective environment offered by super, and to increase available ‘family sized’ housing stock.

Eligibility requirements for the downsizer contribution include[3]:

  • Your client/s are 55 years or older at the time they make a downsizer contribution.
  • The home was owned by your client and/or their spouse for 10 years or more prior to the sale.
  • The home is in Australia and is not a caravan, houseboat or other mobile home.
  • The proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset.
  • The client has provided their super fund with the ‘downsizer contribution into super’ form either before or at the time of making their downsizer contribution.
  • The downsizer contribution is made within 90 days of receiving the proceeds of sale, usually at the date of settlement.
  • Your client has not previously made a downsizer contribution from the sale of another home.

The changes to the superannuation landscape as of 1 July 2023 were not as significant as some previous years. However, it’s important to understand the key amendments because superannuation plays an increasingly pivotal role in shaping retirement plans and financial security for millions of Australians.

As financial advisers, it is imperative to communicate these changes effectively to clients and guide them in navigating the evolving superannuation landscape. By understanding the impact of these changes, advisers can assist their clients to make informed decisions to secure their financial future and achieve their retirement goals. Staying ahead of the curve in the ever-changing world of superannuation is key to providing clients with sound financial advice and ensuring their long term financial wellbeing.

 

 

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Notes:
[1] Source: ATO
[2] Ibid.
[3] Ibid.

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