House of Representatives

Superannuation (Objective) Bill 2016

Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016

Superannuation (Excess Transfer Balance Tax) Imposition Act 2016

Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Scott Morrison MP and Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)

Chapter 5 Non-concessional contributions

Outline of chapter

5.1 Schedule 3 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (the TLA Bill) amends the annual non-concessional contributions cap from $180,000 to $100,000, introduces criteria for an individual to be eligible for the non-concessional contributions cap and makes other minor amendments in respect of the non-concessional contributions rules.

5.2 All references to legislative provisions in this chapter are references to the Income Tax Assessment Act 1997 (ITAA 1997) and all legislative amendments referred to in this Chapter are contained in the TLA Bill 2016 unless otherwise stated.

Context of amendments

5.3 This measure forms part of the Government's Superannuation Reform Package originally announced in the 2016-17 Budget. The Government announced refinements to the non-concessional contributions cap on 15 September 2016. The measure will improve the sustainability and integrity of the superannuation system.

5.4 To ensure superannuation is being used to increase individuals' income in retirement, and not for tax minimisation or estate planning purposes, there are limits on the amount of non-concessional contributions individuals can make. By reducing the annual non-concessional caps and restricting their use to those with balances less than the general transfer balance cap, this measure will better target the tax concessions. This will encourage those who have aspirations to build their superannuation balance up to an amount equal to the general transfer balance cap, while retaining the flexibility to accommodate lump sum contributions from one-off events such as receiving an inheritance or selling a large asset.

Summary of new law

5.5 Schedule 3 to the TLA Bill:

·
amends the annual non-concessional contributions cap from $180,000 to $100,000 (which is subject to indexation based on average weekly ordinary time earnings (AWOTE));
·
introduces a requirement that an individual must have a total superannuation balance at 30 June of the previous financial year of less than the general transfer balance cap in the relevant year ($1.6 million in the 2017-18 financial year) to be eligible for the non-concessional contributions cap;
·
prevents payment of the government co-contribution in respect of an individual who is not eligible to make non-concessional contributions; and
·
makes other minor amendments in respect of the non-concessional contributions rules.

Comparison of key features of new law and current law

New law Current law
Annual non-concessional contributions cap
Amount of cap
The annual non-concessional contributions cap is four times the annual concessional contributions cap.

This equals $100,000 (4 x $25,000) in the 2017-18 financial year.

Note: the annual concessional contributions cap has been reduced from $30,000 to $25,000 in Schedule 2 to the TLA Bill.

The annual non-concessional contributions cap is six times the annual concessional contributions cap.

This equals $180,000 (6 x $30,000) in the 2016-17 financial year.

Indexation of cap
The annual non-concessional contributions cap is indexed as the concessional contributions cap is indexed. The concessional contributions cap is indexed in $2,500 increments in line with AWOTE. The annual non-concessional contributions cap is indexed as the concessional contributions cap is indexed. The concessional contributions cap is indexed in $5,000 increments in line with AWOTE.
Eligibility criteria
An individual must have a total superannuation balance of less than the general transfer balance cap on 30 June of the previous financial year to be eligible for the non-concessional contributions cap in the relevant financial year.

The general transfer balance cap for the 2017-18 financial year is $1.6 million, and is indexed in $100,000 increments in line with the Consumer Price Index (CPI).

There is no total superannuation balance test to determine whether an individual is eligible for the non-concessional contributions cap.
Total superannuation balance
An individual's total superannuation balance at a particular time is the sum of:

·
the accumulation phase value of their superannuation interests;
·
if they have a transfer balance account, an adjusted balance for that transfer balance account; and
·
any rolled over superannuation benefits not reflected in the individual's accumulation phase value or balance of their transfer balance account,

reduced by the sum of any structured settlement contributions.

No equivalent.
Bring forward cap
Individuals may be able to access a bring forward period for their non-concessional contributions cap of two or three times the annual cap, depending on their total superannuation balance.

In the 2017-18 financial year, the amount of the cap an individual may bring forward is three times the annual cap over three years if their total superannuation balance is less than $1.4 million, two times the annual cap over two years if their superannuation balance is above $1.4 million, and nil if their superannuation balance is $1.5 million or above.

An individual's total superannuation balance is determined on 30 June of the previous financial year.

Transitional arrangements apply to individuals who brought forward their non-concessional contributions cap in the 2015-16 or 2016-17 financial years.

Individuals can access a three year bring forward period for their non-concessional contributions cap of three times the annual cap.

Eligibility for government co-contribution
In addition to the existing eligibility requirements, individuals are not eligible for the government co-contribution in an income year if:

·
their non-concessional contributions exceed their non-concessional contributions cap for that year; or
·
if, at 30 June of the previous year, their total superannuation balance equals or exceeds the general transfer balance cap.

Non-concessional contributions and total superannuation balances do not affect eligibility for the government co-contribution.

Detailed explanation of new law

Annual non-concessional contributions cap

5.6 Individuals with a total superannuation balance of less than the general transfer balance cap ($1.6 million in the 2017-18 financial year) at 30 June of the previous financial year, are eligible for the general (or annual) non-concessional contributions cap. [Schedule 3, item 2, subsection 292-85(2)]

5.7 The general non-concessional contributions cap is equal to four times the concessional contributions cap. This means that for the 2017-18 financial year, the general non-concessional contributions cap is $100,000 (four times the $25,000 concessional contributions cap). This does not include any increases in the concessional contributions cap due to the carry forward of unused concessional contributions cap. [Schedule 3, item 2, paragraph 292-85(2)(a)]

5.8 The concessional contributions cap is indexed and increases in increments of $2,500 in line with AWOTE. Indexation of the concessional contributions cap automatically flows through to the non-concessional contributions cap. [Schedule 11, item 6, subsection 960-285(7) table item 2]

5.9 More information on the concessional contributions cap, including amendments to that cap made by the TLA Bill, is contained in Chapter 4 of this explanatory memorandum.

Non-concessional contributions

5.10 Non-concessional contributions are, generally, contributions made from an individual's after-tax income (that is, from income that has been taxed at their marginal rate) and are therefore not included in the assessable income of the superannuation fund. Individuals may choose to make non-concessional contributions to their superannuation because future earnings on these contributions within the superannuation system will be taxed at the concessional rate of 15 per cent.

5.11 In comparison, concessional contributions are made from pre-tax income, and generally included in the assessable income of the superannuation fund and taxed at the concessional rate of 15 per cent.

Eligibility criteria

5.12 An individual is eligible for the non-concessional contributions cap in a financial year if, at 30 June of the previous financial year, the individual's total superannuation balance was less than the general transfer balance cap in the relevant financial year. [Schedule 3, item 2, subsection 292-85(2)]

General transfer balance cap

5.13 The general transfer balance cap is $1.6 million for the 2017-18 financial year and is subject to indexation on an annual basis in line with CPI, in $100,000 increments. [Schedule 11, item 6, subsection 960-285(7) table item 3]

5.14 The general transfer balance cap is discussed in Chapter 3 of this explanatory memorandum. Total superannuation balance

5.15 The concept of 'total superannuation balance' is inserted by Schedule 11. This concept is relevant for several measures in the Government's 2016-17 Budget Superannuation Reform Package and ensures consistent treatment for the valuation of an individual's total superannuation balance across all of these measures.

5.16 An individual's total superannuation balance, at a particular time, is the sum of the following:

·
the accumulation phase value of their superannuation interests that are not in the retirement phase at that time;
·
the retirement phase value of their superannuation interests which is the balance of their transfer balance account at that time (but not less than nil), adjusted to:

-
reflect the current value of account-based superannuation interests in the retirement phase; and
-
disregard any debits that have arisen in respect of structured settlements; and

·
the amount of each roll-over superannuation benefit paid at or before that time, that is received after that time, and not reflected in the accumulation phase value or the retirement phase value.
This sum is then reduced by the sum of any structured settlement contributions.
[Schedule 11, items 2, 3, 4, 7 and 9, section 307-205, subsection 307-205(2), section 307-230 and the definitions of 'account-based annuity', 'accumulation phase value', 'total superannuation balance' , 'transfer balance' and 'transfer balance account' in subsection 995-1(1)]

Accumulation phase value

5.17 The first component of an individual's total superannuation balance is the accumulation phase value. The default rule for determining the accumulation phase value of an individual's superannuation interest at a particular time is the total amount of superannuation benefits that would become payable, if the individual voluntarily ceased the interest at that time. Otherwise the accumulation phase value is the value of the superannuation interest as set out in the Income Tax Assessment Regulations 1997. [Schedule 11, items 2, 3, 4, 7 and 9, section 307-205, subsection 307-205(2), paragraph 307-230(1)(a) and the definitions of 'accumulation phase value ' and 'total superannuation balance' in subsection 995-1(1)]

5.18 Where an individual had a single superannuation interest in a superannuation entity regulated under the Superannuation Industry (Supervision) Act 1993, this amount would be the individual's withdrawal benefit, which is the amount of benefits that would be payable to the individual, and/or rolled over to another superannuation fund or retirement savings account, if the individual voluntarily ceased to be a member of the fund.

5.19 However, if an individual has more than one superannuation interest in a given superannuation entity it would be possible for an individual to cease an interest in the entity but still retain membership of the entity in respect of other interests. For example an individual, on resignation from employment, could be entitled to be paid a defined benefit income stream (with no lump sum equivalent) and also have an accumulation account balance with their fund. In these circumstances, only the value of the accumulation account would be included in the accumulation value.

5.20 The regulation making power enables alternative valuation rules to be prescribed for certain types of superannuation interests, or superannuation interests in specific funds, in circumstances where the default rule could lead to a nil or minimal valuation. [Schedule 11, item 3, paragraph 307-205(2)(a)] Retirement phase value

5.21 The second component of an individual's total superannuation balance is the retirement phase value, which is the balance of their transfer balance account, adjusted by:

·
disregarding the effect of certain credits and debits to the transfer balance account to reflect the current value of account-based superannuation interests in the retirement phase; and
·
disregarding the effect of any debits to the transfer balance account that arose for a structured settlement contribution.

[Schedule 11, items 4 and 9, paragraph 307-230(1)(b) and subsections 307-230(2), (3) and (4) and the definition of 'total superannuation balance' and 'transfer balance' and 'transfer balance account' in subsection 995-1(1)]

5.22 Schedule 1 to the TLA Bill, as explained in Chapter 3, introduces the concept of a 'transfer balance account'. This account represents the net amount of capital an individual has transferred to their superannuation retirement phase.

5.23 An individual's transfer balance account may be debited in certain circumstances, and it is possible for an individual's transfer balance account to have a negative balance if their debits exceed their credits. However, for the purposes of the total superannuation balance, if an individual's adjusted transfer balance account is less than nil, it is taken to be nil. [Schedule 11, item 4, paragraph 307-230(1)(b)]

Adjustments to the retirement phase value

Account-based income streams

5.24 The balance of an individual's transfer balance account is adjusted for the purposes of working out their total superannuation balance to reflect the actual value of an interest in an account-based income stream at a particular time. All other superannuation income stream interests retain the value for the given interest attributed to the transfer balance account. [Schedule 11, item 4, subsections 307-230(3) and (4)]

5.25 Using this method ensures that an individual's total superannuation balance is as up-to-date as possible without imposing an additional obligation on superannuation income stream providers to calculate other superannuation interest balances, for example for defined benefit interests, on an annual basis, as these interests have already been calculated for the purposes of the transfer balance account.

5.26 The adjustment to the transfer balance account balance disregards certain credit and debit amounts made to the account for superannuation interests that support an account-based superannuation income stream. An adjustment for the account balance of the income stream, being the value of the interest in the income stream if it is voluntarily ceased or is deemed to cease at that time, is made to the transfer balance account balance. The adjustment provisions cover all superannuation income streams for which there is an account balance attributable to a beneficiary being allocated, account-based or market linked pensions and annuities. [Schedule 11, item 4, subsections 307-230(3) and (4)]

5.27 An amendment to the Superannuation Industry (Supervision) Regulations 1994 will be made to set out the meaning of an account-based annuity. [Schedule 11, items 4 and 7, paragraph 307-230(4)(d) and the definition of 'account-based annuity' in subsection 995-1(1)]

5.28 For further detail on the concept of a transfer balance account, see Chapter 3.

Structured settlement contributions

5.29 For the purposes of determining an individual's balance in their transfer balance account, any debits that arose under item 2 (relating to structured settlements) of the table in subsection 294-80(1) are disregarded. [Schedule 11, item 4, subparagraph 307-230(2)(b)(i)] Roll-over superannuation benefit

5.30 The third component of the total superannuation balance is an individual's roll-over superannuation benefit that is paid at or before a time, which is received after that time, and not reflected in the individual's accumulation phase value or balance of the transfer balance account at 30 June of the relevant financial year. [Schedule 11, item 4, paragraph 307-230(1)(c)]

5.31 This third component is intended to capture amounts that are rolled-over at the end of a financial year that would not otherwise be accounted for in the accumulation phase value or retirement phase value of an individual's superannuation interests at a particular time because the amount is 'in transit'.

Example 5.1 : Roll-over superannuation benefit Jennifer has $450,000 in the accumulation phase in her superannuation fund, Fund A.On 29 June 2019 Jennifer requests Fund A to partially roll-over an amount of $100,000 to Fund B. Fund B does not receive the $100,000 roll-over superannuation benefit until 1 July 2019.On 30 June 2019, Jennifer's total superannuation balance is the $350,000 remaining in accumulation phase in Fund A, plus the $100,000 roll-over superannuation benefit that is in transit to Fund B. This is because the roll-over amount was paid before 30 June 2019 but not received by Fund B until after that time, and it was not reflected in her accumulation phase value which is calculated at 30 June of that year.

Adjustment for structured settlement contributions

5.32 Once the sum of the accumulation phase value, retirement phase value (including the effect of any adjustments) and any roll-over amounts is calculated, this total is reduced by the sum of any structured settlement contributions. [Schedule 11, item 4, paragraph 307-230(2)(a) and subparagraph 307-230(2)(b)(ii)]

5.33 Schedule 11 provides that 'structured settlement contribution' has the meaning given by section 294-80. [Schedule 11, item 9, subsection 995-1(1)]

5.34 Subsection 294-80(2) provides that a structured settlement contribution is a contribution to a complying superannuation plan that satisfies the requirements of section 292-95 or if the contribution was made before 10 May 2006, the contribution would be covered by section 292-95 disregarding the following requirements (grandfathering rule):

·
that the contribution is made within 90 days of the later of the day of receipt of the payment from which the contribution is made, or the day a settlement agreement is entered into or approved by a court (where applicable) (paragraph 292-95(1)(b)); and
·
at the time the contribution is made to the fund (or earlier) the individual or their legal personal representative notifies the fund, in the approved form, that section 292-95 is to apply to the contribution (paragraph 292-95(1)(d)).

[Schedule 1, item 4, paragraph 294 80(2)(b)]

5.35 The grandfathering rule reflects the fact that it was not necessary to comply with these contribution timing requirements before the start of the excess non-concessional contributions regime.

5.36 The other requirements under section 292-95 include, broadly, that the contribution arises from the settlement of a personal injury claim and two legally qualified medical practitioners have certified that because of a personal injury, it is unlikely the individual can ever be gainfully employed in a capacity for which they are reasonably qualified or trained.

5.37 Structured settlement contributions are not counted towards the annual contributions caps under existing law, and are being excluded from the total superannuation balance calculation, to recognise that these are usually large payments that can provide the funds for ongoing medical and care expenses resulting from serious injury and income loss.

Example 5.2 : Total superannuation balance where structured settlement contribution has been made Masayo is 55 years old and has a balance of $1 million in her superannuation account which is in the accumulation phase. She does not have any superannuation interests in the retirement phase. In the 2017-18 financial year, Masayo is involved in an accident that results in her receiving a structured settlement of $2 million, which she contributes to her superannuation account on 15 May 2018.To determine whether she is eligible for the non-concessional contributions cap in the 2018-19 financial year, Masayo's total superannuation balance at 30 June 2018 is her accumulation phase value ($3 million) less her structured settlement contribution ($2 million), giving her a total superannuation balance of $1 million. As Masayo's total superannuation balance is below $1.6 million on 30 June 2018, Masayo is eligible for the non-concessional contributions cap in the 2018-19 financial year.

Example 5.3 : Total superannuation balance for a defined benefit pensioner where structured settlement contribution has been made and account-based pension commenced During the 2017-18 financial year, Morgan was in receipt of a lifetime pension from her defined benefit superannuation interest valued at $1.1 million on 1 July 2017. On 1 May 2018, Morgan receives a structured settlement of $1.5 million, contributes that amount to a defined contribution fund and commences an account-based pension valued at $1.3 million on 28 June 2018. The remaining $200,000 from the structured settlement amount remains in the accumulation phase.Morgan's total superannuation balance on 30 June 2018 is calculated as her accumulation phase value (a), plus her retirement phase value (b), plus her rollover superannuation benefit (c), less her structured settlement contribution, where:(a) Accumulation phase value: $200,000;(b) Retirement phase value (adjusted transfer balance account balance):Transfer balance account balance on 30 June 2018:

Transfer balance account
Credit Debit
1/7/17 Defined benefit pension $1.1 million
1/5/18 Structured settlement contribution $1.5 million
28/6/18 Account-based pension $1.3 million
30/6/18 Balance $900,000 CR
The retirement phase value for the purposes of calculating total superannuation balance is the transfer balance account balance on 30 June 2018, adjusted as follows:1. Disregard the amount of the credit that arose in respect of the account based pension ($1.3 million) (i.e. by reducing the balance);2. Increase the balance by the amount that would become payable if the account-based pension ceased on 30 June 2018 ($1.3 million assuming no change in value from 28 June 2018); and3. Disregard the amount of the debit that arose in respect of the structured settlement contribution ($1.5 million) (i.e. by increasing the balance).Therefore, the transfer balance account balance for the purposes of calculating Morgan's total superannuation balance on 30 June 2018 is:

$900,000 - $1.3 million + $1.3 million + $1.5 million = $2.4 million

(C) Rollover superannuation benefits = $0.Morgan's total superannuation balance = (a) + (b) + (c) - her structured settlement contribution:

$200,000 + $2.4 million + $0 - $1.5 million = $1.1 million

Calculation of total superannuation balance on 30 June 2017

5.38 The provisions regarding the calculation of total superannuation balance apply to the financial year starting on 1 July 2017 and later financial years. A transitional rule applies to calculate an individual's transfer balance account balance for the purposes of calculating an individual's total superannuation balance on 30 June 2017, see paragraph 5.71.

Bringing forward the non-concessional contributions cap

5.39 Individuals may be able to access a bring forward period for their non-concessional contributions cap equal to two or three times the annual cap, depending on their total superannuation balance (see calculation of the bring forward cap section below).

5.40 Once an individual has accessed the bring forward cap in a financial year (the first year), the bring forward cap and the bring forward period are calculated by reference to the difference between the general transfer balance cap and the individual's total superannuation balance in that first year. Once the bring forward period has expired, an individual may then access the annual cap or a new bring forward cap if eligible.

5.41 An individual is eligible to access the bring forward non-concessional contributions cap in a particular financial year (the first year) if:

·
their non-concessional contributions for that financial year exceed their general non-concessional contributions cap;
·
their total superannuation balance is less than the general transfer balance cap;
·
the difference between the general transfer balance cap and their total superannuation balance (the first year cap space) is greater than the general non-concessional contributions cap;
·
they are under 65 years of age at any time in that financial year; and
·
a bring forward period is not currently in operation in respect of the financial year.

[Schedule 3, item 2, subsection 292-85(3)]

Example 5.4 : Bring forward non-concessional contributions cap - eligibility Maya is 43 years old, and her total superannuation balance on 30 June 2017 is $500,000. In the 2017-18 financial year, she makes $170,000 of non-concessional contributions. Maya can access the bring forward non-concessional contributions cap in the 2017-18 financial year because:

·
Maya's total superannuation balance is less than the 2017-18 financial year general transfer balance cap of $1.6 million; and
·
the difference between the general transfer balance cap ($1.6 million) and her total superannuation balance ($500,000) is greater than the general non-concessional contributions cap ($100,000); and
·
she is under 65 years of age; and
·
she does not currently have a bring forward period because of an earlier application of the bring forward rules.

Calculating the bring forward non-concessional contributions cap and the bring forward period

5.42 The amount of non-concessional contributions cap an individual may bring forward to a financial year and the bring forward period depends on their total superannuation balance on 30 June of the previous financial year.

$300,000 (indexed) and three year bring forward period

5.43 If the first year cap space (the difference between the general transfer balance cap in the relevant financial year and an individual's total superannuation balance as at 30 June of the previous financial year) is greater than two times the general non-concessional contributions cap, an individual's non-concessional contributions cap for the first year is three times their general non-concessional contributions cap and their bring forward period is three years. In the 2017-18 financial year, that would equal $300,000 (three times $100,000) with a three year bring forward period. [Schedule 3, item 2, subsection 292-85(3) and paragraph 292-85(5)(b)]

Example 5.5 : Bring forward non-concessional contributions cap eligibility and period - three years Karen is 60 years of age and has a total superannuation balance of $1.35 million on 30 June 2017.If Karen makes more than $100,000 of non-concessional contributions in the 2017-18 financial year, her bring forward cap in that year is $300,000 and her bring forward period is three years. This is because the difference between the general transfer balance cap ($1.6 million) and Karen's total superannuation balance ($1.35 million) is more than two times the general non-concessional contributions cap ($200,000).

$200,000 (indexed) and two year bring forward period

5.44 However, if the first year cap space (the difference between the general transfer balance cap in the relevant financial year and the individual's total superannuation balance as at 30 June of the previous financial year) is between one and two times the general non-concessional contributions cap, then the bring forward cap is two times the general non-concessional contributions cap and the bring forward period is two years. That is, someone with a total superannuation balance of $1.4 million to less than $1.5 million on 30 June 2017 is able to access a $200,000 bring forward cap over a two year bring forward period. [Schedule 3, item 2, subsections 292-85(3) and (4), paragraph 292-85(5)(a)]

Example 5.6 : Bring forward non-concessional contributions cap eligibility and period - two years Elliot has a total superannuation balance of $1.45 million on 30 June 2017. His bring forward cap for the 2017-18 financial year (first year) is $200,000 and his bring forward period is two years.

$100,000 (indexed) and no bring forward period

5.45 However, if the difference between the general transfer balance cap in the relevant financial year and the individual's total superannuation balance as at 30 June of the previous financial year is less than the general non-concessional contributions cap, then the individual is not eligible to a bring forward cap but is eligible for the general non-concessional contributions cap ($100,000 in 2017-18). [Schedule 3, item 2, subsection 292-85(2) and paragraph 292-85(3)(e)]

Example 5.7 : Bring forward non-concessional contributions cap - no eligibility Thomas is 63 years old and has a total superannuation balance of $1.55 million on 30 June 2017.As the difference between the general transfer balance cap ($1.6 million in the 2017-18 financial year) and Thomas' total superannuation balance ($1.55 million) is less than the general non-concessional contributions cap ($100,000), Thomas can only make $100,000 of non-concessional contributions in the 2017-18 financial year. He is not eligible to bring forward any future non-concessional contributions caps.

5.46 If the individual's total superannuation balance as at 30 June of the previous financial year, is equal to or greater than the general transfer balance cap in the relevant financial year ($1.6 million in the 2017-18 financial year), they are not eligible for any non-concessional contributions cap in that financial year. This eligibility criterion applies in every year of an individual's bring forward period.

5.47 Where an individual is eligible to bring forward their non-concessional contributions caps to the 2017-18 financial year, their cap for the first year is set out in the following table:

Total superannuation balance on 30 June 2017 Non-concessional contributions cap for the first year Bring forward period
Less than $1.4 million $300,000 3 years
$1.4 million to less than $1.5 million $200,000 2 years
$1.5 million to less than $1.6 million $100,000 No bring forward period, general non-concessional contributions cap applies
$1.6 million or more Nil N/A

Note: These values are subject to change in later financial years as the concessional contributions cap (and therefore non-concessional contributions cap) and the general transfer balance cap are subject to indexation (see paragraphs 5.8 and 5.13 respectively).

5.48 Those individuals who have triggered their bring forward in the 2015-16 or 2016-17 financial years are subject to transitional arrangements (see paragraphs 5.72 to 5.81).

Calculating the non-concessional contributions cap for the second year

5.49 An individual who has brought forward their non-concessional contributions cap is able to make further non-concessional contributions in the second year of the bring forward period if:

·
their total superannuation balance on 30 June of the financial year before the start of the second year is less than the general transfer balance cap in that second year; and
·
their non-concessional contributions for the first year fall short of their cap for the first year.

5.50 If both of these requirements are met, the individual's cap for the second year is the unused portion of their cap from the first year. That is, the difference between their cap in the first year and their non-concessional contributions made in the first year. [Schedule 3, item 2, paragraph 292-85(6)(a)]

5.51 If the individual has a total superannuation balance on 30 June of the financial year before the start of the second year that is equal to or more than the general transfer balance cap in that second year, or they used their entire cap in the first year, their cap in the second year is nil. [Schedule 3, item 2, paragraph 292-85(6)(b)]

Example 5.8 : Calculation of the bring forward cap - second year Alvaro accesses the bring forward rules in the 2017-18 financial year by making non-concessional contributions of $170,000. Alvaro's bring forward cap was $300,000 and his bring forward period is three years.Alvaro wishes to make further non-concessional contributions in the 2018-19 financial year. Alvaro's total superannuation balance on 30 June 2018 is $700,000. He meets the first requirement because his total superannuation balance on 30 June before the start of the second year is less than the general transfer balance cap ($1.6 million).Alvaro also meets the second requirement because his cap for the first year (2017-18) was $300,000, and he only made non-concessional contributions of $170,000.Alvaro's cap for the second year is the difference between his cap in the first year and his non-concessional contributions for that year, $300,000 - $170,000 = $130,000.

Calculating the non-concessional contributions cap for the third year

5.52 If an individual has a three year bring forward period, they may make further non-concessional contributions in the third year if their total superannuation balance on 30 June before the start of the third year is less than the general transfer balance cap in that third year and either:

·
their non-concessional contributions for the second year fall short of their cap for the second year; or
·
if their cap for the second year is nil, and their non-concessional contributions for the first year fell short of their cap for the first year.

5.53 If those requirements are met, the individual's cap for the third year is:

·
if their non-concessional contributions for the second year fell short of their non-concessional contributions cap for the second year - the amount of the shortfall; or
·
if their cap for the second year is nil, and their non-concessional contributions for the first year fell short of their cap for the first year - the amount of the shortfall.

[Schedule 3, item 2, subsection 292-85(7)]

5.54 This test allows individuals to use up any unused portion of their cap from the second year or, if their cap in the second year was nil, any unused portion of their cap in the first year if they are eligible in the third year.

Example 5.9 : Calculation of the bring forward cap - third year Natasha has a total superannuation balance of $820,000 on 30 June 2017 and during the 2017-18 financial year, she made non-concessional contributions of $120,000. Natasha's bring forward cap is $300,000 and she has a three year bring forward period (2017-18, 2018-19 and 2019-20 financial years).On 30 June 2018, Natasha's total superannuation balance is $990,000 and in the 2018-19 financial year, she makes further non-concessional contributions of $110,000. On 30 June 2019, Natasha's total superannuation balance is $1.2 million and her remaining bring forward cap for the 2019-20 financial year is $70,000 ($300,000 - ($120,000 + $110,000)) = $70,000).

5.55 If an individual's total superannuation balance on 30 June before the start of the third year equals or exceeds the general transfer balance cap, or they have used up their bring forward non-concessional contributions cap in the first and second years, their non-concessional contributions cap for the third year is nil. [Schedule 3, item 2, subsection 292-85(7)]

5.56 Where an individual has a two year bring forward period, at the expiry of the two year bring forward period (i.e. in the third year) they may access the general non-concessional contributions cap (annual cap) or bring forward cap again, if eligible, in this year.

Eligibility for government co-contribution

5.57 The Government makes superannuation co-contributions to superannuation interests of low or middle income earners who make personal contributions to their superannuation fund and meet other eligibility criteria.

5.58 Schedule 3 to the TLA Bill amends the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 to provide that, in addition to the existing eligibility criteria for the government co-contribution, a government co-contribution will only be made in respect of a person for an income year if:

·
the individual's non-concessional contributions for the financial year corresponding to the income year do not exceed their non-concessional contributions cap for that financial year; and
·
on 30 June before the start of that financial year, the individual's total superannuation balance is less than the general transfer balance cap for that financial year.
[Schedule 3, item 7, paragraphs 6(1)(da) and (db) of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003]

Commissioner's discretion to extend time for structured settlement contributions to be made

5.59 Schedule 3 also amends the contribution timing requirements to provide the Commissioner with flexibility to allow a longer period (than 90 days) for a structured settlement contribution to be made. [Schedule 3, item 3, paragraph 295-95(1)(b)]

5.60 An individual may request the Commissioner to allow a longer period of time for the contribution to be made. If the individual is dissatisfied with the decision made by the Commissioner, they may object in the manner set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953). [Schedule 3, item 4, subsections 292-95(6) and (7)]

Technical amendment - administrative alignment of objection rights

5.61 Schedule 3 also amends the law to ensure that the objection rights that apply to discretionary decisions made by the Commissioner in respect of non-concessional contributions align with the objection rights that apply to discretionary decisions in respect of concessional contributions.

5.62 Section 292-465 provides the Commissioner with discretion to disregard non-concessional contributions in working out the amount of non-concessional contributions for a financial year or to reallocate non-concessional contributions to another financial year, on application by a person. A similar discretionary provision exists in section 291-465 in respect of concessional contributions. A person should have the right to object against the application of this discretion in the standard manner set out in Part IVC of the TAA 1953.

5.63 The majority of individuals who receive an excess non-concessional contributions determination will have the excess amount released from superannuation unless they specifically request that no amount be released. As such most individuals will not receive an excess non-concessional contribution tax assessment against which, in the absence of this specific review provision, the individual could object.

5.64 The Superannuation Legislation Amendment Act 2010 (No. 117 of 2010) provided for objection rights in respect of non-concessional contributions by inserting subsection 292-465(9).

5.65 The terms of subsection 292-465(9) as originally enacted, prima facie, limit the grounds for review to being dissatisfied with a determination that was applied for under section 292-465. The intent of this provision was to provide an avenue for review for a taxpayer who was dissatisfied with the Commissioner's determination, or a decision not to make a determination.

5.66 Following the decision of the Administrative Appeals Tribunal in Ward and Commissioner of Taxation [2015] AATA 138, these amendments are being made to align the review provisions in respect of the Commissioner's discretion to disregard or reallocate non-concessional contributions with those in respect of concessional contributions. This ensures that if a person is dissatisfied with the Commissioner's exercise of the discretion under section 292-465 (either in respect of the determination made or a decision not to make a determination), the person may object in the manner set out in Part IVC of the TAA 1953. [Schedule 3, item 5, subsection 292-465(9)]

5.67 For the avoidance of doubt, and also in alignment with the review provisions in respect of the Commissioner's discretion to disregard or reallocate concessional contributions, amendments are being made to clarify:

·
the right to object under section 175A of the Income Tax Assessment Act 1936 or section 97-35 in Schedule 1 to the TAA 1953; and
·
the application of the Administrative Decisions (Judicial Review) Act 1977;

where a person is dissatisfied with the Commissioner's exercise of the discretion under section 292-465. [Schedule 3, item 5, subsection 292-465(10)]

Consequential amendments

5.68 Schedule 3 to the TLA Bill inserts a new subheading, 'Your excess non-concessional contributions' before subsection 292-85(1). [Schedule 3, item 1, subheading to subsection 292-85(1)]

5.69 Schedule 3 to the TLA Bill also amends the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 to insert the definitions of 'total superannuation balance', 'general balance transfer cap', 'non-concessional contributions', 'non-concessional contributions cap' and 'total superannuation balance'. [Schedule 3, item 8, section 56 of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003]

Application and transitional provisions

Application

5.70 The amendments in Schedule 3 apply in relation to working out your non-concessional contributions cap for the financial year commencing on 1 July 2017 and later financial years. [Schedule 3, item 9]

Transitional

Calculation of total superannuation balance on 30 June 2017

5.71 Where an individual's total superannuation balance is calculated on 30 June 2017, the calculation of an individual's transfer balance is based on the sum of credits to their transfer balance account just after the start of 1 July 2017 less the sum of certain debits to their transfer balance account on 1 July 2017. [Schedule 1, item 35, section 307-230 of the Income Tax (Transitional Provisions) Act 1997]

Bring forward rule

5.72 Transitional rules apply to individuals who have activated the bring forward rule in the 2015-16 or 2016-17 financial years, to ensure they do not retain the benefit of existing higher caps for the remainder of their bring forward period. The transitional provisions do not affect an individual's non-concessional contributions cap for any financial year that ended before 1 July 2017. [Schedule 3, item 6, subsection 292-85(3) of the Income Tax (Transitional Provisions) Act 1997]

5.73 Individuals must have a total superannuation balance of less than the general transfer balance cap ($1.6 million) as at 30 June 2017 to be eligible to access their bring forward cap in the 2017-18 financial year, and as at 30 June 2018 to be eligible to access their bring forward cap in the 2018-19 financial year. Individuals with a total superannuation balance that equals or exceeds the general transfer balance cap ($1.6 million) on 30 June of the previous financial year will have a non-concessional contributions cap of nil in the relevant financial year of their transitional bring forward period, due to the application of the standard rules which apply a non-concessional contributions cap of nil for individuals with total superannuation balances equal to or over the general transfer balance cap.

5.74 After a bring forward period that was triggered in the 2015-16 or 2016-17 financial year ends, the individual is subject to the general rules regarding bringing forward the non-concessional contributions caps (discussed at paragraphs 5.39 to 5.56).

Bring forward period triggered in the 2015-16 financial year

5.75 Where an individual triggered their bring forward period in the 2015-16 financial year, their non-concessional contributions caps for the first (2015-16) and second (2016-17) years are set by the rules that applied to those financial years. However, their cap for the third year (2017-18) will be set by the transitional rules put in place by this Schedule.

5.76 The third year cap (for 2017-18) is determined under the standard calculation for the third year cap (under subsection 292-85(6)), but applied as if the first year cap had been $460,000. [Schedule 3, item 6, subsection 292-85(1) of the Income Tax (Transitional Provisions) Act 1997]

5.77 The transitional rules modify the calculation of the second year cap for the purposes of ensuring the correct third year cap. This is necessary because the third year cap is based on the unused portion of caps from prior years. However, this modification does not affect the actual cap that applies to the individual in the 2015-16 or 2016-17 financial year. [Schedule 3, item 6, subsections 292-85(1) and (3) of the Income Tax (Transitional Provisions) Act 1997]

5.78 This first year cap of $460,000 represents $180,000 for each of the first and second years (equal to the annual cap for 2015-16 and 2016-17), and $100,000 for the third year (equal to the annual cap for 2017-18).

Example 5.10 : Calculation of the bring forward cap - transitional Henry made a non-concessional contribution to his superannuation fund of $200,000 in the 2015-16 financial year (the first year). Under the non-concessional contributions cap rules applying to the 2015-16 financial year, he exceeded his yearly cap of $180,000 and triggered the bring forward rules. These rules gave him a cap for the first year of $540,000.In the 2016-17 financial year (the second year), Henry's cap was $340,000 ($540,000 - $200,000). He made a further $100,000 of non-concessional contributions in that financial year.As Henry's bring forward period started in the 2015-16 financial year, the standard rule for calculating his third year cap in the 2017-18 financial year is modified by the transitional bring forward non-concessional contributions cap rules.As Henry's total superannuation balance on 30 June 2017 is $550,000 he is eligible in 2017-18 for the transitional bring forward cap rules to apply, and his cap is calculated by taking the amended bring forward cap of $460,000 less his contributions in the first and second years ($200,000 + $100,000). His cap for the 2017-18 financial year is therefore $160,000.

Bring forward period triggered in the 2016-17 financial year

5.79 Where an individual triggered their bring forward period in the 2016-17 financial year, their non-concessional contributions cap for the first year is set by the rules that applied to that financial year. However, their cap for the second and third year is set by the transitional rules put in place by this Schedule.

5.80 The second and third year caps, for the 2017-18 and 2018-19 financial years, are determined under the standard calculation of those caps (under subsections 292-85(6) and (7)), but applied as if the first year cap had been $380,000. [Schedule 3, item 6, subsection 292-85(2) of the Income Tax (Transitional Provisions) Act 1997]

5.81 This first year cap of $380,000 represents $180,000 for the first year (equal to the annual cap for the 2016-17 financial year), and $100,000 for each of the second and third years (equal to the annual cap for 2017-18 and 2018-19 financial years, assuming the cap has not increased in 2018-19 due to indexation).

Example 5.11 : Calculation of the bring forward cap - transitional Molly has a total superannuation balance of $200,000 as at 30 June 2016. In September 2016 she makes non-concessional contributions of $250,000. 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, given the transitional bring forward cap of $380,000. Molly makes a non-concessional contribution of $110,000 in the 2017-18 financial year and $20,000 in the 2018-19 financial year.Molly is 40 years old and has a total superannuation balance of $675,000 on 30 June 2019. She can then access a new bring forward period and contribute up to $300,000 in non-concessional contributions in the 2019-20 financial year if she wishes.

STATEMENT OF COMPATABILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016

5.82 Schedule 3 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

5.83 Schedule 3 to the Treasury Laws and Amendment (Fair and Sustainable Superannuation) Bill 2016 reduces the non-concessional (after-tax) contributions cap from $180,000 to $100,000 per annum, and introduces a requirement that for individuals to be eligible for the non-concessional contributions cap, they must have a total superannuation balance below the general transfer balance cap ($1.6 million in the 2017-18 financial year). This Schedule also allows eligible individuals under 65 years old to bring forward up to 3 years of non-concessional contributions.

5.84 Non-concessional contributions are, generally, contributions made from an individual's after-tax income (that is, from income that has been taxed at their marginal rate). Individuals may choose to make non-concessional contributions to their superannuation because future earnings on these contributions within the superannuation system will be taxed at the concessional rate of 15 per cent.

5.85 To ensure superannuation is being used to increase individuals' income in retirement, and not for tax minimisation or estate planning purposes, there are limits on the amount of non-concessional contributions individuals can make.

5.86 By reducing the non-concessional annual caps and restricting their use to those with balances less than the general transfer balance cap, this measure will better target the tax concessions. This will encourage those who have aspirations to build their superannuation balance up to an amount equal to the general transfer balance cap, while retaining the flexibility to accommodate lump sum contributions from one-off events such as receiving an inheritance or selling a large asset.

5.87 The Parliamentary Joint Committee on Human Rights has previously noted that the area of superannuation may engage the right to social security in article 9 and the right to an adequate standard of living in article 11 of the International Covenant on Economic, Social, and Cultural Rights.

5.88 Australia's retirement income system consists of three elements commonly referred to as the three pillars: the age pension, compulsory superannuation contributions, and voluntary savings including voluntary contributions to superannuation.

5.89 The first pillar, the age pension, provides for a minimum safety net of income in retirement, and is the primary method through which Australia meets its obligations under article 9 of the International Covenant on Economic, Social, and Cultural Rights and article 11 as far as it relates to income in retirement.

5.90 Non-concessional superannuation contributions fall under the voluntary superannuation contributions pillar.

5.91 The existing annual non-concessional contributions cap disproportionately benefits high income earners both because they have higher savings and they benefit more from putting these savings into a concessionally taxed environment as the relative discount on their marginal tax rate is greater. These changes are expected to affect less than 1 per cent of fund members and will not prevent affected individuals from using superannuation to support an adequate standard of living in retirement.

Human rights implications

5.92 Schedule 3 does not engage any of the applicable rights or freedoms because it reduces but does not remove the ability for individuals to make non-concessional contributions until their superannuation balance meets the transfer balance cap ($1.6 million in the 2017-18 financial year). Individuals with this level of superannuation savings are expected to enjoy a financially comfortable retirement.

Conclusion

5.93 Schedule 3 is compatible with human rights as it does not raise any human rights issues.


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