Superannuation changes ahead for defined benefit members
While the fate of the budget's superannuation changes remains unclear, defined benefit fund members face the prospect of major changes to taxation conditions from July 1, 2017. Two proposals are likely to have the biggest impacts affecting current strategies.
The first is the reduction in the maximum annual concessionally taxed contributions cap to $25,000. The second is the proposed removal of the exemption of notional funded and unfunded employer contributions from the penalty excessive contributions tax.
Both of these proposals will have the biggest impact on higher income fund members and others utilising their current ability to make salary sacrifice contributions to a second separate accumulation fund. The changes will also reduce the scope for making salary sacrifice member contributions to an employer's fund when fund rules allow this.
If implemented, the measures will subject defined benefit fund members to rules applying to accumulation fund members since 2007. They will limit the ability of many defined benefit fund members to make salary sacrifice contributions forcing them to make after tax contributions to their fund or consider other investment options. Subjecting notional employer contributions to excess contributions tax will not impact on lower or middle-income defined benefit fund members.
But higher-income defined benefit fund members earning in excess of $100,000 annually will face higher tax burdens. The precise income levels at which the excess contributions tax cuts in varies with the notional value of the employer contribution. The more generous the fund, the lower the income level at which the excess contributions tax will apply.
With the proposed $25,000 maximum annual concessional contributions cap, a notional employer contribution of 15 per cent would lead to excess contributions until annual superable income is $166,666. But with a notional employer contribution of 20 per cent, the excess contributions tax would start at an annual income of $125,000.
Apart from ceasing or reducing all salary sacrifice contributions, there will be limited options to reduce excess contributions tax liabilities. Even when, as for example in the PSS, the notional employer contribution to the defined benefit funds varies with the level of the member contributions, reducing the member contribution will reduce the final benefits payable.
Paying the penalty tax on the excess contributions may still be the best option in order to access a higher employer benefit. For some older defined benefit fund members able to claim their benefits, drawing their pension or benefits on or close to July 1, 2017 could be attractive, especially if there's another job or an alternative redundancy benefit available.
Fortunately, there'll be at least a year before the proposed changes apply. This will allow time to adapt and adjust personal strategies to whatever changes are enacted.