From 1st July this year (only a little more than 3 months away) a range of super reforms take effect. Superfund members with significant balances need to understand what the coming superannuation changes mean for them and subsequently take whatever action is required to mitigate against any negative consequences the new laws may create.
This will ensure their superannuation continues to grow in the most tax effective way to secure financial independence.
SUPER IS STILL SUPER
Super remains a very attractive place to save for retirement. And there may be opportunities to grow your super and retire with more.
While you build up your super, pre-tax contributions and investment earnings will generally continue to be taxed at the low rate of up to a maximum of 15%*1, not your marginal tax rate of up to 49% *2.
Also, when you retire, you can still transfer a generous amount into a superannuation pension, where no tax is paid on investment earnings and payments are generally tax-free at age 60 and over.
1 Individuals with income above $300,000 (in 2016/17) will pay an additional 15% tax on personal deductible and other concessional super contributions. This income threshold will reduce to $250,000 from 2017/18.
2 Includes Medicare levy and, for 2016/17, the Temporary Budget Repair levy of 2% on taxable income exceeding $1
REFORMS AT A GLANCE
Some important changes will be made to concessional and non-concessional contributions, as well as benefits that can be received from super. Unless stated otherwise, the following changes take effect from 1 July 2017.
Concessional contribution changes
Concessional contributions include employer contributions (such as the superannuation guarantee and contributions made under a salary sacrifice arrangement), as well as personal contributions claimed as a tax deduction.
- The annual cap on concessional super contributions will reduce from $30,000 or $35,000 (depending on age) to $25,000.
- It will be possible to make personal tax deductible super contributions up to your concessional cap regardless of your employment status.
- An additional 15% tax on concessional contributions will be payable by people with incomes greater than $250,000 (currently $300,000).
Non-concessional contribution changes
Non-concessional contributions include personal contributions made to super from your after-tax pay or savings and super contributions received from your spouse.
- The annual cap on non-concessional contributions will reduce from $180,000 to $100,000.
- ‘Transitional’ rules will apply if you made non-concessional contributions totalling more than $180,000 in 2015/16 or 2016/17.
- The maximum non-concessional contributions that can be made over three years, by bringing forward up to two years’ worth of future contributions, will reduce from $540,000 to $300,000.
- Non-concessional contributions will not be able to be made if you have a total superannuation balance over $1.6 million.
Changes to superannuation benefits – $1.6million transfer balance cap
- A lifetime limit of $1.6 million (subject to indexation) will apply to the amount of superannuation that can be transferred into ‘retirement phase’ accounts. This limit applies to existing pensions and those commenced after 1 July 2017.
- Tax paid on earnings from investments held in ‘transition to retirement’ pensions will increase from 0% to a maximum of 15%.
- Capital gains tax relief may be available when converting money held in the retirement phase back into the accumulation phase to meet either of the above two requirements.
IMPACT OF THE $1.6 MILLION TRANSFER BALANCE CAP
The rules to ensure people don’t transfer more than $1.6 million from the ‘accumulation’ phase of super into the ‘retirement phase’ (otherwise known as a superannuation pension or income stream) are quite complex .If you are impacted , key changes will need to be made and you should seek advice on what specific strategy may need to be implemented. There are, however, a few key things to keep in mind.
Couples can have $3.2 million in pensions
Up to $3.2 million may be transferred to pensions by a couple, as the $1.6 million pension transfer balance cap is a per person limit.
Contribution splitting could be a good strategy
Where one member of a couple holds the majority of the superannuation and that person has (or will) accumulate more than $1.6 million in super, splitting up to 85% of the previous financial year’s concessional contributions with their spouse who has less super could increase the combined amount that could be transferred into pensions.
Accumulation phase is still tax-effective
Amounts exceeding the $1.6 million transfer cap won’t have to be withdrawn from the super system. The excess amount can stay in the ‘accumulation’ phase where earnings are generally taxed at 15%, but in most cases the actual tax rate paid is a lot lower when deductible expenses, franking credits and other items are taken into account in the fund.
Before 1st July 2017
Maximise concessional contributions
Concessional contributions are taxed in the super fund at a maximum rate of 15% (or 30% for some people who earn a high income *3). This tax rate in super is likely to be lower than your marginal tax rate of up to 49% *4 that would be paid on salary or other sources of taxable income.
In the current financial year, these contributions are capped at $35,000 pa if you were 49 years of age or older on 30 June 2016 and $30,000 pa for everyone else.
From 1 July 2017, the cap reduces to $25,000 pa for everyone. If your cash flow allows, you may want to take advantage of the higher cap that applies until 30 June 2017.
3 Individuals with income above $300,000 (in 2016/17) will pay an additional 15% tax on personal deductible and other concessional super contributions. This income threshold will reduce to $250,000 from 2017/18.
4 Includes Medicare levy and, for 2016/17, the Temporary Budget Repair levy of 2% on taxable income exceeding $180,000. Resident marginal tax rates can be found at www.ato.gov.au
Maximise non-concessional contributions
In the current financial year, non-concessional contributions are capped at $180,000 pa or $540,000 if you bring forward up to two years’ worth of contributions. Other conditions apply (www.ato.gov.au).
From 1 July 2017, the maximum non-concessional contributions you can make is $100,000 or $300,000 by bringing forward two years’ worth of contributions. However, non-concessional contributions will not be able to be made if you have a total superannuation balance *5,*6 over $1.6 million.
If you have sufficient money available that you would like to contribute to super, you may want to make non-concessional contributions before 30 June 2017 to take advantage of the higher cap.
5 After-tax contributions cannot be made where super balance exceeds $1.6m.
6 Total superannuation balance includes superannuation savings in accumulation and income streams
From 1st July 2017
Personal deductible contributions for employees as well
Currently, only those earning less than 10% of their income*7 from employment (the ‘10% test’) are eligible to claim super contributions as a tax deduction. From 1 July 2017, all individuals under the age of 65 (and those aged 65 to 74 who work more than 40 hours over 30 consecutive days in the financial year the contribution is being made), will be able to claim a tax deduction for personal super contributions.
This change will enable more people to be able to:
- Make personal deductible contributions, and
- Make greater use of the cap that applies to personal deductible and other concessionally taxed super contributions.
7 Includes assessable income, reportable fringe benefits and reportable employer super contributions.
Make spouse super contributions
Currently, a tax offset of up to $540 is available for individuals who make superannuation contributions to their spouse’s account if their spouse earns7 up to $13,800 pa.
From 1 July 2017, the Government will allow more people to access the offset by extending eligibility to those whose spouses earn up to $40,000 pa.
From 1st July 2018 and 2019
Make ‘catch-up’ concessional contributions
From 1 July 2018, if you don’t use up all of the concessional contribution cap (see page 5) you will be able to accrue the unused amounts for use in subsequent years. Unused amounts can be carried forward on a five year rolling basis. 2019/20 is the first financial year it will be possible to use the carried forward amounts. To be eligible, your super balance cannot exceed $500,000 on 30 June of the previous financial year.
If eligible, this new opportunity will help those unable to utilise the concessional contribution cap due to broken work patterns and competing financial commitments. It could also help to manage tax and get more money into super when selling assets that result in a capital gain.
WHAT SHOULD YOU DO NEXT?
If you would like to understand exactly how you might be impacted and what steps you need to take, please contact Calibre Private Wealth Advisers for a confidential initial discussion. We can assess the impact the super reforms could have for you, as well as review your retirement savings plans and the strategies you are using.
Beyond that, as we head towards the end of another financial year, now is a great time to see if there is anything else you could be doing to tax-effectively build and protect your wealth.