Time to prepare for super changes
Investors have a brief window of opportunity to make the most of the current superannuation rules before new contribution limits and tax rates come into force on July 1 this year.
The reform package announced in the 2016 Federal Budget and passed by parliament last year is the biggest shake-up of super in a decade. The changes summarised below are likely to affect most people to some degree, and wealthier Australians more than most. But there is still time to benefit from the current rules.
Pension account limits
Super has two phases, an accumulation phase where you build up retirement savings in a low tax environment, and a pension phase where no tax is paid on earnings or withdrawals. At present, there are no restrictions on how much money you can hold in super. But from July 1, pension account balances will be limited to $1.6 million.
If you’re retired and have more than $1.6 million in your pension account, the excess will need to be put back into an accumulation account where earnings will be taxed at 15 per cent. Alternatively, you could take the excess out of super entirely. Failure to do so could result in tax being applied to earnings on any excess amounts, which is a compelling reason to start planning early.
Even though you will have six months’ grace to remove excess amounts up to $100,000 without penalty after the July 1 deadline, you won’t be eligible for any inflation-linked increases of the cap in future.
Lower contribution caps
This financial year, tax-deductible concessional contributions of up to $35,000 are permitted for people aged 50 and over, or $30,000 for the under 50s. From July 1, the limit will be $25,000 for everyone.
Tighter rules will also apply to non-concessional (after tax) contributions. Currently you can contribute up to $180,000 a year, or up to $540,000 by bringing forward two years’ contributions. From July 1, these caps will be reduced to $100,000 or $300,000 under the bring forward rule.
These changes provide an incentive for anyone with spare cash to take advantage of the higher contribution limits before June 30. This is particularly so if you have an opportunity to make a large non-concessional contribution funded by an inheritance, the sale of property or other assets.
The situation is more complex if you already have close to $1.6 million in super. From July 1 you won’t be able to make any further non-concessional contributions and any excess above $1.6 million held in a pension account will need to be removed.
Changes to transition to retirement rules
Earnings in a transition to retirement (TTR) pension will lose their tax exemption from July 1. Instead, all earnings on income and capital gains will be taxed at the concessional super rate of 15 per cent. Capital gains on assets held for longer than 12 months will be taxed at the discount rate of 10 per cent.
If you’re using a TTR pension in combination with salary sacrifice to boost your super, the removal of the tax exemption may reduce the final amount you accumulate for your retirement. While a TTR strategy is still attractive, you may like to contact us to discuss additional ways to boost your savings.
More high earners to pay tax surcharge
Under the existing rules individuals who earn $300,000 or more pay tax of 30 per cent on their super contributions, compared with the 15 per cent everyone else pays. From July 1, the tax surcharge will kick in once you earn $250,000 or more.
If you expect to earn between $250,000 and $300,000 next financial year, then you have an added incentive this year to maximise your concessional contributions (within your age-based limit). As always, the devil is in the detail. If you would like to discuss how the new rules could affect you and your retirement, contact us so we can help put plan in place to make the most of the current and future rules.