The recent changes to the superannuation rules are designed to further limit the amount of money Australians can keep in the tax advantaged superannuation system. So, where does that leave you for your superannuation planning for this financial year? Here’s a brief summary of the key issues:
Contributions which qualify for a tax deduction:
This is known as a concessional contribution and is currently limited to $30,000 for those aged less than 49, and $35,000 for those aged 49+ in the year of contribution. Next financial year the limit will be just $25,000. Note also that from 1 July 2017 employees will be able to claim a tax deduction for personal contributions to super up to $25,000 (including employer superannuation guarantee and salary sacrifice amounts).
ACTION: If you can, perhaps try to maximise your concessional contribution this year.
Contributions which do not qualify for a tax deduction:
This financial year you could invest up to $180,000 p.a. in super as a personal non-concessional contribution (i.e. you do not receive a tax deduction on this contribution). If you are under age 65, you can bring forward up to two years of non-concessional contributions. This means you could contribute $540,000 this financial year – as long as you have not triggered the ‘bring forward’ provision in the previous two financial years.
From next financial year, the non-concessional limit will be reduced to $100,000 per year ($300,000 using two years of ‘bring forward’).
ACTION: There are transitional arrangements in place depending on when the bring forward rule is triggered so ensure you speak with your financial adviser about maximising any non-concessional contribution this year. It is also important to note that from 1 July, those superannuation members with total balances in excess of $1.6m will be restricted in making further after-tax contributions to superannuation.
New super pension cap of $1.6m:
The maximum amount of superannuation that can be used to fund a tax-free pension in retirement will now be restricted to a ‘balance cap’ of $1.6 million per member. This has the effect that when transferring a member’s superannuation accumulation to pension phase to start an account based pension to fund retirement, any balance above the $1.6 million balance cap will need to remain in accumulation phase where it will continue to be taxed at the (albeit concessional) rates applicable to superannuation, rather than being tax free.
ACTION: If you are currently close to, or have over $1.6m in an account-based pension, or in superannuation totally, ensure you speak to your financial adviser about the implications for your retirement strategy going forward.
Transition to Retirement strategy:
From 1 July 2017, there are two main ways pre-retirees can benefit from the ‘Transition to Retirement’ rule:
Use super to top up salary when moving to part-time employment
If you want to wind down your career by working part-time before you fully retire, the ‘Transition to Retirement’ rule could enable you to top up your income using your super. Previously you had to ‘retire’ to access your super monies before 65. Now as long as you are over 56, you can start a non-commutable TRIS from your super money.
You can use the TRIS income (which has tax concessions) to replace your forgone salary – so your net income remains the same, but you are working less.
And, importantly, because you are moving to part-time employment, you won’t need to draw down as much of your super money as if you were fully retired.
Top up your super without forfeiting net income
If you want to stay working full-time, but need to build up your super – or your spouse’s super – you could use the TTR rule to help you.
You can choose to sacrifice part of your salary so it is invested in your super fund (or your spouse’s super fund via the super splitting rules).
And, if you wish, you can start a TRIS from age 56 to pay you income to make up part or all of the income you contributed… even though you are still working full-time. The benefit here is that drawing a TRIS and contributing pre-tax to superannuation can be are much more tax effective than paying PAYG tax on your full salary.
Note: From 1 July 2017, employees will also be able to make personal deductible contributions to super so you have the opportunity to enter a salary sacrifice agreement with your employer or make your own deductible contributions to super which might include lump sum leave payments, bonuses or the proceeds from a windfall or sale of an asset, and claim a deduction to offset some of the tax you would normally pay.
ACTION: Note that rule changes from 1 July 2017 reduce the amount you are able to contribute into superannuation by pre-tax salary sacrifice and deductible contributions. The limit (known as the concessional contribution cap) is currently $30,000 if you are under age 50, and $35,000 if you are 50 and over but will reduce to $25,000 per annum for everybody (which includes employer superannuation guarantee payments).
Other changes also to be implemented from 1 July 2017 now mean earnings in a TRIS are no longer tax free in the fund.
It is important you talk with your financial planner to understand the impact of these changes on the benefits to you of an existing or new TTR strategy.
The Low Income Superannuation Contribution:
The Government currently provides a contribution of up to $500, equal to 15% of concessional contributions made, up to $3,333, for workers with an adjusted taxable income of up to $37,000 p.a. The Low Income Superannuation Contribution (LISC) is set to be abolished from 1 July 2017 but is to be replaced with a Low Income Superannuation Tax Offset (LISTO) that will achieve the same outcome.
ACTION: No need for you to change your strategy here.
The Government co-contribution:
Currently, if you are working, and make a non-concessional contribution to super, and earn up to $51,021 this year, you are eligible for a super co-contribution from the Government of up to $500.
ACTION: This won’t change – so no need for you to change your strategy here.
If your partner’s income is less than $13,800, you could qualify for a tax offset of up to $540 on the first $3,000 you contribute to superannuation for them from your after-tax income. This tax offset decreases as your partner’s income increases above $10,800. Interestingly, the income threshold for the tax offset will increase from $10,800 to $37,000 from 1 July 2017.
ACTION: This is an improvement and means you could contribute more on behalf of your spouse next year, but doesn’t mean you should change your strategy this year.