After 6 months of ambiguity, it seems agreement has at last been reached (though not yet legislated) about superannuation changes. You’ve probably already heard about it but here’s a summary:
- After 1st July 2017 amounts over $1.6m per person in a super pension, will no longer be tax-free. So any excess must be withdrawn or moved back to super accumulation phase with its 15% tax on fund investment income and 10% on realised gains held more than a year.
- After 1st July 2017, concessional (tax deductible) super contributions will be limited to $25,000 p.a. The limit is $35,000 this financial year.
- The proposed $500,000 non-concessional lifetime limit has been dropped. So this financial year, you can contribute $180,000 and bring forward up to $540,000 (3 years @ $180k) – best wait till legislation is passed. But after 1st July 2017 the non-concessional super contribution limit will be $100,000 p.a. (using money you’ve already paid tax upon). Then after 1st July 2018, if you’re under age 65 you can bring forward 3 years of this limit, allowing contributions up to $300,000. If your accumulation balance is over $1.6 million, you can’t make such contributions.
- The work test (40 hours work in 30 consecutive days) for those aged 65 to 75 to contribute to super will remain. Keeping this is foolish as people are working longer and need a chance to catch up on super. If you’re now aged 64, you’ll get no Age Pension until you’re 65½ (rising to 67 for people under age 60 now).
- Concessional contribution ‘catch up’ provisions have been delayed and will now start in 2019/20 for those who have less than $500,000 in super. This where you could catch-up on 5 years of contributions (5 x $25k = $125k) – e.g. for mums returning to work.
- The 10% employment income test for personal super contribution deductions will go. So if you’re largely self-employed but have some employee income (e.g. medical specialists), you can claim a tax deduction for personal superannuation contributions regardless of your employed income.
- If your annual income exceeds $250,000 your concessional super contributions will attract 30% contributions tax rather than 15% – the Division 293 tax threshold on concessional super contributions will reduce to $250,000 from $300,000.
- Income on pension account assets supporting transitional pensions will be taxed like accumulation funds (i.e. 15% and 10% on gains).
- The spouse income threshold for claiming a tax offset for spouse contributions will rise so the effective Low Income Superannuation Tax Offset continues.
- Anti-detriment payments will be abolished from 1st July 2017 – i.e. no refund of contributions tax paid in a taxed superannuation account when the fund member dies.
For a self-funded retirement, you need to contribute between 15-18% of your earned income throughout your career. So the 9.5% p.a. super guarantee helps but isn’t enough on its own. The main effect of the change to lower contribution limits is that people will need to plan their contributions over a longer time span to optimise their super. Instead of paying off your mortgage then boosting your 9.5% employer super, it will be desirable to boost your super earlier in your career while paying off your home loan.
If you’re later in your career now, you didn’t enjoy the full benefit of the now higher super guarantee payments, so some opportunity to catch up is required. But the funds to achieve this are not usually available to each of us on an annual basis over many years. In practice your saving capacity can often arise as a lump sum (inheritance, redundancy payout, home downsizing, etc). So Federal Budget balancing by limiting super contributions may be impractical for those later in their careers – blending higher Govt revenue with expenditure cuts might have been more realistic.
Before the May 2016 Budget, someone under 50 could contribute up to $2m into their super over 10 years (if they were able) via concessional and non-concessional contributions, after tax. Following this week’s super changes, someone can contribute up to $1.2m into their super on the same basis. This is about 40% less than before but significantly better than proposed in the May 2016 Budget.
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Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.