The clock is ticking for investors who want to take advantage of the more generous tax concessions available in superannuation this financial year. As of 1 July, new rules come into effect that will reduce contribution limits.
Until then, eligible individuals under 65 can make a non-concessional (after tax) contribution of up to $540,000 under the bring forward rule which allows you to bring forward two years’ contributions. That means couples can put up to $1.08 million into superannuation while the opportunity lasts.
From 1 July, the cap on non-concessional contributions will reduce from $180,000 a year to $100,000, and $300,000 under the bring forward rule.
But this is only one of the wide ranging superannuation changes you need to plan for if you want to take full advantage of the existing rules.
Superannuation contribution caps
Tighter rules will also apply to tax deductible concessional contributions. This financial year contributions of up to $35,000 are permitted for people aged 50 and over, or $30,000 for those under 50. But from 1 July, the limit will be $25,000 for everyone. These limits include the 9.5% compulsory superannuation contributions made by your employer.
These changes to the concessional and non-concessional caps provide an incentive to take full advantage of the existing rules if you can. This is especially so if you have an opportunity to make a large non-concessional contribution funded by an inheritance, the sale of a property or other assets.
Before you bring forward a sale or take any other action, be aware that there could be tax or other considerations so it’s important to get advice.
There’s an added incentive for people who already have large account balances to act now. From 1 July, non-concessional contributions won’t be allowed if your superannuation balance is higher than $1.6 million.
With contributions becoming more restricted planning is now even more vital. For many the opportunity to contribute to superannuation from 1 July 2017 will reduce from potentially $575,000 in one year (utilising concessional and non-concessional caps) to a maximum of $25,000.
We strongly recommend you seek advice in this area to ensure your retirement savings are put to their best use.
Expansion of tax-deductible superannuation contributions
From 1 July, you will no longer need to be predominantly self-employed (also known as the 10% Rule) to make a personal deductible superannuation contribution on your individual tax return.
All individuals under the age of 75 will be permitted to claim tax deductions for personal superannuation contributions (voluntary concessional contributions). This is designed to benefit individuals whose employers don’t accommodate salary sacrificing, or those who are part self-employed and part employed, but fail to meet the current 10% income test.
Pension account limits
Superannuation has two phases, an accumulation phase where you grow your retirement savings in a concessional tax environment, and pension phase where no tax is paid on earnings or withdrawals. Under existing rules, there are no limits on the amount of money you can hold in superannuation. But from 1 July, a maximum of $1.6 million can be held by a retiree in a tax-free pension account.
Non-concessional contributions before 1 July that push the balance above $1.6 million can stay in superannuation.
But individuals who have more than $1.6 million in a pension account on that date will be required to put the excess back into an accumulation account where earnings are taxed at 15%, or take the excess out of superannuation entirely.
Exceeding the cap
An excess transfer balance occurs if the total value of an individual’s income stream is above their transfer balance cap. If there is excess, it will be necessary to:
- reduce the amount held in pension phase (e.g. a partial commutation)
- pay excess transfer balance tax.
The excess transfer balance tax is based on notional earnings determined by a legislative formula. Excess transfer balance tax is payable for every day the amount held in pension phase exceeds the cap. Notional earnings will be subject to tax at:
- 15% for the first breach, and
- 30% for the second and subsequent breaches.
If the person is unaware or leave the funds in pension phase, the ATO will make a determination once the information from superannuation funds is received. Notional earnings will be calculated from the date of breach through to when a determination is made and that amount will then attract the General Interest Charge (April – June 2017 8.78%).
Transition to retirement tax changes
Earnings in a transition to retirement (TTR) pension will lose their tax exemption from 1 July. All earnings on income and capital gains will be taxed at the concessional superannuation rate of 15%. Capital gains on assets held for longer than 12 months will be taxed at the discount rate of 10%.
If you are one of the many people using a TTR strategy in combination with salary sacrifice to boost your superannuation, the loss of the tax exemption may reduce the total amount you accumulate for retirement. While TTR pensions are still attractive, you may like to talk to us about additional ways to boost your retirement savings.
High earners to pay more tax
Individuals who earn $300,000 or more currently pay tax at a rate of 30% on their superannuation contributions, instead of the 15% everyone else pays. But from 1 July, the higher tax rate will apply to incomes of $250,000 or more.
If you expect to earn between $250,000 and $300,000 next financial year, you may want to make the most of your allowable concessional contributions before 30 June.
The reforms that will be ushered in on 1 July amount to the biggest shake-up of superannuation in a decade.
As always, if you would like to discuss how the changes might affect you and what you can do to prepare, please call us on 03 5443 0344.