What opportunities do the new super rules create for you?

In November 2016, several superannuation changes were legislated that confused even their own policy writers! These changes were designed to improve the sustainability, flexibility and integrity of Australia’s super system (which is government talk for: reduce the tax benefits that superannuation offers higher income earners).

There are some important changes that could have an impact on your planning and investment opportunities. The aim of this blog is to give you a quick checklist of things to consider to identify if there are any actions or opportunities available to you as a result of these new rules.

Reduction in tax deductible contributions limit

From 1 July 2017, the maximum amount you can contribute into super while obtaining a tax deduction has reduced to $25,000 (regardless of age). The implications of this reduction include additional tax, slower accumulation of superannuation funds, alternative investment choices, restrictions on salary sacrifice arrangements and insurance premiums paid within super can end up having a larger impact on your retirement saving than expected.

Action plans and opportunities:

  • Consolidate super savings into one low-cost account (click here to read about how insidious super fees can be);
  • Consider borrowing within super to offset the impact of the lower contribution limit;
  • Consider making up to $3,000 p.a. in spousal contributions to enjoy an 18% tax offset (if your spouse isn’t working or earns less than $10,800 p.a.;
  • Consider paying income protection insurance premiums outside super (you will enjoy more tax savings and products tend to provide more comprehensive cover); and
  • Consider contributing after tax money into super – it might be advantageous to do this prior to 30 June 2017 before the caps reduce.

Employees can now wait until the end of the financial year to make additional contributions

Previously, the only way a PAYG employee could make additional contributions into super was through salary sacrificing via their employer (i.e. requesting your employer to contribute some of their salary into super).

However, from 1 July 2017, employees can now make lump sum contributions at any time and claim a tax deduction when they lodge their income tax return. This means you no longer have to work out how much you want to contribute into super at the beginning of each year and notify your employer. Instead, you can wait until May/June each year and make the decision at that time – which means you can take into account the past year’s cash flow and tax position. This will result in better super and tax planning outcomes.

More tax on super for higher income earners

Currently, if you earn more than $300,000 per year, your contributions into super are taxed at 30% – instead of the usual 15%. From 1 July 2017, this threshold will be reduced to $250,000. Implications include additional tax and, as a result, slower accumulation of superannuation funds – this means you will have less by the time you get to retirement. You should seek advice to assess the longer-term impact of this as it now might be necessary for you to invest more outside of super than previously planned.

If distributing funds from a family trust, consideration must be taken as to how funds should be disbursed. Also, to limit the impact on accumulation of superannuation funds, it is recommended that you consider paying this tax personally rather than from your superannuation fund.

Super catch up contributions

From 1 July 2018, taxpayers with superannuation balances of less than $500,000 will be able to access their unused tax deductible contribution cap to make additional superannuation contributions. So, if you have not utilised your annual cap of $25,000, you can go back 5 years and use the balance of the cap of each year. This can prove to be beneficial if you’re moving overseas, expecting to crystallise a large capital gain, returning from maternity leave, returning to the workforce – there are many situations where this might be useful.

Reduction in ability to shift assets into super

Under the existing rules, you can contribute up to $180,000 per year of assets from your personal name into super (or $540,000 in one lump sum – bring forward 3 years of contributions).

From July 1, this cap is reducing to $100,000 a year (or a lump sum of $300,000) if your super balance is less than $1.4 million. This too would result in a slower accumulation of superannuation funds and alternative investment choices – and this needs to be addressed within your financial plan.

Action plans and opportunities:

  • If you are planning on shifting more money inside super, consider doing so prior to 30 June 2017;
  • Consider borrowing within super to boost your super savings;
  • Consider making spousal contributions (discussed above); and
  • Consider paying income protection insurance premiums outside super.

Introduction of the $1.6 million cap

This cap has been introduced to limit the amount individuals can have within their superannuation fund that is tax free. Earnings on investments of the first $1.6 million will be tax free. Earnings on balances in excess of $1.6 million will be taxed at 15%. The biggest implication is that it will limit the amount of tax free income available within the superannuation fund.

The idea behind this rule is to increase the tax that people with significant super balances pay. I suspect that this might be the focus of governments moving forward. That is, it wouldn’t surprise me if future governments made changes to this cap.

There are two things you should consider as a result of the above new rule – even if you aren’t even close to the $1.6 million mark:

  • Take any opportunity to even up your spouse’s and your super balances – particularly if you have close to $1 million; and
  • Be careful to not be too super-centric. Don’t put all your eggs in one basket. Instead, spread your wealth across variously ownership structures (personal name, trusts, super).

Let’s have a chat

These super changes are significant and there will no doubt be more changes to come. The government is always tinkering with super. That’s why it’s important to seek advice from an experienced and independent professional.

By the way, the above information is only a brief explanation of the major legislative changes that could impact your financial affairs. The devil is in the detail. However, with the right proactive planning, it is possible to use the super rules to your advantage and achieve your financial goals. In this regard, we invite you to reach out to us for a complimentary discussion.