The changes to super announced by the Turnbull Government in the federal budget in May 2016 became law this week. There are a few financial planning opportunities that you should be aware of.
Super contribution planning can be deferred until May each year
Self-employed people currently have greater flexibility with how and when they make super contributions. Unfortunately, employees can only make additional super contributions via salary sacrificing some of their wages. This typically requires an employee to forecast their tax position and cash flow for the coming financial year and change their regular salary sacrificing arrangements accordingly. However, the government has lifted this restriction from 1 July 2017. This means that employees can wait until the end of the year before deciding how much they want to contribute into super (which is often depended upon their tax position and cash flow). For example, if you know your employer will contribute $10,000 over the financial year, in May or June you can decide whether to make additional contributions.
Also, from 1 July 2018 people will now be able to access past years unused contribution limits (up to 5 years). Again, this provides a good planning opportunity.
Borrowing to invest inside super just became more attractive
The government has reduced the amount you can contribute into super from 1 July 2017. From this date, you can contribute up to $25,000 p.a. and claim a tax deduction (currently the cap is between $30,000 and $35,000) and/or up to $100,000 p.a. (currently $180,000) if you do not claim a tax deduction. These changes make it more difficult to get money inside super.
Therefore, if you are in your 40’s or 50’s and have a relatively low super balance, borrowing to invest might be an excellent way of essentially investing your future contributions today. Mathematically, this is a far superior approach compared to incremental un-geared contributions (assuming you invest in quality assets).
Warning about being too super-centric
At the moment, a super fund in pension phase doesn’t pay any tax on investment earnings (usually super funds are taxed at a flat rate of 15%). However, the government will introduce a cap of $1.6 million from 1 July 2017. That is, any monies more than $1.6 million will be taxed at 15%.
I am always wary of situations where clients holds a high percentage of their wealth inside super because they are at the governments beck and call (i.e. too much legislative risk). People that have a high super balance are ‘easy targets’ for governments looking to raise taxes. Like with most things, diversification and moderation is the key.
Super is less attractive if you earn over $250,000 p.a.
If you earn over $250,000 p.a. from 1 July 2017 your super contributions will be taxed at a rate of 30% (instead of the lower 15%). Currently this threshold is $300,000 p.a.
An employee on a salary of $240,000 would make contributions of at least $22,800 p.a. or $19,380 after the 15% contribution tax. Compare that to an employee on $260,000 p.a. who would make contributions of $24,700 or $17,290 after 30% tax. That’s a difference of over $2,000 p.a. or 12%!
Therefore, it’s now more important for people earning over $250,000 p.a. to consider options other than super to reduce tax and build wealth.
The ATO has more information about these super changes on its website here.
Of course, if you would like to discuss how these changes impact you, please don’t hesitate to contact us.
