Are you up to date with the latest super reforms? Knowing how they impact you and your business can help you open up to new opportunities.
But you need to get up to date with the reforms before they pass through Parliament – so here’s a short explanation of the main changes which are about to occur.
Accumulators: If you are under 65
Very important: Reduction in non-concessional contribution caps
If you are getting close to retirement age, this change is incredibly important to you. From 1 July 2017, the annual non-concessional contributions cap will be reduced to $100,000 (from the current $180,000).
What does this mean? It means you have until 30 June 2017 to use the current caps and contribute up to $540,000 this financial year. Luckily, you can make use of the “bring forward” rule to do this. Here is how it works:
- The rule allows you to bring forward up to three years of non-concessional contributions in one year
- Then, for the next two years, you can make no or low contributions to your super, until you reach the three year cap
- Thus, you will have three years worth of contributions to utilise the current caps
Keep in mind: If you contribute more than $180,000 this financial year without reaching the $540,000 limit, any new contributions from 1 July 2017 onwards are subject to the new $100,000 cap.
At the same time, by doing this you still trigger the bring forward rule but instead of your cap being $540,000 across three years, it might be $460,000 or $380,000. By contrast, if you decide to wait until 1 July 2017 to trigger the bring forward rule you will only be able to contribute $330,000.
Tip: If you want to make in-specie contributions – that is, contributions to super that are not cash such as listed shares, etc., then you should look at whether the cap reduction affects your ability to do this.
High income earners and people with large super balances
Adding money to your super is great, but when you start adding too much money, the Government will think you are not using your super for its intended purpose (to fund retirement). As a result, the reforms address people who have large super balances to pare back their tax advantages.
Non-concessional contributions capped at $1.6 million
Do you have more than $1.6 million in your super balance? If so, starting from 1 July 2017 you will no longer be able to make non-concessional contributions to your super. This means that you have until 1 July 2017 to maximise your contributions.
Concessional contributions cap reduced
The current annual concessional contribution cap is $30,000 for those aged under 50 and $35,000 for those aged 50 and over. Starting 1 July 2017, the cap will be reduced to $25,000 for everyone.
30% tax on super lowered to $250,000
Starting 1 July 2017, if you earn $250,000 or more you will pay 30% tax on contributions you make. The rule currently applies only to those earning $300,000 or more.
You might also be interested in: Are You Up To Date With The Latest Superannuation Changes?
People with low super balances and broken employment
“Catch up” super contributions
Normally, the role of annual caps is to limit how much you can contribute to your super. However, if you are an “on and off” contributor and your super balance is below $500,000, you will be allowed to catch up on your contributions by using your unused concessional caps for up to five years.
Tip: Unused cap amounts can be carried forward from the 2018-2019 financial year, which means the first opportunity to use the new rules will be 2019-2020.
Tax offset for low income earners
If you earn less than $37,000 you will benefit from a new tax offset which will refund any tax paid on super contributions.
Tax offset for topping up spouse’s super
If your spouse earns up to $40,000, you will be able to make super contributions on their behalf and claim a tax offset of up to $540. At the moment, the law allows you to do it only if your spouse earns less than $13,800.
Retiree or transitioning to retirement
Tax concessions limited to pension balances up to $1.6 million
The reforms introduce a $1.6m ‘transfer cap’ on the amount you can hold in a superannuation pension. This means that, if you are in pension phase, the balance of your fund needs to be no more than $1.6m.
If not, from 1 July 2017 the Tax Commissioner will direct your fund to reduce your retirement phase interests back to $1.6m and you will be subject to an excess transfer balance tax. Your overall super balance can be more than $1.6m but only $1.6m can be transferred into a tax-free pension.
Tip: The low 15% tax rate means that it might be worthwhile to keep the excess balance in super.
[ctt template=”9″ link=”afI8F” via=”no” ]The low 15% tax rate means that it might be worthwhile to keep the excess balance in super.[/ctt]
Bonus tip: If your spouse has a low super balance, you can think about ways to maximise your returns as a couple.
Earnings on fund income no longer tax-free
From 1 July 2017, the income from assets supporting transition to retirement income streams will no longer be exempt from tax but included in the fund’s assessable income.
Let’s look at this for a second:
- Now: if your super fund earns interest from a term deposit, it is tax free if you are transitioning the interest to your retirement pension funds.
- From 1 July 2017: if your super fund earns interest from a term deposit, it will be added to the fund’s assessable income.
Lump sum withdrawals no longer meet minimum pension requirements
People under 60 are currently allowed to withdraw from their pension funds; under certain circumstances, the withdrawal is considered a tax-free lump sum.
Starting from 1 July 2017, this will become an unauthorised practice and you will no longer be able to take lump sums from your account based pension. Generally, from age 60, these pension payments become tax free.
Over 65 and still working?
The rule goes that, if you are 65 or over and you are still working, you can only contribute to your super fund if you work 40 hours in a 30 consecutive day period in the financial year.
However, even though the original Budget announcements abolished this work test, the reform is not progressing. The work test will remain.
Contractors and self-employed
If you are partially self-employed or partially a wage earner: If you want to claim a tax deduction for your super contributions, you need to earn less than 10% of your income from salary or wages. From 1 July 2017 this rule will be abolished.
Contractors who hold their insurance through super: The abovementioned change will be useful if you fall into this category, as you will be able to claim a personal tax deduction for insurance premium contributions. However, the contributions must remain within the $25,000 concessional cap.
Do you have questions about the super reforms?
We have a team of specialists who are ready to assist you in understanding the super reforms and learning how to turn them to your advantage.