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SUMMARY: Restrictions taken off salary sacrifice strategies, plus New Zealand’s super pension age lift is a taste of things to come in Australia.
Salary sacrifice strategies will be much easier to implement when the new super rules come into force on 1 July.
No longer will employees have to wonder whether their employer will actually offer a super salary sacrifice arrangement. It won’t matter. If they don’t, you’ll be able to do it yourself.
One of the biggest problems for salary sacrifice in the past is that employers were under no obligation to offer it as an option to clients.
From 1 July, they still will have no obligation to do so.
But employees won’t have to go through their employer any more in order to make what will be the equivalent of salary sacrifice. They will simply be able to implement it themselves.
This will be possible because the new rules will allow individuals to make tax deductible contributions directly. The change in rules will also remove a more serious anomaly (I’ll come back to that).
From 1 July, anyone who is able to make concessional contributions to super will be able to make them directly to their super fund.
So, let’s say you’re earning $80,000 from your employer. You’re employer is then putting in 9.5%, or $7600 a year, into your super fund.
With the new CC limits of $25,000 for everyone from next year, if you’re able to contribute, you’ll be able to put in $17,400 into your super fund. And then be able to claim the deduction.
The contribution will be made via your super fund. And the difference between your marginal tax rate and the super contributions tax rate of 15%, will be refunded via your tax return.
Note: One of the downsides of this for employees is that you will have to pay, up front, the contributions with after-tax money. Then claim the tax deduction, and then get the refund via your tax return. This might prove to be a cash-flow issue for some. And for them, maintaining salary sacrifice arrangements with willing employers, might be worthwhile.
Another advantage of this new rule is less guesswork to a constant frustration about whether an employer is going to make contributions on time.
Employers are not required to pay their super contributions until the 28th day of the following month/quarter. The problem here is that if you are trying to maximise your super contributions via voluntary contributions, you’re at the whim of your employer as to whether the contributions will be made before 30 June (and therefore fall into the current financial year) or before 28 July (meaning they fall into the following financial year.
Contributions count according to the date they were received by the super fund.
It will give a little more certainty. If you know that your SG contributions from your employer are going to be paid before or after 30 June (call your pay office to confirm), then you will be able to maximise deductible contributions, or withhold them, in the leadup to the last days before 30 June.
Disregarding the 10% rule
Another advantage is that the 10% rule will be gone. The 10% rule means that if you receive 10% or more of your income as an employee, you’re not able to make concessional contributions personally.
You can only make them as an employee, which can be very restrictive, often impossible, to make contributions up to your CC limit.
It’s been a big problem for some, particularly those whose employment arrangements change during a financial year.
If you go from self-employed to employee during a financial year, or vice versa, it could play havoc with your contributions and tax deductibility.
Take one client of mine, for example. He was a partner in a law firm for the first half of the year and was considered “self employed”. So he made regular contributions to his super fund that he usually claims at the end of the financial year.
However, one year, he changed employment. And the new employment, though still a partner, meant that he was partly an employee, receiving SG contributions.
This meant that the contributions that he had made – for which he intended to claim a tax deduction – in the first half of the year, could no longer be claimed. Those contributions had to be made as non-concessional contributions, which, given he was under 40 years of age, was not optimal.
However, from the 1 July 2017, this anomaly will be removed. Under most circumstance, he would still be able to claim what he had contributed as a tax deduction, as long as he was still under the $25,000 CC limit for the next financial year.
Dodgy employer super contributions gone …
The biggest anomaly that will be lifted is actually pretty serious. The law has stated that an employer must ensure that the superannuation payments equal to the Superannuation Guarantee are made on behalf of an employer.
But, technically, an employee’s request for salary sacrifice could actually reduce the employer’s requirement to make SG contributions.
For example, take an employee earning $100,000 a year. The employer would be required to pay $9500 to super as SG contributions. However, if the employee requested to have $10,000 made as a salary sacrifice contribution to super, then that is in excess of the 9.5% that an employer needs to ensure goes to the super fund. The employer would be left with no legal requirement to pay an extra 9.5% in SG to the employee’s super fund.
Few employers would actually have done that. Only scumbags, really. But it has been something that the financial advice community has continually warned about – to check to see what your employer is actually contributing to super in these instances.
Employees where this is an issue would be better to cancel salary sacrifice arrangements (post 1 July), force the employer to pay the 9.5%, then make their own tax-deductible contributions during that same financial year.
Move in age of access to super?
New Zealand Prime Minister Bill English has signalled that the age of access to superannuation is to be lifted from 65 to 67.
The decision was based around New Zealanders living longer and is almost certainly a precursor of what is to come here.
It has been talked about on the sidelines here for years. Australia has already raised the age pension age from 65 to 67. From 1 July this year, eligibility for the age pension will increase form 65 years to 65 years and six months. And it will increase every two years, by six months, until it hits age 67 in 2023.
The only unusual part of the decision in NZ, as far as I’m concerned, is that they have announced it won’t kick in for … TWENTY YEARS!
Yes, access to NZ super will rise from 65 to 65.5 years in 2037. And will then rise by six months each year until it hits 67 years in July 2041. That means that it won’t start to affect anyone born before June 1972. And those born after July 1974 will have to wait until they are 67 to fully access their super.
It will happen here in Australia. It’s just a matter of when it’s announced. Nothing is surer. But don’t assume that it will come into place in 20 years. It will be sooner than that.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.