Teeth will gnash and grind … but for many, this month marks the end of an era for superannuation.
An era when super was simple and generous. And, possibly, the greatest tax dodge of all time.
People had accounts with mega-millions in it. Individuals with more millions than you could fathom could ever be stuffed into one little superannuation account. No tax paid on the fund, its earnings or the pensions that were drawn from it.
I’m not arguing against the changes, or in favour of the rules that were replaced on 1 July. All power to those who, in the past, have used the rules to their advantage. They made the most of what was available to them at the time. They were being smart. Or well advised.
But on 1 July, things changed. And, largely, the superannuation advantage is taken away from wealthy, and handed, relatively, back in favour of the small guy. The punters. Mums and Dads.
“What the?! There are some positive changes?” I hear some ask.
Well, yes. There are. There has been a lot of doom and gloom, particularly around the new $1.6m pension fund limits and the reduction in concessional contribution limits, back down to $25,000 for all.
But there are two big pluses coming for us general mugs. And for those who wish to make the most of the new rules, they truly are significant. Today, we’re going to look at the first big positive.
The murder of the 10% rule
It seems bizarre to say this, but … finally, in the 2018 financial year, anyone will be able to make tax-deductible contributions to super, whenever they want.
What has stopped people being able to do this is in the past is what has been known as the “10 per cent rule”. This has meant, essentially, if you earned more than 10 per cent of your income as an employee, then you could only make tax-effective super contributions through your employee arrangement.
The problem? This really occurred if you were partly self-employed, or if your employer didn’t offer salary sacrifice (which no employer is compelled to do). Or if you made a capital gain late in a financial year.
If you worked 1-2 days a week as an employee, but spent most of your time as a consultant, or running your own business, then you could only make concessional contributions via your employer.
This particularly hurt people who wanted to make contributions late into a financial year, and those whose employers didn’t offer salary sacrifice.
The rule was stupid. Never made any sense. It’s existence hurt tens, possibly hundreds of thousands of workers. And now, decades after a stake should have been put through its rotten heart … it has finally been killed off.
Never have so many people interested in super wanted something to be killed off as much as this rule.
How does this help you?
From 1 July, if you want to make a tax-deductible contribution to your super fund, you can. You don’t need to ask your employer to put some of your salary into super (salary sacrifice).
For example, if you earn $100,000 and your employer puts in 9.5 per cent, or $9500, then you have another $15,500 that you could technically contribute (from 1 July, 2017, when the concessional contribution limit fell to $25,000 for all) .
Under the old rules, you could make a salary sacrifice arrangement with your employer to put that extra $15,500 into super. If they don’t offer it … bad luck.
If you happen to make a capital gain late in a financial year, when it was too late to make significant super salary sacrifice arrangements, you were in trouble also.
So, for the first time, during the 2018 financial year, you will be able to make contributions to your own super fund … that you will then be able to claim a personal tax deduction for, at the time of your choice.
This is a big improvement. It won’t benefit everybody, every year. But for so many, there are considerable tax savings to be made right here.
The other major benefit is the “five-year catch-up rules”. They don’t kick in to force until 2018. But are something to start planning immediately. I’ll return to this idea in an upcoming article.