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SUMMARY: Hold off on non-concessional contributions for now. The “agreed” changes are far from a done deal.
The dust hasn’t settled. And the horse-trading certainly has only just begun.
In the meantime, for most, I wouldn’t be recommending anyone make any unnecessary non-concessional contributions to super. Certainly without thoroughly checking your tax records, or the records the ATO has for you.
There are too many people who could wound their superannuation by doing so. And not necessarily in the obvious way, by busting over the $500,000 NCC caps that were introduced on Budget night (though could still be knocked out during “trade week” between the parties).
And given the importance of superannuation contributions and the timeframes surrounding being able to make them, the parties (the Coalition, Labor and the Greens) need to make banging out an agreement their first priority.
If Treasurer Scott Morrison’s rules outlined on Budget night are not to be passed as announced, many people could end up being penalised by other time factors.
If you’re in your 40s, 50s or even early 60s, I wouldn’t be making NCCs before you’ve thoroughly run through not just your current circumstances, but what the next five years could look like. And even then, you might be forced to take a calculated risk ahead of a deal actually being struck and the rules being set in concrete.
The new proposals will require you to see into your future a few years.
Why? Because of the way some of the new rules might mix.
Take these two rules – the $500k limit for non-concessional contributions and the five-year catch up provisions.
Let’s take a couple. They’re both 50 years old. And have $300,000 in their super fund (all concessional) each. They’re earning $120,000 a year each. They have not contributed beyond the 9.5% superannuation guarantee. In a few years, the kids will be off their hands, freeing up their income and ability to make extra contributions.
They’re also considering selling an investment property to start beefing up their superannuation. They would clear about $600,000 after repaying debt and capital gains tax and are considering contributing the money to super.
If they sold and put $300,000 each into their super funds, they would now have $600,000 each in super. (In recent columns, I have pointed out that taking steps to equalise super between couples will become crucially important. See 18/5/16. But, of course, there will be exceptions where this might not work best.)
However, under Coalition’s proposal, this would seriously penalise them under the five-year catch-up rule.
You can only use the catch-up provisions if your super balance is below $500,000.
So, even though they have only made SG contributions of $57,000 over the last five years ($120,000 x 9.5% x five years) and could arguably “catch up” around $68,000 each in super contributions, they’re non-concessional contribution with the property sale money will stop them from playing catch up.
The proceeds from the investment property sale could just as easily be an inheritance or savings sitting in redraw/offset.
In this situation, the couple will have to weigh up a number of possibilities – and each person’s situation will be different.
But they might wish, in the year in which the gain is made, to salary sacrifice an extra $68,000 of income (which would also reduce their tax liability on the gain from the property), then delay the NCC until the following financial year, or later. Or they could make other concessional contributions under the new proposal that would remove the 10% rule, allowing anyone to make deductible contributions.
In some cases, the best advice might be to avoid making any NCCs until you have reached $500,000 in your super fund, if there’s any chance you might need to use your catch-up provisions. Once you’re over the $500,000 limit for catch up, then you’re free to use the $500,000 NCC limit.
If the super balances aren’t even and one person is over $500,000, then it might make sense (from the example above) to put the $500,000 NCC into the fund of the partner already above $500,000 in their super balance and hold out on the extra $100,000 until after the second person has reached the $500,000 limit.
Similarly, if you’re getting close to the $500,000, consider ramping up concessional contributions to your partner (if they have less in super). Take it a step further and roll over your own concessional contributions each year to your partner’s fund via spouse splitting provisions.
Confusing? Yes? Well, I’m sorry, and I’ve said this before. We’ve been used to “Simpler Super” for a decade now. If the current proposal is passed, super is going to become complex again. And will require proper planning.
I will go into more of these sorts of strategies/conundrums in the coming weeks/months. But, in the meantime, think carefully (or see an adviser who is up with the rules) before making any NCCs.
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The Coalition took a superannuation reform agenda into the election.
Just five days before the election (and despite initial opposition), Labor agreed the Coalition’s changes were necessary – or similar super cost savings would be required to be found in the Budget.
Given the increased perceived “fairness” of the policies, it was understood the Greens might largely support the changes.
That almost sounds like tripartite agreement, doesn’t it?
Now, Labor wants the changes to be sent off for review to determine whether the changes are retrospective, and to check some elements for fairness.
But the pressure for change is now also coming from within. Coalition members are reporting a backlash from their ground forces that saw less money donated and fewer volunteers offering a hand during the campaign and at polling stations.
Hold on to your hats. There’s a fair bit of politics to play out yet.
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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. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.