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SUMMARY: The world of super changes – not for the better – in 2017. Here’s what to consider before the 1 July 2017 deadline.
The legislation has passed and we now “know” what the rules are for superannuation, post 1 July 2017.
(We don’t actually know all of the rules. Some of them are still to be worked out.)
It’s certainly a great lessening of the benefits of superannuation for some. For those who have worked to the previous rules to build as big a pension fund as they could, and have built more than $1.6 million … the message is “sorry, but you were too successful”.
But the rules are here. And at least we have some certainty. Today, here is what you need to do to make the most of rules, before they change in July.
Concessional contributions – maximise them for FY17
You have the remainder of FY17 to use the existing concessional contribution (CC) limits. That is, $35k for the over-50s and $30k for the under-50s.
From 1 July 2017, everyone will have the same CC limit of $25k. And that won’t go far for a large number of Australians.
If you earn, for example, a salary of $150,000 a year, then your employer is putting in about $14,250 (9.5% of $150,000) into super under the Superannuation Guarantee rules. That means, at most, you can salary sacrifice $10,750 a year, post July 2017.
If you are earning $200,000 a year, then your employer is making $19,000 a year in SG contributions, which will leave you just $6000 as an amount that you can contribute, tax concessionally, to super, via salary sacrifice.
Make the most of CCs this financial year. If you can make contributions up to $30,000 or $35,000, consider doing so. Speak to your HR department or a financial adviser about making those contributions via salary sacrifice, prior to 30 June.
Note that salary sacrifice can only be made on income that has not yet been earned. You can’t do salary sacrifice on income for which you have already been paid.
So, if this might make sense to you, get an agreement in place that will help you maximise your super contributions for this year.
The truly self-employed operate under a slightly different set of rules (if they don’t receive a salary from their business). As a result, they are often making their contributions towards the end of the financial year. Consider hitting your limit. A little bit of extra pain to get you to threshold in FY17 could be worth it, particularly if your business is likely to be more profitable in future years.
Non-concessional contributions – limits are also dropping
The global lifetime limit of $500k for NCCs was dropped during the negotiations for the Government to get its super changes through parliament.
In its place, it was agreed to decrease the limit from $180k a year to $100k a year. Under the three-year pull-forward rules, the amount a person could get into super from $540k to $300k.
But there’s a kicker. You won’t be able to make any NCCs if your superannuation balance has already exceeded the $1.6m limit.
If you’re able to make big contributions to super via NCCs and you’ve already got a considerable super balance, you’ll need to make those prior to 1 July.
If you’re already over $1.6m, or these would take you over $1.6m, then at least you have got the money into the superannuation system – something you wont be able to do after the new rules kick in.
You might have to move some of it back to accumulation/super on 1 July. But there it will only be taxed at a maximum of 15%. This will make sense in many instances, but see below about the “three buckets”.
If you have considerable wealth outside of super, which will see you taxed at a higher rate than 15%, then it may well make sense to get the money into super and pay superannuation levels of tax.
But this will be individual by individual. Pay a financial adviser for a few hours of their time to try to point you in the right direction.
Turn TTRs into ABPs
For the first time in Australian superannuation history, some pension funds are going to be taxed. Specifically, transition-to-retirement pensions are going to be taxed from 1 July.
TTR pensions will be taxed at a maximum of 15% until such time as you qualify to convert that pension fund into an account-based pension (ABP).
If you are 65, you automically receive an ABP and you won’t have to pay tax on the fund’s earnings again.
However, many people are sitting on TTR pensions, which will be taxed post 1 July 2017. One way of changing a TTR to an ABP would be to make sure your super fund is aware of when you change a job, post age 60.
For anyone on a TTR, consideration must be given to whether it is a worthwhile strategy. The answer could still well be yes – the income you receive, if you are over 60, will still be tax free.
As I wrote here (1/6/16), the strategy that combined TTR with a salary sacrifice strategy is likely to still work best for those with small amounts in superannuation. Get advice.
Understand your three pots strategy
Your pension account can have up to $1.6m at the point you turn it on. And this fund will be tax free.
However, there is also the Seniors And Pensioners Tax Offset (SAPTO), which allows individuals over age 65 to earn up to $32,279 before paying tax outside of super. (Couples can earn $57,948 combined, or $28,974 each.)
If (as a member of a couple), you have assets outside of super of $700,000, on which you are earning 4%, you will have earned $28,000 and will be under the tax-free threshold under SAPTO.
These will become the critical first two pots. Roughly, therefore, you can have around $2.3m in assets ($1.6m inside and $700k outside of super), before you will have to pay any tax on your earnings.
Your third pot becomes your accumulation or super fund, that houses what is in excess of $1.6m you put into your pension.
On this fund, on as much money as you can get in there, you’re not going to pay any more than 15% tax.
Potentially millions of dollars on which you are paying no more than 15% tax on a small portion of it.
The last, and least preferred pot, becomes money outside of super, that will take you in excess of the SAPTO limits.
Spouse super splitting strategies
Couples have a distinct advantage when it comes to the new super rules, that individuals cannot compete with.
Each member of a couple gets the same $1.6m transfer to pension cap. That means a couple can have up to $3.2m in total in a pension fund, though only a maximum of $1.6m each. (Plus, as discussed above, potentially another $1.4m outside of super, before they will pay any tax.)
But evenly split super balances will rarely happen naturally. Some work will need to be done.
Depending on the difference between the spouses’ super balances, the work might need to start when a couple is in their 40s, even 30s.
As I wrote in this column (18/5/16 and I will revisit this topic early in the new year), using strategies like “spouse super splitting” will become imperative.
Transferring CCs at the end of a financial year to build up the superannuation of a spouse with a lower balance, will become important.
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The era of Peter Costello’s “Simpler Super” died on Budget night in 2016.
From that moment, super was going to become a whole lot more complex. It was going to move from being something straightforward enough to figure it out yourself, back into the realms of complexity that will require either serious study, or serious advice, to make the maximum benefit from.
In early 2017, before the new rules start on 1 July, you have a limited opportunity to make some final adjustments/additions to your super before the new rules make life a whole lot harder.
Make the most of them.
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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.