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Couples will have to work together as a “superannuation team” to avoid paying increased retirement taxes following the July 2 Federal Election.
Tougher tax regimes will be imposed on superannuation by both the Coalition and Labor, but particularly those with larger balances.
The Turnbull Government plans to implement the biggest shakeup for superannuation in a decade, headlined by limiting how much you can have in a super pension, while the Shorten Opposition wants to tax those who receive more than $75,000 in tax-free income from their super fund.
But couples who work together to “even up” their super fund balances could save potentially tens of thousands of dollars in tax in retirement.
Both the Coalition’s and Labor’s policies are saying that superannuation, has been too generous, for the “wealthy”, for too long.
No matter who wins the election, super taxes are therefore destined to rise.
The higher taxes will be mostly for “relatively wealthy”, with superannuation balances of $1.5 million or more.
The Coalition, if re-elected, will limit the amount a worker can have in a super pension fund to $1.6 million. Pension funds and payments have been tax-free for more than a decade.
Those with more than that in their super pension fund, will have to transfer the excess back to super accumulation, where it will continue to be taxed at up to 15 per cent.
In choosing that number, the Coalition is saying that people should be able to have a maximum of $80,000 in a tax-free pension income.
Since 2007, Australians have been able to have an unlimited balance in their super pension and pay no tax on the pension that is then paid to them.
The Coalition will also restrict the amount Australians can put into super, cutting the current tax concessional limits from $30,000 (for the under 50s) and $35,000 (for the over 50s) to a flat rate of $25,000.
Workers can also currently put in after-tax money to their super fund. This is limited to $180,000 a year. The Government intends to limit this to $500,000 – or less than three years of the current limit – over a lifetime.
However, to sweeten the deal, Australians will be able to contribute to super until later in life. The previous cut-off of age 64 will be raised to 74.
And Turnbull will make it easier for everyone else to get money into super, with new “five-year” catch-up provisions on the $25,000 limit.
This will help women, and their often disjointed work history, most, but will also be welcomed by the self-employed.
Labor’s super plan is far simpler. They have not announced any reduction to the contribution limits, allowing Australians to continue to build larger super balances.
But Shorten’s plan will tax those who take bigger pensions from their super pension funds.
Super members will be able to tax up to $75,000 as a tax-free super pension, but will have to pay tax on pensions taken above that.
Breakout #1 – The big super tip
Raising kids. Paying the mortgage. Household chores. All are better and far easier to do when a couple works together, yes?
From now on – and no matter who wins the July 2 Federal Election – you will need to add superannuation to that list for couples for “team” beats “individuals”.
Superannuation has now become a game where spouses MUST work together. Or pay wads in unnecessary tax in retirement.
Why? Because both Liberal and Labor want to tax individuals who have “too much” super. An example? If the husband has $2.5 million in super, but the largely stay-at-home wife has just $100,000, the husband will face a big super tax bill from both Liberal and Labor.
But … if they “even up” their super, and they both have $1.3 million in super, there will be no super taxes.
No matter who wins the election, individuals with big balances will be taxed more. The way around that will be to make super a couples’ game.
Right, so how?
Here are four ways to do this. Everyone’s situation is different – so your best bet is to find a good financial adviser to help you navigate super’s complex rules.
Spouse splitting rules: Transfer your employer and salary sacrifice super contributions to your spouse’s account. This will become a common strategy to even up super accounts.
Spouse contribution rebate: A working spouse can contribute up to $3000 for a low-earning spouse and get a tax return/rebate of up to 18 per cent, or $540 added to their tax return. The lower-earning spouse’s income is tested. The Turnbull Government wants to lift the income test from $10,800 to $37,000.
Making non-concessional contributions: Non-concessional contributions to super are after-tax deposits. If you are going to make NCCs, consider making them to the person with the lower super balance.
Salary sacrifice and pensions: There are really powerful strategies here, particularly for couples, where one is working and the other is not.
Breakout/graphic – super tips by life stage
Single 20- and 30-somethings
Coalition victory
Start contributing a little extra to super earlier, via salary sacrifice. Even $20-50 a week will have a big impact, given the restrictions you will have in years to come with the Coalition’s reduce contributions limits.
Do a “risk profile” and aim to be a bit more aggressive with your super investments. At a young age, the extra risk should pay huge benefits over the decades to you turning 60 or 65.
Labor victory
No rule changes that will impact on you now. Super rule changes are almost a guarantee in the future, so good idea to start putting in a little bit, even $20-50 a week, now.
Couples with kids
Coalition victory
Couples can no longer wait until the kids are off their hands to contribute extra to super, because of reduced limits. Start earlier, even with small amounts.
If one spouse is returning to work after kids, consider catch-up provisions to beef up super.
Labor victory
If one partner is not working, or part-time, access the low-income spouse offset, co-contribution scheme and spouse-splitting rules.
Working couples, no kids
Labor victory
Labor is not intending to introduce catch-up provisions, so you need to make higher, and more consistent, contributions to super.
Make the most of higher contribution limits.
Coalition victory
Look to lift your super contributions to the new, lower, limits. Immediate tax saving for salary sacrifice, but long-term bonuses for your super in a compounding low-tax environment.
If you’re both working, start looking at options to even up your super balances. Will be required no matter who wins government.
Women
Coalition victory
Women the biggest winners – New five-year “catch up” provisions to help for women who have been out of the workforce for extended periods get more into super.
Make the most the co-contribution rules and the $500 super tax refund for those earning less than $37,000 a year.
The rules are complex. A good financial adviser could you make a quick few thousand dollars a year by helping you navigate the rules here, if finance is not your specialty.
Labor victory
Consider spouse-splitting rules with your partners to help even up your super balances.
Pre-retirees (50-65)
Labor victory
Pre-retirees should use the current super contribution limits to get as much into super as possible. Future governments are likely to restrict contributions in the future.
Coalition victory
Maximise higher contribution limits of $35k for FY16 and FY17, before new $25k limit starts. The immediate tax saving is great, particularly when access to super savings is not far off.
Maximise salary sacrifice and spouse splitting strategies to minimise tax when super pensions are taken.
Beware of change of rules on “transition to retirement” from the Coalition. Might be worthwhile for some people to retire, then come back to work.
Retirees (65 plus)
Coalition victory
Work-test abolished. You might have further opportunities to get more money into super, with super contributions age extended to 74 and no work test.
Use new rules older contribution age to “even up” super balances between spouses.
Reduce super pension payments to keep more money in super.
Labor victory
You will need to meet “work test” to make super contributions. Consider a part-time job to allow you put extra into super.
Bruce Brammall is principal financial adviser of Bruce Brammall Financial and author of Mortgages Made Easy (www.brucebrammallfinancial.com.au).
E: bruce@brucebrammallfinancial.com.au.