SUMMARY: You’ve got a limited opportunity to make the most of higher contribution limits for superannuation in FY17.
Bless life’s simple things. Damn the bastards who want to complicate them.
Getting money into super, for some time, has been relatively simple. But, as we know, change is coming.
Now seems like a good time to review the Turnbull Government changes that specifically relate to how one gets money into super, before and after the Big Bang changes that come into force on 1 July.
And to recap on some items you should have on your “to do” list for prior to 30 June.
Let’s start with the general understanding of what the government is trying to do. They want to stop the growth of monstrous super funds for the “wealthy”. They have determined that “enough” in super is $1.6 million. So, getting money in to super once you’ve got “enough” is going to be made harder.
There are two main types of contributions that can be made to super – concessional and non-concessional.
Concessional contributions (CCs)
Concessional contributions are those that have not been taxed before entering super. So, instead of being taxed at up to top marginal tax rate (of 49%), they are taxed at 15%.
Because of the big potential tax break, the government restricts how much money you can put in to super via CCs.
In the current financial year, those aged 50 or over can contribute up to $35,000 for the current year, while those aged under 50 can contribute $30,000.
From 1 July, all age groups, if eligible to contribute, will have the same, reduced, limit of $25,000.
CCs include the Superannuation Guarantee (SG) payments that employers make for their staff. The current rate for that is 9.5% of your salary. If you’re earning $100,000 a year, then your employer is supposed to be contribute $9500 to your super fund.
That $9500 is taxed at 15% on the way into the super fund, instead of being taxed at 39%, which is the marginal tax rate for someone earning $100,000.
Contributions made via salary sacrifice also count as CCs. So, if our $100,000-a-year employee wanted to get more into super in FY17, they could salary sacrifice $20,500 (if they were under 50) and $25,500 (for the over 50s).
From next year, they will be limited to $25,000 in total, so they will only be able to salary sacrifice $15,500.
That’s for employees.
For the self-employed, it’s a little different.
If you have made yourself an employee of your own company, then you need to pay yourself SG, as per above.
But large numbers of self-employed don’t pay themselves a salary. They take profits, or drawings, instead.
The truly self-employed can make CCs at any time of the financial year. (They operate under the same general caps as employees, as for the CC limits.)
The big changes from 1 July are two-fold, as they relate to CCs – one good, one bad. The bad is reduction in CC limits to a flat $25,000 for everyone.
The good is that it will no longer be only the self-employed who can make contributions at any time of the year.
Those who are employees will be able to make contributions to super and claim a tax deduction, without it having to go via SG or salary sacrifice contributions.
This removes a ridiculous anomaly that has always existed. Previously, if your employer gave you SG, but didn’t allow you to do salary sacrifice (it is not compulsory to offer it to employees), then you were restricted to simply your SG contributions to super.
This idiocy goes on 1 July.
How will it work? If you’re an employee earning $100,000 a year and have spare cash flow of, say, $10,000, then you could contribute the $10,000 to super. It would be taxed at 15% on the way in, meaning $8500 would end up in your super fund. However, on that $10,000, you could claim a tax deduction at your marginal tax rate, meaning you would get a tax return of approximately $3900 for the contribution to your super.
Another improvement – although it doesn’t kick in until 1 July 2018 – will be ability to do five-year catch-ups on CCs. If you have not used up your cap of $25,000 in previous years (going back a maximum of five years), you will be able to make extra contributions to make up for it. Technically, if you made no contributions in the first four years, you could make $125,000 (5 x $25,000) in the fifth year.
Non-concessional contributions (NCCs)
NCCs are amounts that don’t get taxed on the way in to superannuation, ostensibly because it is after-tax money and has been fully taxed outside of super.
NCCs are where the wealthy have been able to create particularly large super fund balances. They allow, potentially, huge contributions to super.
Currently, the limits for NCCs are $180,000 a year, with the ability to pull forward two more coming years to put up to $540,000 into super in one hit. Couples could, therefore, get as much as $1.08m into super ($540,000 each) by 30 June.
These rules still apply for FY2017. That is, if you’re eligible (largely, for those 64 and under), you can get up to $540,000 into super this year. See an adviser if this is something you think you should be considering.
But the ability to use NCCs to lift your super balance is going to be curtailed.
In last year’s budget, the plan was to limit everyone to a maximum lifetime limit of $500,000 for NCCs. This was axed during negotiations.
The $180,000 limit will now be reduced to $100,000 a year from 1 July. The three-year pull-forward provisions remain in place, but with an obviously reduced maximum of $300,000 for the three years.
Further, you will not be able to make any NCCs if your combined super balance (if you have more than one account) is more than $1.6 million.
Last minute opportunities
Those wanting to make the most of the higher CC and NCC limits for the FY17 need to start putting thought into it now. It can take some planning, potentially even the sale of some assets, where appropriate. Speak to an adviser about how you can make the most of these strategies in the lead up to 30 June.
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: firstname.lastname@example.org . Bruce’s new book, Mortgages Made Easy, is available now.