By Steve Blizard 8 May 2016
Treasurer Scott Morrison has announced the biggest shake-up to Australia’s superannuation system in a decade, with his pre-election budget targeting high-income earners while retaining concessions for the lowest paid.
With many of the changes set to begin on July 1, 2017, such an array of unexpected large and complex changes to super will ultimately see many investors having to adjust their financial affairs.
So with a July 2 Federal election ahead, and the fact that it’s not unusual for budgetary changes to be amended or dumped before being legislated, here are some ideas to help prepare over the next 14 months and beyond.
Maximise pre-tax concessional contributions
For those aged 49 (and above) on June 30 each year, the maximum pre-tax contribution that can be salary sacrificed is $35,000 and $30,000 for everyone else.
On July 1, 2017 these levels will drop to $25,000, irrespective of age.
For small business owners this takes into account any super contributions claimed as a tax deduction, and for employees this is the total, including the employer Superannuation Guarantee Contribution (SGC) of 9.5 percent plus any salary sacrifice amounts made into super.
When including the super guarantee (SG), employees with annual income over $250,000 may already be in excess of the $25,000 concessional cap.
Known as the Division 293 tax, an additional 15 percent tax is currently levied on concessional super contributions when the income threshold exceeds $300,000.
It is proposed that this threshold be lowered to $250,000 from 1 July 2017, also matching one of Labor’s policy commitments.
Beating the threshold
Family trusts and gearing into property and shares are set to return as popular strategies as investors look to sneak in under the new $250,000 threshold.
More exotic strategies such as the new “angel investor concession” laws, offering 20 percent tax offset for investments of up to $200,000, will also attract more interest from high net worth investors.
The new laws, which emerged as part of the National Science and Innovation Agenda statement and passed by the Senate on May 4, seek to reward investors with additional tax benefits for investing in early-stage technology.
This initiative includes a 20 percent non-refundable carry forward tax offset on investments in qualifying companies, capped at $200,000 a year, and a 10-year exception on capital gains tax, providing they are held for 12 months or more.
Low income earner super rebate
In a fairness measure, the Turnbull government will continue Labor’s low income superannuation contribution scheme but renamed as the low income superannuation tax offset (LITSO).
The re-named scheme will ensure that workers earning less than $37,000 a year will continue to receive an automatic rebate worth up to $500 annually, directly into their super accounts.
Co-contribution scheme continues
The co-contribution scheme has been left unchanged in the budget.
Adrian Raftery, a senior lecturer in financial planning and superannuation at Deakin University, says: “It’s surprising how few people actually take advantage of free money from the government.”
If your income is under $35,454 and you contribute up to $1000 of after-tax income into your super account, the government will match each dollar with a payment of 50 cents.
The incentive shades out at income of $35,454 and cuts out altogether at $50,454.
The income thresholds will increase slightly for the 2016-17 year.
The budget increases the income threshold to $37,000 from $10,800 for a low-earning spouse to have their spouse pay into their super account.
The higher earning spouse can pay up to $3000 in the lower-paid spouse’s super account and they receive a rebate, which is worth $540 on $3000.
Maximise non-concessional contributions.
In a rare move of retrospectivity, with the clock started in July 2007, from May 3 the non-concessional cap (NCC) that can be contributed post-tax to super over an individual’s lifetime, has been slashed to the ridiculously low amount of $500,000.
Before budget night those under 65 were able to contribute $180,000 into super each financial year or make use of the ‘‘three year bring-forward rule’’ of $540,000.
Fund members that have already made NCCs above $500,000 cannot make any further contributions, the excess NCCs won’t have to be withdrawn from the super system and won’t be subject to penalties.
There is no doubt the new rule is unnecessarily harsh and it won’t be a surprise if it is watered down in the future.
One option is to wait to see what happens and then contribute more if possible.
Large Pension Funds
To date, there has been no limit on the super balance an individual can transfer into the pension phase tax-free.
However, from 1 July 2017 pension account balances will be limited to $1.6million, so those with larger account balances need to plan carefully.
Where action is necessary, one potential option is may be to take some of the account balance out as a lump sum and then, if possible, contribute that into your spouse’s name.
This option has been made more attractive with the removal of the work test applying to non-mandated super contributions (including salary sacrifice and personal contributions) for those aged 65 to 74 (inclusive) from 1 July 2017.
Another option may be to increase pension payments now so you fall under the $1.6m limit by July next year.
The new caps may also see couples re-visiting “spouse splitting” rules, where it is possible to allocate up to 85 percent of before-tax super contributions with a spouse before the financial year.
However with Australians facing stricter controls on the cash they can add to their retirement nest eggs, Scott Morrison’s major budget saving from super may trigger a backlash from voters preparing to leave the workforce.