The superannuation changes coming into effect on 1 July 2017 are the most significant in a decade. What are the changes and the issues that you need to be discussing now?
The changes are significant in their impact on how, and how much, you can contribute to superannuation over a lifetime, and how much you can transfer and hold in the tax-free pension phase. They will affect everyone in different ways, depending on their personal circumstances and plans.
Read Related Article: Change is as Good as a Holiday
Ever since the Federal Budget was released in May 2016 the media, politicians, self-interest groups, and other commentators have had a lot to say.
Change of any sort often brings sometimes un-constructive public debate – which in turn breeds uncertainty. Sadly, elements of our community thrive on bad news and, sometimes, exaggerate or ‘massage’ the truth to achieve their desired outcome. Is it an ‘alternative truth’ or ‘fake news’?
The superannuation changes announced in the budget are now bedded down with legislation (having been passed at the end of November 2016). The reform measures announced in the budget have generally been passed in the form proposed, but there are a couple of notable exceptions.
The proposed $500,000 lifetime limit on the amount an individual can contribute to super as a non-concessional contribution has been scrapped. It is replaced with a reduced annual cap or limit of $100,000 per annum, down from the present $180,000. Individuals under 65 years of age will still be able to bring forward up to three years’ worth of contributions and effectively contribute up to $300,000 in one year (with some restrictions applying).
Anyone with more than $1.6m in super will not be able to make non-concessional contributions after 1 July 2017, and those with between $1.4m and $1.6m will be restricted in the amount they may contribute under the three year ‘bring forward’ rule.
For most Australians, superannuation remains the best wealth accumulation structure from a tax perspective. On top of the income tax benefits available on contributions, superannuation in the accumulation phase pays maximum tax of 15% on investment income and no tax when a super fund is paying a pension to its members.
Another change announced in the budget related to the removal of the work test requirement for people aged between 65 and 74 who wish to contribute to super.
Superannuation law requires a person aged between 65 and 74 to be gainfully employed if they wish to contribute. The test actually requires that they be gainfully employed, or self-employed, for a minimum period of 40 hours, worked within a 30-consecutive day period in the financial year in which they wish to contribute.
When the government announced they would be removing this restriction, it was met with wide applause. However, that applause was short lived as the proposal was abandoned as part of the trade-off for discontinuing with plans to introduce a lifetime cap for non-concessional contributions.
Despite the pictures painted by the media, the budget actually contained some excellent measures that benefit more individuals than it disadvantages. One of the positive changes that has been legislated, albeit being delayed by 1 year to 1 July 2018, is the ability to carry forward the unused portion of the concessional contribution cap.
Concessional contributions generally include contributions made by self-employed folk who are able to claim a tax deduction for their contributions, and contributions made by employers on behalf of their employees. The annual limit for concessional contributions is $25,000, from 1 July 2017.
While $25,000 may not sound like a like, the majority of concessional contributions fall well short of this figure. For some, a year or two might go by without making any concessional contributions. If the concessional contribution cap is not maximised each year, the unused portion of the cap is lost. However, from 1 July 2018, individuals with less than $500,000 in super will be able to carry forward the unused portion of their concessional cap for up to five years.
Even though the pundits might criticise super, and others might become disengaged, it remains one of the best tax effective structures for building wealth for retirement.
PETER KELLY | CENTREPOINT ALLIANCE
PREPARE FOR LIFE ISSUE 25 | MARCH 2017
The information provided in this page is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs. You should seek independent advice from your financial adviser before making any decisions.
AUSTRALIAN MORTGAGE AND FINANCIAL ADVISERS (AMAFA)
Phone: 07 3378 2056
Fax: 07 3378 2069