Article published by RJS Wealth Management Pty Ltd
When people speak about the new super reforms there’s a lot of focus on the new transfer balance cap of $1.6m, or the impact of capital gains tax on balances withdrawn from super into accumulation. These new rules are making life less pleasant for many Australians and we know they’re not popular with everyone. We hope if you are one of those affected, you’re speaking to an adviser about what to do and you’ve got a plan of action.
There are other super reforms coming into force on 1 July 2017 which are targeted at those who don’t have large super balances, or who don’t have regular income. These people will potentially benefit from the changes because they’re being given the opportunity to make contributions in years where they are financially strong to make up for the times when they are not. These reforms have been created to give some individuals a better chance to make solid preparations for their financial future and retirement.
A concessional contribution is one paid from before tax income. It includes payments you make as part of the super guarantee (paid by your employer but included in your income), tax deductible contributions made by self-employed or unemployed individuals, and any payments made via salary sacrifice. These amounts are taxed at 15%as they enter super (well below the marginal tax rate it would be subject to outside super). For the 2016/2017 year, if you’re 49 or over on 30 June 2016, you can make yearly concessional contributions of $35,000 per year. Individuals younger than this can contribute $30,0001.
After 1 July 2017, regardless of age, you can contribute just $25,000 per year.
The caps on concessional contributions have been reducing gradually over the last decade, limiting many Australians ability to pay just 15% tax on large deposits to super instead of the marginal rate. The latest reduction (the $25,000 cap on contributions) is less than a quarter of the cap for over 50s ten years ago (it was $105,113)2.
If you make contributions over your concessional limit you will be required to pay tax at your marginal tax rate. You’ll be taxed further for making excess contributions, incur other interest charges, while also being entitled to a 15% tax offset3. These contributions will then count towards your non-concessional contribution cap.
It seems like there’s no longer much scope for those who wish to take advantage of tax concessions given to super account holders. But there is an upside for those who don’t have large super balances. The reforms allow you to carry forward the unused portion of your concessional cap for use in future years. From 1 July 2018, if your super balance is below $500,000, and your concessional contributions in one financial year are less than $25,000, you may carry forward the balance for up to five years. This new reform particularly benefits individuals with irregular or interrupted income.
Case Study: Jenny works part time and her super guarantee for 2018/19 is $3,500. Her super balance is $220,000. In 2019/20 she moves to full time work and also chooses to salary sacrifice some of her income. She can choose to contribute up to $46,500 as concessional contributions before 30 June 2020.
In a further blow to high income earners, they now must pay an extra 15% tax on their concessional contributions if their income is over $250,000. Before the reforms, you could earn up to $300,000 before being slugged for the extra tax. That all changes from July 1. Of course, 30% is still less than the marginal tax rate you would have to pay outside super if you’re earning $250k.
Case Study: Jackie earns $240,000 and makes concessional contributions of $20,000 on 10th July 2017. This takes Jackie’s income to $260,000. She pays 15% tax on the first $10,000 and 30% on the remaining $10,000.
If you were planning on making concessional contributions before July 1 you may wish to do so to take advantage of the higher cap that is still in place. If you are a freelancer, part-timer or just returning to work, (and your super balance is under $500k) you might be glad to know that your lumpy income is no longer a disadvantage when it comes to your ability to contribute to super. And if you earn over $250,000, at least the 30%tax rate you’ll pay on any concessional contributions is less than the 47% you must pay on your other income. When it comes to super reforms, it pays to look on the bright side, some Australians will definitely benefit from the upcoming changes.
It also pays to contact your financial adviser as soon as possible if you have any questions at all about concessional contributions caps or any other issues we’ve raised in this article. With less than three months to go until 1 July, it’s time to make sure you’re ready. Contact RJS Wealth Management on 1300 27 28 29.
Are you pleased about the new bring forward rule on concessional contributions? Or are you frustrated by other changes?
1. ATO: Super SMSFs–Contributions and rollovers, contributions caps
2. Superguide March 2017: Boost your superannuation–over 50s contributions cap cut
3. Qsuper: Super and retirement–contribution caps
This blog has been prepared by RJS Wealth Management Pty. Ltd. ABN 24 156 207 126. RJS Wealth Management Pty. Ltd. is a Corporate Authorised Representative (No. 438158) of Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licensee (Number 233209). The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this fact sheet can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.