Federal Budget ahead, but Act Now on Superannuation Changes
The Federal Budget will be delivered next Tuesday night 9 May 2017, but right now you need to be acting on last year’s highly contentious announcements to avoid being exposed to higher taxation. Sticking with the status quo may cost you!
There have been RBLs (reasonable benefit limits), age based deduction limits and modified levels of ‘concessional’ superannuation contributions that can be made by you (or for you) over the years, confusing everyone with an interest in building up a tax effective retirement nest egg.
Long term plans are regularly thrown into disarray, as governments try to make the system fairer or to grab a slice of tax revenue for short-term budgetary measures.
Particularly if you have been seeking to maximise your superannuation contributions as part of your salary package, or as a small business making contributions toward your retirement each year, everyone needs to sit up and take notice of the imminent changes to avoid penal rates of taxation.
Until 30 June 2017 the maximum concessional superannuation contributions remain, that is $30,000 per year up to age 49 and $35,000 from age 50. These are the ‘caps’.
Concessional contributions include contributions your employer makes on your behalf, or any contribution that you may be eligible to make, and deduct, for yourself. Superannuation guarantee contributions and any salary sacrifice amounts, count toward the cap.
These caps are only $25,000 from 1 July 2017. So as you get nearer to retirement age, there is no longer an ability to ramp-up your deductible superannuation contributions.
Governments once encouraged us to save for retirement, now they are trying to limit how much you save so the tax concessions don’t cost the federal budget too much (and hopefully less than the additional pensions they will have to fund down the track).
For example, if you:
are an employee aged 50 or more, and negotiated as part of your salary package to have $30,000 contributed to superannuation and do nothing, and continue to have your employer contribute at that rate after 1 July 2017, you will be exposed to ‘excess contributions tax’. Although you will be under the current cap for the 2017 tax year by $5,000, you will be over the new cap by $5,000 in 2018 (starting on 1 July 2017);
are less than 50 years of age and have a small business, and it is beneficial and possible to be contributing $2,500 a month to your superannuation fund, you too will be contributing too much from 1 July. Your monthly contribution will need to drop to just $2,083.33 ($25000 for the year), to avoid the ‘excess contributions tax’.
We urge all clients to check the total concessional (‘deductible’) contributions they are making, or being made on their behalf, to ensure that you remain within the new $25,000 cap from 1 July 2017. For some, salary packages will need to be altered ahead of 1 July 2017.
Other superannuation changes:
Above we have focused on the deductible ‘concessional’ contributions that you may make to your superannuation fund. But changes to non-concessional contributions - those made with ‘after-tax’ money – are also being shaken up. Contribute too much, and you will be volunteering to pay more tax to the government at the cost of money for retirement! The previous cap of $180,000 per annum is dropping to just $100,000 per annum, with the ‘bring forward rule’ also affected. Many people doubt this will affect them, until they have a windfall gain / cash (property sale, inheritance, move back to Australia for retirement) and are surprised they are unable to provide for their own retirement by directing enough money into their superannuation fund. These lower limits will significantly affect people sensibly effecting smart decisions, because they won’t be allowed to do what they need to do;
The ‘maximum’ $1.6 million that can be used as a tax-free retirement is a bit of a beat-up. Whilst some will struggle to enjoy an adequate retirement on $1.6 million (depending upon lifestyle, age, health, any debts going into retirement, etc), this level of superannuation is a dream to most. Of course, more than $1.6 million can be saved in superannuation, it just won’t be tax-free like the first $1.6 million is.
Do you have tax questions regarding your situation, as you work through this maze on the long road to retirement? Contact Tax Services Australia today.
For any financial planning questions, you will need to obtain advice from a financial planner who has an Australian Financial Services Licence (AFSL), and we encourage you to find one that is experienced, objective, and who will truly provide advice entirely in your best interests, unaffected by any self-interest or commission-driven remuneration structure.