The changes to superannuation from 1 July 2017 will cause many people to re-think what they should be doing with their superannuation savings and pensions before that date. At the time of writing, we have four months to implement valuable strategies.
One of the prominent changes to super after 1 July 2017 is the change to whether non-concessional (non-tax deductible) contributions can be made to a complying superannuation fund such as a retail or industry fund or to a self-managed superannuation fund (SMSF).
The making of non-concessional contributions serves at least two purposes. The most obvious is to more quickly build superannuation savings. Concessional (tax deductible) contributions are capped this year ending 30 June 2017 to $30,000 for people less than 49 years of age or $35,000 if 49 years and over.
Non-concessional contributions of $180,000 may be made by 30 June 2017. Alternatively, a maximum of $540,000 ($180,000 x 3) may be made by 30 June 2017 but no further non-concessional contributions may be made for the next two financial years (years ending 30 June 2018 and 2019). After 1 July 2017, the annual and three year limits reduce to $100,000 and $300,000 respectively.
For some people who have cash outside a super fund, consideration might be given to making a lump sum contribution subject to the above limits before 1 July 2017. While having a lazy $540,000 might seem unusual, there may be situations where a person may have just sold a property or have inherited a share of an estate.
Remember that having savings in a super fund still represents a very tax effective environment with tax on income being only 15% whilst in accumulation phase (usually the time before pensions begin to be drawn). In accumulation phase, the tax rate on capital gains is an effective 10%.
The second purpose of making non-concessional contributions is to build on the tax-free component of a person’s member’s account on their super fund. Upon the member’s death, the tax-free component paid to a non-dependant, such as an adult child is not subject to tax. In contrast, the taxable component of a death benefit paid to an adult child is subject to tax at 15% plus 2% Medicare levy. Death benefits paid by a super fund to a spouse or child under 18 years are tax free.
The super changes are not without their traps. People over 65 years can only make the annual non-concessional contribution cap of $180,000 before 1 July 2017 and must also satisfy the work test. That test requires the person to be gainfully employed for at least 40 hours in a continuous 30 day period during the financial year.
As a means of restricting people to contribute to their super savings after 1 July 2017, the Government has spuriously stopped people with more than $1.6 million in super savings from making non-concessional contributions. Therefore, this financial year is the last chance for those people to make non-concessional contributions.
This article has been restricted to making superannuation contributions before and after 1 July 2017. A planned future article will deal with the $1.6 million account balance test, rolling amounts from pension phase to accumulation phase and changes to tax arrangements if a transition to retirement pension continues after 1 July 2017.