Don't make the ultimate super sacrifice

Salary sacrificing into super is a good strategy, but you must get it right.

Summary: Knowing what you can contribute into your superannuation beyond your employer’s contributions is important, but contributions are also a matter of timing. Plus “Election 2013” – the super political promises have started.
Key take-out: Leaving salary sacrifice planning to the last minute could be a bad mistake if you are sailing close to the super contributions cap.
Key beneficiaries: Superannuation investors and SMSF trustees. Category: Portfolio management.

Concessional contributions are a fairly simple concept. There’s a limit you generally don’t want to go over.

For the moment, that’s $25,000 for everyone who’s able to make contributions. (Let’s see what this year’s election brings? See below.)

But there are just too many things that can go wrong when it comes to making your contributions to super. Not all of them are within your control.

For the self-employed, the equation isn’t that difficult. You have control over the timing of your contributions and, if there’s a stuff-up, you’ve only got yourself to blame.

For employees, the combination of Superannuation Guarantee payments and salary sacrifice makes things a little more complex. So if your aim is to maximise your super contributions, you must start planning now.

What can go wrong?

Plenty. Let me outline a common one.

As an employee, you are generally going to be paid 9% of your salary into your chosen super fund.

If you’re earning $100,000, then the boss tips in $9000 a year. If you wish to contribute up to the maximum $25,000 for this financial year, you should be able to salary sacrifice $16,000 in total.

However, when exactly is that $9000 paid? Is it paid weekly, monthly, quarterly? Most importantly, when do they pay the last one for the year?

Employers don’t need to make their SG payments before the 28th day of the month following the period that the payment relates to. If the period ends on June 30, then the employer has until July 28 to make the SG payment.

Employers will largely take stock of salaries paid up to 30 June and pay the Superannuation Guarantee payments in July. While the SG payment related to work in June (or perhaps the June quarter), because it wasn’t made until July it counts towards the following year’s concessional contributions cap.

However, the following is reasonably common: An employer gets toward the end of the 2012-13 financial year and is looking for extra tax deductions for the business. If it pays employee super contributions prior to 30 June, 2013, for the period up to 30 June, it can then claim the deduction for FY13.

If it makes the payment in July, the company can’t claim it until the 2013-14 financial year. It is at the employer’s discretion as to when it pays it.

Where can this cause trouble?

Take Michael, who is earning $100,000. His employer pays 9% super monthly, which is $750 a month. On about the 20th of the following month, every month, the employer contributes $750 into Michael’s super fund.

Michael has planned for this and salary sacrifices $1333 a month. The combination of SG and salary sacrifice brings him to $24,996 in total concessional contributions.

However, the employer has had a bumper year in FY13 and wants to reduce its tax burden. It decides to pay the June payment of $750 on June 27, instead of July 20. It doesn’t have to warn anyone and doesn’t.

All of a sudden, Michael has had 13 payments of $750 made during FY13, plus his salary sacrifice of $15,996, making concessional contributions of $25,746.

Michael will end up having to pay extra tax on this amount and the amount in excess of $25,000 will become a non-concessional contribution.

Questions to ask to reduce the chance of getting it wrong

Call your super fund and find out exactly how much and when contributions were paid for the previous financial years and the current financial year.

See what their history is like on when they pay the June (month or quarter) contribution.

Then speak to someone knowledgeable in your HR department. Find out when they intend to make the final payment.

Please note: Even if these calls are made and the information gleaned, you can still get tripped up. I have made those calls on behalf of clients and told when previous payments were made and when the intended payment is to be made for the current year, only to find in June that the employer changed its mind at the last minute and paid an extra super contribution in the June.

But it requires research and questioning. And the time to start the planning for that is now.

Promises, promises! We’ve heard it all before

You know what? I’m actually at the point where I almost don’t want to hear politicians talking about superannuation. For the last five or six years, almost every time they have, super has bled.

But it’s an election year, so we’d better expect some. After years of silence and trying to make themselves a small target on super, the Coalition has finally made some super promises.

Super was there in Tony Abbott’s campaign launch document, “Our Plan. Real Solutions for all Australians”. Abbott promised that super wouldn’t get any worse under a government he may lead in the future.

The promise was, “we won’t move the goalposts”. They’ll “deliver greater stability and certainty on superannuation”.

That’s a far cry from what many had probably hoped for, such as “we’ll lift concessional contributions limits back to where they were”.

Abbott said: “It is unfortunate that Labor has wasted so much money and made so many threats and changes to the superannuation system.”

“We will ensure that no more negative unexpected changes occur to the superannuation system, so that those planning for their retirement can face the future with a higher degree of predictability.”

Well that would be better, but we’ve heard it before.

It wasn’t long before the 2007 election that Kevin Rudd promised this: “There will be no change to the superannuation laws, not one jot, not one tiddle.”

Well, we know what followed that comment – the greatest negative overhaul of superannuation in decades.

For people trying to prepare for their retirement, the road seems to have only ever become more bumpy and difficult to navigate under the Rudd and Gillard governments.

  • Concessional contributions were cut for the over 50s from $100k to $50k.
  • Concessional contributions were cut for the under 50s from $50k to $25k.
  • Indexation was frozen on contribution limits.
  • The government co-contribution was first reduced on two fronts – how much the government would contribute and the maximum at which it would contribute.
  • A penalty contributions tax for those earning in excess of $300,000 was introduced.
  • Salary sacrifice contributions were added back to salaries for the purposes of means testing.
  • The 50-50-500 rule was announced, then delayed to mid 2014. It might be dead.

The changes that emanated from Jeremy Cooper’s Super System Review are predominantly positive, but the majority of them are aimed at helping those who “don’t care” about their super (it’s right there in the opening paragraph of his report) and were aimed at “providers” rather than trying to help individuals making choices. For those who actively plan for their retirements, nearly all changes since the 2007 Simpler Super changes have been negative.

As we enter an election year, the best we can probably hope for is that the tide finally turns. Instead of governments and oppositions claiming that super is too generous, that things will at least get to a position where the cuts have been made and we can look forward to some positive news.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E:

Graph for Don't make the ultimate super sacrifice

  • HOSTPLUS has announced it is to change its legal structure to become a pooled superannuation trust (PST) so that self-managed super funds (SMSFs) can avail of its underlying investment platform. It will be the first industry super fund to do so. Chief executive David Elia said that SMSFs would benefit from the wholesale prices on offer and that industry funds could help SMSFs to keep costs down. “It will genuinely give SMSFs – and I think the planning industry out there – an alternative option,” he said.
  • The SMSF Professionals' Association of Australia (SPAA) has become the first Australian financial services organisation to partner with the United Nations, Geneva-based Convention of Independent Financial Advisors (CIFA). SPAA chief executive Andrea Slattery said the partnership would give SPAA a “window seat” to what is happening in the financial advisory sector overseas. “This is an exciting and important development for our organisation and the broader SMSF industry,” Mrs Slattery said.
  • Trustees should be wary of keeping the bulk of their self-managed super fund (SMSF) assets in property, according to HLB Mann Judd. “It can be dangerous having just property in your SMSF as it is an illiquid asset and not easy to sell,” SMSF specialist Andrew Yee said, according to media reports. HLB Mann Judd say a diversified portfolio is a good way to weather unstable market conditions while still accumulating wealth.

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