Budget changes will reduce concessional contributions. But there is still time to maximise earnings, writes Annette Sampson.
Another budget, another round of changes to the super system. Last week the government announced it would:
- Levy an extra 15 per cent on concessional contributions for people earning $300,000 or more and
- Defer for two years new concessional contribution caps for the over-50s with less than $500,000 in super. This means everyone will be subject to the general cap of $25,000, compared with the $50,000 that applies now for those aged 50 and older.
Both changes will come in from July 1, so those affected will need to act quickly to review their super strategies and ensure they're still getting benefits from the system.
Here are eight things you should be doing now to beat the changes.
1. MAXIMISE THIS
This is a no-brainer for people with the cash flow to sock money away before June 30. If you're on an income of more than $300,000 you'll save 15 per cent tax. If you're over 50, it is your last chance, for the next two years at least, to top up your super by the full $50,000. From next financial year you'll be able to contribute only half that.
However, the head of technical services at MLC, Gemma Dale, says it is important to ensure you stay within the current limits, as any amounts above this can be hit with penalty tax.
While Dale says legislation has now been passed that allows you to get a refund of up to $10,000 of excess contributions the first time you exceed the cap, most people don't want the hassle. And if you are not eligible for the refund, or have also used up the maximum non-concessional cap, the penalties start at the top marginal tax rate and can be 93 per cent, or even higher in some cases.
The head of technical services at ipac Securities, Colin Lewis, says if you are an employee it is particularly important to make arrangements to increase your contributions now as the only way to get pre-tax money into your fund is via a salary-sacrifice arrangement.
The tax rules allow you to trade off part of your salary for increased employer super contributions but you can only sacrifice money you are yet to earn. So you have just over six weeks to maximise your savings.
If you are earning more than $300,000 and have not made the maximum non-concessional contribution, he says exceeding the cap is less of an issue. As excess contributions are taxed at 46.5 per cent, Lewis says you save the 1 per cent flood levy and the money is in a fund in which earnings are taxed at a maximum rate of 15 per cent and you can take a tax-free lump sum or pension once you reach 60 and retire.
But extra care should be taken if you are also trying to maximise your non-concessional contributions.
2. REVIEW NEXT
The head of technical at SuperIQ, Kate Anderson, says employees aged 50 and older should also review their salary-sacrifice arrangements for next year to ensure they will not exceed the $25,000 cap. Concessional contributions include compulsory super payments as well as salary sacrifice and any contributions your employer makes to subsidise costs, such as insurance.
Dale says some higher earners have been worried their compulsory super payments will automatically push them over the $25,000 cap.
But she says employers are only required to pay compulsory super on up to $43,820 of salary a quarter (equivalent to just over $175,000 a year), so this problem can be avoided.
Lewis says higher earners also need to be aware of the potential to earn unexpected income. For example, he says the taxing point with employee share plans occurs when any restrictions come off the shares and they are vested with you. This could push you above the $300,000 limit.
He says your super contributions are also included in the $300,000 limit, though you'll only pay the extra tax on the portion of your super that takes your salary over the limit. So someone with an income of $290,000, receiving $25,000 of employer super, will pay only the extra tax on $15,000 - $2250 more.
3. REVIEW TRANSITION-TO-RETIREMENT STRATEGIES
Dale says the ongoing effectiveness of transition-to-retirement strategies will depend on your circumstances, but for some people they will become less attractive. If you're under 60, she says the taxable component of your pension will also affect its viability.
Lewis says the ability to salary sacrifice less into super will reduce the effectiveness of strategies based around using transition-to-retirement pensions to build up more super. But for people wanting to cut their working hours and use the pension to supplement their income, they will still be effective.
4. START EARLY
Dale says people have forgotten that until six years ago, people under 35 were only able to make $15,000 of concessional contributions to super. Their ability to save has increased, while the ability of older people to put money away has been curtailed.
If you have spare cash flow, she says, it makes good sense to be putting some of it into super.
5. CONSIDER INVESTING
MORE IN SHARES
Anderson says people earning $300,000 or more often have their own self-managed super fund and can use franking credits from fully franked dividends to offset the extra tax on their contributions.
"A majority of funds with shares paying fully franked dividends don't even pay the 15 per cent contributions tax," she says.
"I expect we'll see a shifting of assets into these investments."
6. CONSIDER NON-CONCESSIONAL CONTRIBUTIONS
While concessional contributions are the most tax-effective way to invest in super, Dale says making after-tax or non-concessional contributions still has tax benefits.
While you don't get a tax break on your contributions, she says your super fund pays a maximum 15 per cent tax on any earnings and once you start a pension, both the fund's earnings and your pension income is tax-free.
"You will effectively have a tax-free income forever," she says. "There's not much that can beat that."
While younger people might not want to lock the money away, she says non-concessional contributions can be a good way for people nearing retirement to boost their super and set themselves up for a tax-free income.
7. DON'T RUSH INTO GEARING
Dale says while gearing might appear more attractive due to the budget measures, investors should remember it is a riskier strategy. "You have to remember that you have to make a loss to get the tax benefits," she says. "You have to be absolutely confident that the value of the investment will increase over time by more than the after-tax losses."
She says gearing within a self-managed super fund can be "a fabulous strategy for the right person, but not for the average person".
One problem, she says, is getting enough money into the fund to pay off your debt if you don't have a sizeable account balance already, as well as a strong cash flow.
"You might borrow $1 million to buy a property but if you want to rent it, you may not be able to get money into the fund to pay off your loan. You will have to make after-tax contributions and the incentive soon disappears."
Dale says you also have to be confident you can take the risks, a long time frame, be doing it for the right reasons, and have a strong cash flow both within the fund and personally.
"If you have a fund worth $1 million and you want to borrow $500,000, you can use the income from the $1 million to cover your debt payments," she says. "But more often you see people with a $50,000 fund wanting to borrow $300,000. That's a very different situation."
8. CONSIDER BRINGING FORWARD ANY GOLDEN HANDSHAKES
Dale says the budget crackdown on golden handshakes, along with the end of more-generous transitional rules on June 30, provide a strong incentive for people to arrange to receive these payments before the end of the financial year when possible. See I Can Do That on page 8 for more details.