Changes to superannuation from 1 July 2017

You probably know the Commonwealth Government hands down its annual budget in early May each year. It’s an exciting time of year for financial planners. Most advisers let their excitement overcome them and race to put material on their website as fast as possible. The budget is handed down on Tuesday night and the websites get updated on Wednesday morning.

Experience has taught us to do things a little differently. Immediately after the Budget, the media is typically saturated with news of the changes. So we prefer to wait a while before we publish our thoughts. This lets us fully digest the changes so that when we do write about them we are providing a thorough and intelligent response that actually helps our clients choose the best way to respond.

And that was our intention again this year. But guess what? The 2017 budget was very different. It actually contained few changes that will be relevant for many of our clients. To be honest, this was a major relief: the changes from 2016 were so substantial that we needed a year off!

Between now and the end of the financial year we will discuss the relatively minor changes that the 2017 budget will herald for our clients. But before we do that, we are going to devote a couple of articles to discussing the really major changes that were announced last year, in the 2016 budget. This makes particularly good sense, because most of those changes take effect from 1 July 2017.

1 July 2017 is coming up fast – but it is not here yet. So if you think that the changes below will affect you negatively, then please contact us immediately to see if we can act pre-emptively and help you make the most of superannuation.

As you read through the discussion below, please remember this: superannuation remains a really generous way of saving for retirement. Yes, most of the changes mean it has become less generous, but ‘less generous’ does not mean ‘useless.’ Superannuation remains a critical part of any decent financial plan. Please keep it front and centre in your thinking.

Concessional contributions – from July 1, you can’t make as many of ‘em!

A concessional contribution is one for which the contributor claims a tax deduction. The flipside of this is that the superannuation fund pays tax of 15% when it receives concessional contributions. The most common type of concessional contribution is the mandatory superannuation contributions that all employers must make on behalf of their staff. This contribution is typically required to be 9.5% of the employee’s gross salary.

Self-employed people can also make concessional contributions into their superannuation funds, although there is a little bit of paperwork involved in that process. Unfortunately, it can seem that even that little bit of paperwork is too daunting: at least 25% of self-employed people have no superannuation at all (source: ASFA).

If you are self-employed, you simply must make sure you use super as much as possible! Talk to us and we will show you how.

From 1 July 2017, the amount of contributions for which a tax deduction can be claimed will be capped at $25,000 per year. This is a reduction across the board. For people aged over 50, the previous limit was $35,000 per year. For everybody else, the previous limit was $30,000 per year.

There is some good news, however. For people with superannuation balances less than $500,000, the annual limit will actually be averaged over a five-year period, such that concessional contributions equal to $125,000 can be claimed across a five-year period. Spreading contributions like this will be particularly useful for people whose income varies each year. This can include self-employed people, people returning to work or taking time out of work for childbirth or other reasons.

From 1 July 2017, most people will be able to make ‘personal contributions’ into superannuation. These personal contributions are added to other concessional contributions and the total of all concessional contributions cannot exceed $25,000. People can simply pay money directly into their superannuation fund. The only stipulation is that you must tell the fund that this is a concessional contribution for which you will claim a tax deduction. (If you do not want to claim a tax deduction for the contribution, then you should identify it as a non-concessional contribution. Please see below).

Non-concessional contributions – you can’t make as many of them, either!

A non-concessional contribution is one for which the contributor does not claim a tax deduction. The flipside of this is that the superannuation fund does not pay tax when it receives the contributions. Non-concessional contributions are sometimes known as ‘after-tax’ contributions.

The main purpose of non-concessional contributions is to move money into the superannuation system, where investment earnings are taxed at no more than 15%. Capital gains are typically taxed at 10%, and no tax at all is paid on earnings where assets are being used to finance a pension (although see below for a discussion of the changes to transition to retirement pensions). So, contributing money into superannuation in order to invest often reduces the total amount of tax paid.

Currently, non-concessional contributions are limited to $180,000 per year per person. People can bring forward up to 3 years’ worth of contributions, allowing them to contribute up to $540,000 at a single point in time.

As of 1 July 2017, the annual limit for a non-concessional contribution will fall to $100,000 per person per year. People can still bring forward three years’ worth of contributions, meaning that the effective limit is $300,000 per person over a three-year period.

Not everyone can make a non-concessional contribution. People aged 75 or older cannot make them. People aged between 65 and 74 can only make them if they satisfy a work test. People with superannuation assets worth more than $1.6 million as at the most recent 30th of June cannot make them regardless of their age.

In summary, if you are considering making a non-concessional contribution into superannuation, then you should talk to us immediately. There is still time between now and 30 June for you to take some advantage of the rules as they currently exist.