Guide to super reforms

The super changes that took effect on 1 July 2017 may have created some powerful opportunities to help you grow your super and retire with more.

A range of super reforms came into effect on 1 July 2017.

For most people, the impact of these changes is positive or neutral.

Super remains a very attractive place to save for retirement. And there may be new opportunities to help grow your super and retire with more.

While you build up your super, pre-tax contributions and investment earnings will generally continue to be taxed at the low rate of up to a maximum of 15%¹, not your marginal tax rate of up to 47%².

Also, when you retire, you can still transfer a generous amount into a superannuation pension, where no tax is paid on investment earnings and payments are generally tax-free at age 60 and over.

Some important changes have been made to concessional and non-concessional contributions, as well as benefits that can be received from super.

Unless stated otherwise, the following changes took effect on 1 July 2017.

Concessional contribution changes

Concessional contributions include employer contributions (such as the superannuation guarantee and contributions made under a salary sacrifice arrangement), as well as personal contributions claimed as a tax deduction.

1. The annual cap on concessional super contributions has reduced from $30,000 or $35,000 (depending on age) to $25,000 (regardless of age).
2. It is now possible to make personal tax deductible super contributions up to your concessional cap regardless of your employment status (subject to meeting other contribution rules).
3. An additional 15% tax is payable on concessional contributions to the extent they together with a person’s income from certain sources are greater than $250,000 pa (previously $300,000 pa).
4. If you don’t use up all of your concessional contribution cap in a financial year, from 1 July 2018 you will be able to accrue the unused amounts for up to five years. Assuming you meet all eligibility criteria, from 1 July 2019, you will be able to make additional concessional contributions on top of the normal annual cap using these unused amounts provided your total superannuation balance is less than $500,000 on the 30 June prior to making the contribution.

Non-concessional contribution changes

Non-concessional contributions include personal contributions made to super from your after-tax pay or savings and super contributions received from your spouse.

1. The annual cap on non-concessional contributions has reduced from $180,000 to $100,000.
2. The maximum non-concessional contributions that can be made over three years, by bringing forward up to two years’ worth of future contributions, has reduced from $540,000 to $300,000. Rules apply to determine whether you are eligible to use the bring-forward rule.
3. ‘Transitional’ rules now apply if you made non-concessional contributions totalling more than $180,000 in 2015/16 or 2016/17. This may limit additional non-concessional contributions that you can make from 1 July 2017 without incurring a penalty.
4. Non-concessional contributions can not be made if you have a total superannuation balance over $1.6 million on the previous 30 June.
5. The annual cut-out income threshold that determines eligibility for the spouse contribution tax offset has increased from $13,800 to $40,000.

Changes to superannuation benefits

1. A lifetime limit of $1.6 million (subject to indexation) now applies to the amount of superannuation that can be transferred into ‘retirement phase’ accounts. The transfer balance cap applies to both new pensions and those that existed on 1 July 2017.
2. Tax paid on earnings from investments held in ‘transition to retirement’ pensions has increased from 0% to a maximum of 15%.
3. A transition to retirement pension will enter ‘retirement phase’ automatically when you reach age 65, or at the time that you contact your super fund and let them know that you have retired, ceased an employment arrangement after turning age 60, are permanently incapacitated, or terminally ill. When the ‘transition to retirement’ pension enters retirement phase, it will count towards your transfer balance cap, and earnings will be taxed at 0%.
4. ‘Anti-detriment’ amounts are no longer payable if a super fund member passes away after 1 July 2017. Anti-detriment payments essentially refunded the 15% tax that was deducted from super contributions during the member’s lifetime when the ‘death benefit’ was paid to eligible beneficiaries as a lump sum.

Some opportunities to grow your super and retire with more may be available from 1 July 2017 and in future financial years.

Opportunities may be available from 1 July 2017 if you:

• Are an employee
• Have a low income spouse
• Have a spouse and have (or are likely to have) more than $1.6 million in super, or
• Have reached your ‘preservation age’ and would like some of your super to be paid to financially independent adult children in the event of your death.

Personal deductible contributions for employees as well

Prior to 1 July 2017, if you earned more than 10% of your income from eligible employment, you could not make personal deductible super contributions (PDCs).

These are super contributions that are made personally (not by an employer) which can be claimed as a tax deduction to reduce your assessable income and income tax payable.

Like salary sacrifice, they are concessionally taxed in the super fund at a maximum rate of 15% (or 30% if your income from certain sources and concessional contributions are over $250,000 in 2017/18).

With the removal of the ‘10% test’ it is now possible to make PDCs regardless of your employment status.

This new opportunity may appeal if:

• Your employer doesn’t offer salary sacrifice
• You receive a bonus or redundancy payment you would like to contribute to super but you don’t have a valid salary sacrifice agreement in place, or
• You are a resident for tax purposes, are working overseas for a foreign employer and your employer can’t or won’t contribute to an Australian super fund.

Even if you are eligible to make salary sacrifice contributions, you may want to consider switching to making PDCs or opt for a combination of both. The best approach for you will depend on a range of factors.

For example, you may be better off making PDCs if salary sacrificing reduces your entitlement to other benefits, such as leave loading, holiday pay and Super Guarantee contributions.

Also, with PDCs, the entire contribution can be made (and the deduction amount determined) at the end of the financial year when your cashflow and tax position is clearer.

Make spouse super contributions

A tax offset of up to $540 is available if you contribute to your spouse’s super account and they earn up to $40,000 (previously $13,800). It may therefore be worthwhile re-considering spouse super contributions if your spouse is a lower income earner.

Manage caps on super pensions

If you have a spouse and one of you has (or is likely to have) more than $1.6 million³ in super, there are some strategies you could use to ‘equalise’ super benefits and use more money as a couple to start tax-effective retirement pensions.

One approach is to split up to 85% of your previous financial year’s concessional contributions with your less superannuated spouse. Concessional contributions include super guarantee, salary sacrifice and personal deductible contributions, as well as certain other amounts.

Another option, if you have reached your ‘preservation age’⁴ and permanently retired (or met another ‘condition of release’), is to cash-out a portion of your super and arrange for the money to be contributed into your spouse’s super account.

Recontribute super

If you can access your super⁵, but are still eligible to make super contributions⁶, there is a way you could reduce the tax that would be payable on your super by your financially independent adult children if you pass away. It involves:

1. Cashing out some of your superannuation, which may include an amount from the ‘taxable component’ (which would be taxed in the hands of your adult children at up to 17%⁷), and
2. Making a non-concessional contribution back into your fund. A non-concessional contribution forms part of the tax-free component (on which no tax would be payable by any of your superannuation beneficiaries).

While this strategy is not new, it may be more attractive now that ’anti-detriment’ amounts are no longer payable on the taxable component of a superannuation benefit when a member dies on or after 1 July 2017.

If you are under 60, depending on how much you withdraw and what, tax may be payable. It is important that you seek advice to understand how this will impact you before you make a withdrawal.

Make ‘catch-up’ concessional contributions

From 1 July 2018, if you don’t use up all of the annual concessional contribution cap (currently $25,000) you will be able to accrue the unused amounts for use in subsequent years.

Unused amounts can be carried forward on a five year rolling basis. 2019/20 is the first financial year it will be possible to use the carried forward amounts. To be eligible, your super balance cannot exceed $500,000 on 30 June of the previous financial year.

If eligible, this new opportunity will help those unable to utilise the concessional contribution cap due to broken work patterns and competing financial commitments. It could also help to manage tax and get more money into super when selling assets that result in a capital gain.

Some key actions and decisions may be required from 1 July 2017 in response to the super reforms.

These may arise if you:

• Have been making salary sacrifice contributions to super
• Plan to make non-concessional contributions and your ‘total super balance’⁸ on 30 June 2017 was $1.6 million or more
• Held more than $1.6 million in a retirement phase pension on 1 July 2017
• Hold insurances in super, particularly income protection where you are making super contributions to pay the premiums, or
• Have (or would like to have) nominated who you would like to receive your super in the event of your death.

Review salary sacrifice agreements

If you have been making salary sacrifice contributions, you should review your contribution strategies and the arrangements you have made with your employer to ensure you don’t exceed the reduced concessional contribution cap of $25,000 in 2017/18.

When doing this, make sure you take into account:

• The Super Guarantee contributions you receive from your employer, and
• Any other concessional contributions you plan to make (or will receive), including personal deductible contributions.

You may also need to amend the salary sacrifice agreement in place with your employer.

Consider whether to cease making NCCs

If your ‘total super balance’⁸ was $1.6 million or more on 30 June 2017, you will not be able to make any further non-concessional contributions (NCCs) in the 2017/18 financial year. It may however, be possible to make further NCCs in future financial years if your total super balance is less than $1.6 million on 30 June of the previous financial year.

Address excess transfer balances

If you held more than $1.6 million in a ‘retirement phase’ pension on 1 July 2017, you should commute some of your pension (either to cash or back to the ‘accumulation’ phase) as soon as possible to avoid potential tax penalties. Pension payments and/or a reduction in the value of the pension due to market movements will not help to address this issue.

Review insurance in super

Holding life and total and permanent disability insurance in super remains tax effective for most people. This includes those who have income from certain sources and concessional contributions which exceed $250,000 pa, despite the additional 15% tax that is payable from 1 July 2017 for high income earners on concessional super contributions.

However, if your income from certain sources and concessional contributions exceed $250,000 pa you should reconsider whether it’s worth holding income protection insurance in super. This is because, the effective tax rate payable when funding income protection in super would be 15%, compared to zero outside super where a full tax deduction is usually available – see table below.

Also, even if your earnings from certain sources and concessional contributions are less than $250,000 pa, income protection insurance may still be better held outside super if you are likely to be constrained by the concessional contribution cap of $25,000 pa. In this scenario, given the effective tax rate would be the same, insuring outside super can ensure your retirement savings are not eroded by paying insurance premiums.

Review binding nominations

The introduction of the transfer balance cap (TBC) of $1.6 million that applies to retirement phase income streams may warrant reviewing the death benefit nomination you have put in place for your super.

This could involve:

• Completing a reversionary beneficiary nomination if your super is held in a retirement phase pension
• Changing the people you have nominated (or the amount they would receive) in a binding death benefit nomination, or
• Switching to a non-binding nomination.

Your Westlawn Wealth Adviser can help you decide which of these options best suits your circumstances under the new super rules.

Table: Effective tax rate on money used to pay insurance premiums

Your Westlawn Wealth Adviser can help you assess the impact the super reforms could have for you, as well as review your retirement savings plans and strategies.

Contact us today:

• Call (02) 6642 0433
• Email planning@westlawn.com.au

Copyright © 2017

1. An additional 15% tax is payable on personal deductible and other concessional super contributions to the extent those amounts together with a person’s income from certain sources exceeds $250,000 in FY2017/18.
2. Includes Medicare levy.
3. From 1 July 2017, there is a limit on how much super you can transfer to ‘retirement phase’ during your lifetime. This is known as the ‘transfer balance cap’ and in 2017/18 it’s $1.6 million. This cap will be indexed in future years.
4. Preservation age is 55 for those born before 1 July 1960 and gradually increases to 60, depending on your date of birth.
5. To access your super, you need to have reached your preservation age (see footnote 4 above) and permanently retired, or you must meet another ‘condition of release’.
6. To make super contributions, you need to be under age 65 or if aged 65 but less than 75, you need to have worked at least 40 hours over a 30-day period in the financial year you make the contribution.
7. Including Medicare levy.
8. Total super balance includes amounts held in accumulation phase, amounts counted in individual’s transfer balance account (adjusted to reflect current value of account based income streams) and in-transit rollovers.
9. Assumes concessional contributions (CC) do not exceed the CC cap.