Guide to the super reforms
What they could mean for you
What they could mean for you
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 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.
Non-concessional contributions include personal contributions made to super from your after-tax pay or savings and super contributions received from your spouse.
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:
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:
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.
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.
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.
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:
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.
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:
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:
You may also need to amend the salary sacrifice agreement in place with your employer.
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.
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.
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.
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:
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
Type of cover | Income & concessional contributions <$250,000 pa | Income & concessional contributions $250,000+ pa | ||
Inside super9 | Outside super | Inside super9 | Outside super | |
Life | 0% | Marginal tax rate | 15% | 47% |
TPD | 0% | Marginal tax rate | 15% | 47% |
Income Protection | 0% | 0% | 15% | 0% |
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.
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This publication has been prepared by GWM Adviser Services Limited (ABN 96 002 071 749, AFSL 230692) (‘GWMAS’), a member
of the National Australia Bank Limited (NAB) group of companies (‘NAB Group’), 105–153 Miller Street, North Sydney 2060. NAB
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Information in this publication is accurate as at 1 July 2017. In some cases the information has been provided to us by third parties.
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Liz Maroney and Westlawn Wealth Management Pty Ltd ABN 32 124 861 409, Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749, Australian Financial Services Licensee, 105 -153 Miller Street North Sydney NSW 2060.