The superannuation landscape faces it’s biggest change ever come 1 July 2017. High income earners and those with large superannuation balances will face immediate impacts, but for most the impact will be felt in the longer term – reduced capacity to get money into the extremely tax friendly superannuation environment. For further information on the changes, see our recent post Are you ready for the government’s superannuation changes.
So with change comes opportunity. What should you be thinking about between now and the end of the financial year?
Maximise contributions. The opportunity can really be summed up in those two words. If you are 50 years of age or older, you can currently contribute up to $35,000 into super in a year. For everyone else the current limit is $30,000. This is known as your Concessional Cap and relates to funds where a tax deduction applies. So that includes the compulsory contribution your employer makes, any salary sacrifice contributions that you undertake, or if you are self employed, any deductable contributions that you make.
From 1 July this drops to $25,000 for everyone.
Now if you’re paying off a mortgage and have kids at school you might think – big deal, $25,000 is plenty of room for me. But most of us know that the compulsory 9.5% employer super contribution, whilst a good start, is not enough to fully provide for us in retirement (in part, thus the plan to gradually creep this up to 12%). So at some point extra contributions need to be made. Now virtually every Australian puts off that extra level of contributions until the final 10 or so years of their working life, when the mortgage is paid off and the kids, whilst maybe still lingering around home, are at least not requiring quite as much financial support as they used to.
After 1 July 2017, the ability to really try and accelerate your superannuation savings in the later part of your working life will be heavily restricted by the $25,000 cap. Remember this cap includes the contributions your employer makes.
So an opportunity that you may wish to consider is making the most of your higher cap this year, especially if you are over age 50. If you are employed, that would mean salary sacrificing, and as you need to elect to salary sacrifice before you earn the money, it is important you get onto this sooner rather than latter. If you are self employed, it means adjusting your normal contributions, be they monthly, quarterly, or all in June.
The other change that may necessitate action prior to 1 July is the change to the after tax contribution cap, known as the Non-Concessional Cap. This is often used by people when they sell a property or receive an inheritance, and want to drop a lump of money into their superannuation fund. Currently the limit is $180,000 per year. From 1 July this will drop to $100,000. The impact is potentially even greater than it first appears however, as the nature of these type of contributions is that they are often lumpy. To allow for this there is a rule whereby you can use 3 years worth of caps in a single year, and then simply not make any non-concessional contributions in the following 2 years. Thus at present someone could put in $540,000 ($180,000 x 3) in a single year, but after 1 July, that will become $300,000 ($100,000 x 3).
On top of the reduction in the annual non-concessional cap, in future, the ability to make any contributions of this nature will be removed once your superannuation balance reaches $1.6m.
So if you have savings currently sitting outside of super, that you intend to get into super at some point, think about whether you should be taking action prior to 1 July 2017. Keep in mind that once in super, your funds could be invested in cash or term deposits if you wish – I sometimes find people have a reluctance to put money into superannuation because they feel it has to go into shares. This is certainly not the case. Of course, as with all money contributed into super, you do need to allow for the fact that money in our superannuation system is “preserved” ie. not accessible, until you are aged 60 or older, and have retired from the workforce. So don’t put money in that you might need access to prior to retirement.
Note that exceeding contributions caps can result in significant penalties so it is extremely important that you seek advice that is specific to your circumstances, and in particular considers your contribution history, before undertaking any of the strategy options mentioned above.
I hope this helps. Please be in touch if you have any questions – always great to get feedback.
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.