There is so much “noise” around the Coalition’s proposed superannuation changes that their impact is being distorted by the various vested interests pushing their own barrow.
So lets take the political spin out of it and look at the winners, the losers and what it means for your retirement planning.
First up, remember these changes are simply “proposals”. They aren’t law, they haven’t even been put to, or been passed by, Parliament. If the Coalition loses the election then the changes are dead and buried, and even if they are re-elected it looks as though they may not control the Senate and be rejected anyway.
We think the odds are that the changes are unlikely to be implemented in their current form. It’s likely there will either be no change or the changes will be watered down to get through the Senate.
The rationale behind the proposal is that the superannuation system is over generous to rich Australians and the changes will save the Government $6 billion over four years.
But what if they are implemented. Let’s forget the politics and talk about what really matters: your money. Here’s what the proposed changes mean for you.
Concessional (pre-tax) contributions
The Government has proposed reducing the concessional contributions cap to $25,000 from the current maximum of $35,000. That means your maximum annual contribution to super is cut by $10,000.
On top of this, people with combined incomes and super contributions of over $250,000 will have those contributions taxed at 30 per cent rather than 15 per cent. Currently, this only applies to people earning over $300,000.
If the $25,000 concessional cap is not reached in any one year, the new regulations would allow people with super balances below $500,000 to carry forward the unused portion of their cap over for up to 5 years. So they can catch up.
Quantum Financial Principal Claire Mackay says changes to concessional caps mean “people need to be thinking about their super earlier”.
“A lot of people wait until their latter years when they’ve no mortgage and no kids to start ramping up their super, but this needs to change” she says.
Non-concessional (after-tax) contributions
Under the current rules, you can make up to $180,000 in after-tax super contributions every year, and it’s possible to bring forward three years’ worth of contributions to kick in up to $540,000 at once.
The plan is to change this to a lifetime cap of $500,000, which is predicted to impact just 42,000 people wealthy enough to be kicking in such large sums.
This again has the potential to impact people planning on catching up with contributions later in life, for example small business owners after they sell out.
“People who have planned their strategy around catching up on their contributions at a later point in time… seem to be disadvantaged more so than others,” says financial adviser Ben Nash from Pivot Wealth.
The government is seeking to cap retirement phase accounts, or pensions, at $1.6 million a person… a change estimated to impact just 1 per cent of super fund members. When you consider the cut of is $3.2 million for a couple, the changes would only apply to the very wealthy.
These retirement phase accounts currently pay no tax on investment earnings, but under the new regulations super balances above $1.6 million per person would be held in a separate account with earnings taxed at 15 per cent which is still well below marginal tax rates. This money can also be withdrawn and invested elsewhere.
Transition to retirement pensions
Workers aged 56 to 64 are allowed early access to their super funds as they transition into retirement. This means they can reduce their working hours without reducing their income by topping up out of super.
Currently, earnings from this transition account are tax free as well, but the Coalition’s changes would introduce a 15 percent tax. This is estimated to affect around 115,000 people, primarily high earning individuals using transition to retirement to minimise tax.
Winners and losers
As you can see, these bulk of these changes will only impact wealthy Australians.
‘Losers’ include people earning over $250,000, people making more than $25,000 in concessional contributions or $500,000 in lifetime after tax contributions, or those with a superannuation or pension balance greater than $1.6 million.
For the rest, it’s pretty much business as usual. However, the big message is you need to aim to contribute up to your maximum annual level for longer… there is less room to delay and catch up later.
And, naturally, it’s all predicated there will be no future superannuation changes… and pigs might fly!
4 QUICK JUNE TAX TIPS
Tax time is just around the corner, so it’s time you started thinking about how to get the most out of your return.
Here are 4 ways to take control of your taxes before June 30.
- Prepare now
Don’t leave it to the last minute. Start gathering everything you need now so that you’re ready to go when the time comes.
This is also a good time to create a filing system for your financial records. It will save your future self hours of work next year.
- Salary sacrifice for superannuation
Pre-tax contributions into your super are taxed at a concessional rate of just 15 per cent, and will also reduce the amount of tax you’ll pay at your marginal tax rate.
Be sure to check with the tax office website (www.ato.gov.au) for the rates and caps around salary sacrificing.
- Make charitable donations
Any donation made to charity above $2 is tax deductable, so if you’ve been meaning to be more generous, now is the time to start giving.
- Get professional advice
To avoid missing out on claims, it’s always a good idea to seek the help of a professional tax agent. It will cost you a little money, but you’ll likely get a better tax return than you would if you did it yourself.
And the best part is, you can claim the cost of tax advice as… a tax deduction.