How Will the Government’s Latest Superannuation Changes Affect Your Retirement?
The Superannuation Reform Package, which came into force on November 29th 2016, contains a number of changes that may have a significant impact on your retirement. These new changes will take effect from 1st July 2017 and apply to both your concessional (pre-tax) and your non-concessional (post-tax) contributions.
Changes to your concessional contributions
Concessional contributions are the pre-tax payments made into your superannuation fund, and consists of your employer contributions and salary sacrificing.
Annual contribution caps: Currently, your total annual concessional (pre-tax) contributions are capped at $30,000 per year, although for employees aged 50 years and over this cap is $35,000. With the new changes in July 2017, this cap has been reduced to $25,000 (regardless of age), and whilst you can still top up your super above this amount using post-tax dollars, these additional contributions will not be tax deductable.
Catch up payments: If you can’t afford to salary sacrifice or you are out of work for any period of time, the Government has introduced catch-up contributions, commencing in July 2018. This means that for people earning less than $500,000 per year, you can top up your superannuation every 5 years to the total of your unused annual contribution cap (max $125,000).
Increased tax on payments: The earnings threshold for the 30% contributions tax has been lowered from $300,000 to $250,000. This means that if you earn less than $250,000 per year, you will still pay the current 15% tax rate on your concessional contributions after July 2017, however above $250,000, your contributions tax rate will be 30%.
Changes to your non-concessional contributions.
Non-concessional contributions are additional deposits made into your superannuation fund, using money that has already been taxed. For example, you might a yearly bonus at work and decide to contribute this to your superannuation account, rather than depositing it into your savings account.
Transfer balance cap: There will now be a $1.6 million cap on the total amount of superannuation that you can move into your tax free retirement account (retirement phase accounts). For retirees, this means that you either have to withdraw the excess (above $1.6 million) by July 2017 or move it into an accumulation phase, where it will be subject to the 15% tax rate. This is a retrospective rule and does not apply to subsequent earnings on your pension balance after July 2017.
Annual non-contribution caps: For those who have superannuation balances of less than 1.6 million, there will be an annual cap of $100,000 on post-tax deposits (or $300,000 over 3 years). This is a reduction from the current $180,000 cap per year and the $540,000 3 year cap.
TRIPS: Transition to Retirement Pensions (TRIPs) are not currently taxable, however under the new laws in 2017, they will no longer be exempt and will have to pay up to 15% tax.
Take home message for retirees
These changes were designed to prevent wealthy retirees from using their superannuation as a tax-effective retirement vehicle. However they will have significant effects on many retirees. In a nutshell, for existing retirees these changes mean that you will start to pay 15% tax on any superannuation balance over $1.6 million (unless you remove it from your super account before July 2017). There will be some CGT relief available to those who need to move some of their pension assets back to accumulation or withdraw them from super.
For those not ready to retire yet, the amount you can contribute into your superannuation fund in both pre-tax and post-tax dollars has significantly reduced, and if you earn more than $250,000 per year, your pre-tax rate doubles from 15% to 30%.
The rules regarding contributions and pensions are complex with several additional criteria you need to meet. It is therefore important that you contact your financial advisor and put together an action plan to ensure that you will not suffer any undue tax penalties after July 2017.
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.