Substantial changes to the superannuation rules took effect from 1 July 2017. More than 3 months later, the questions keep coming from our clients on how these changes will affect them now and for future financial years.
The stakes are huge. Not only do the new rules mean that you can contribute less into super each year, but timing these contributions will play an important part. As part of a series of articles, we will explore various ways to maximise your super retirement savings.
This week, we dive into more details around Concessional Contributions and how the changes can benefit you.
Concessional Contributions – Part 1
Make the most of the removal of the 10% rule
Concessional contributions are a great way to save for your retirement and reduce your taxable income, saving personal income tax. Whatever is contributed by way of employer contributions, including superannuation guarantee (SG) and salary sacrifice contributions, or a personal contribution for which you claim a tax deduction, adds to what is known as the “Concessional Contribution Cap”. Prior to 1 July 2017, based on your age you could contribute either $30,000 or $35,000 under the cap. However, the cap was reduced to $25,000 for everyone irrespective of their age from 1 July this year.
Whilst the concessional cap has reduced, the Government removed a restriction which previously limited many individuals from utilising the full amount. Prior to 1 July 2017, if you earned more than 10% of your income as salary or wages, you could only make concessional contributions via salary sacrifice besides the SG payments made by your employer. Anyone who earned less than 10% of their income from salary of wages could make a personal contribution from their bank account and claim a tax deduction. By removing this 10% restriction, more people will be eligible to maximise the concessional contributions.
A salary sacrifice arrangement can only relate to future salary, not past earnings. For example, you can salary sacrifice performance bonuses if the agreement regarding your salary sacrifice was entered into before you became entitled to your bonus. Hence, if you received an unexpected bonus and no prior salary sacrifice agreement in place, you cannot contribute it to super. However, now after receiving your bonus in your bank account you can make a personal contribution and claim a tax deduction.
Take the example of James who earns $109,500 per annum including SG and is also entitled to a discretionary bonus each year. He needs $70,000 per annum to meet all his expenses and any bonus he receives goes into his savings account. This year he receives a $10,000 bonus. Now that he can contribute the bonus into super, even without entering into a salary sacrifice agreement, he decides to do this. After seeking advice, he decided to not just contribute his bonus but contribute up to the cap as he would still have enough funds to meet his expenses. He would pay less in tax and have $3,720 or 21% more saved towards his retirement.
|Current Situation||Contributing just the bonus||Making the max contribution|
|Income including SG (A)||$109,500||$109,500||$109,500|
|Amount contributed to super as a concessional contribution including SG (C)||$9,500||$19,500||$25,000|
|Taxable Income (D=A+B-C)||$110,000||$100,000||$94,500|
|Tax on Income including Medicare (E)||$30,532||$26,632||$24,487|
|Net Income (F=D-E)||$79,468||$73,368||$70,013|
|Required Income to meet expenses (G)||$70,000||$70,000||$70,000|
|Surplus Money saved in savings account (H=F-G)||$9,468||$3,368||$13|
|Tax on super contribution (I)||$1,425||$2,925||$3,750|
|Total Tax paid (J=E+I)||$31,957||$29,557||$28,237|
|Net Super Balance (K=C-I)||$8,075||$16,575||$21,250|
|Total funds saved towards retirement (H+K)||$17,543||$19,943||$21,263|
Some people were hesitant to set up salary sacrifice arrangements in the past as they were uncertain about their cash flow needs for the year. They could now consider directing funds into a bank account each month from their salary and have it available in case of an emergency. In the last week of June, they could then make a lump sum contribution into super and claim a tax deduction.
Further, people who earned too much in the past to meet the 10% test, but not enough to fully use their concessional cap via salary sacrifice will also benefit as they can now contribute from their investment income or income generated from self-employment and claim a deduction.
Susan is an example of an individual who has a part time job at an events management company earning $12,000 per annum plus SG and is also in a business partnership where she received an income of $100,000. She spends around $5,500 per month ($66,000 per annum) and any savings are invested. Even if she was to salary sacrifice her full events management salary, under the old rules which applied pre-1 July 2017, she would not have been able to maximise her contributions to super. In fact, Susan’s employer doesn’t allow her to salary sacrifice so previously she couldn’t increase her concessional contributions at all. Under the new rules, on top of the SG her events management employer contributes on her behalf she can contribute $23,860 from the partnership income she generates. Not only does she save on tax and have an additional $5,726 or 36.5% in savings, her savings are also in a tax effective environment.
|Pre 1 July 2017||Post 1 July 2017|
|Salary including SG (A)||$13,140||$13,140|
|Income from business(B)||$100,000||$100,000|
|Amount contributed to super as a concessional contribution including SG (C)||$1,140||$25,000|
|Taxable Income (D=A+B-C)||$112,000||$88,140|
|Tax on Income including Medicare (E)||$31,312||$22,007|
|Net Income (F=D-E)||$80,688||$66,133|
|Required Income to meet expenses (G)||$66,000||$66,000|
|Surplus Money in savings account (H=F-G)||$14,688||$133|
|Tax on super contribution (I)||$171||$3,750|
|Total Tax paid (J=E+I)||$31,483||$25,757|
|Net Super Balance (K=C-I)||$969||$21,250|
|Total funds saved towards retirement (H+K)||$15,657||$21,383|
Concessional contributions also play a part in reducing any investment income or any CGT due to the sale of an investment asset.
Let’s take the example of Tom and Joanne. They are both 64 and have been retired for a few years. They recently sold their investment property in the city for $200,000 more than what they bought it for. Since they held this property for longer than 12 months, they will be able to discount the gains by 50% of the gain ($100,000) will be added to their combined assessable income. The only other income they will receive this year is from their super pension accounts which is tax free. Hence, their assessable income is $50,000 each (half of the $100,000 gain).
They decide to contribute $25,000 each to their super accounts reducing their assessable income to $25,000 each. Since they are 64 and retired, they have full access to the funds in super. By following this strategy, they are better off by $7,166.
|Without Super contribution||With Super contribution|
|Total Gain made from sale of property – each (A)||$100,000||$100,000|
|Assessable Capital Gain each using 50% discount (B)||$50,000||$50,000|
|Amount contributed to super as a concessional contribution each (C)||$0||$25,000|
|Taxable Income each (D=B-C)||$50,000||$25,000|
|Tax on Income including Medicare (E)||$8,547||$1,214|
|Net Income each (F=D-E)||$41,453||$23,786|
|Tax on super contribution (G)||$0||$3,750|
|Total Tax paid (H=E+G)||$8,547||$4,964|
|Net funds available from sale of property (I=A-H)||$91,453||$95,036|
|Total funds left from the sale of the property (I*2)||$182,906||$190,072|
Unlike salary sacrifice, where the contributions are marked as employer contributions when the contributions are made, when you make a personal contribution you will have to claim a tax deduction for it to be reclassified as a concessional contribution. A valid notice of intent to claim a deduction must be given to the trustee of the super fund and the trustee must acknowledge the receipt of the notice.
Anyone under the age of 65 can make a contribution to super. If you are aged between 65 and 74, you will have to meet the work test before you can contribute to super. A concessional contribution to super is taxed at 15%. It is important to work the numbers out on how much to contribute otherwise you may end up paying more in superannuation contributions tax than what you may have paid as income tax. Speak to your adviser to ensure you are maximising your savings and minimising your tax.
Compliance and Technical Manager
Prime Financial Group
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