Speculation is rife as to where actual changes will occur but it is likely that high balances and high income earners will be targeted in terms of their access to superannuation tax concessions.
The Treasurer has also indicated that superannuation should be for genuine retirement savings and not be used as an estate planning tool.
The following is commentary on some of the possible changes as well as a few strategies to consider before Budget night or before end of financial year to maximise opportunities currently available.
Seeking specific professional advice before undertaking any of these strategies is highly advisable to ensure they align with your personal circumstances.
When are changes likely to take effect?
It is rarely the case that Government announcements will apply retrospectively. That is, any announced changes will generally have effect from either budget night or from a future date (usually the start of a new financial year).
It is also usually the case that any arrangements on foot will be grandfathered which basically means they can continue without offending the law while prospective arrangements would be subjected to the new laws.
Concessional Contributions – these are generally contributions on which someone has claimed a tax deduction. They include 9.5% employer super guarantee payments as well as deductible personal contributions and will attract a 15% contributions tax within the super fund that receives them.
There is a limit on how much a person can contribute or allow to be contributed for them before additional taxes are also imposed.
Currently, these limits are set at $30,000 per annum for those under age 50 and $35,000 for those aged 50 and over. It is strongly rumoured that this concessional contribution cap will be reduced to $20,000 per annum.
Non-concessional Contributions – these are contributions made from after tax dollars. No contributions tax is imposed on these contributions and they retain their tax free status when they are ultimately withdrawn from super.
There are limits on the amount of non-concessional contributions that can be made also before there are tax implications. Currently, the cap is $180,000 per annum.
Those under the age of 65 have the ability to bring forward two years of contributions so that they can contribute up to $540,000 in a single year but no more than that over the three year period.
Non-concessional contributions are set at 6 times the concessional contributions cap. Therefore, if the concessional cap is reduced to $20,000 then it is likely so too will the non-concessional cap to $120,000. The ability to bring forward contributions may also be at risk.
If you are considering contributing larger amounts of money into superannuation, it would be worth considering doing so prior to the end of the financial year while you can access higher contribution caps.
Transition to Retirement Income Streams (TRISs) – Once a person has reached preservation age (currently 56 years of age, gradually increasing to 60), they are able to commence an income stream from their superannuation balance.
For those genuinely winding back their working hours, they are able to supplement their salary and wages with an income stream from their super, even though they haven’t really retired.
The ability to commence a TRIS however is only conditional upon reaching preservation age so full time workers can also use them as a tax effective means of improving their retirement savings.
A significant benefit of commencing any type of income stream from a super balance is that no tax (including income tax and capital gains tax) is payable on income from assets that are being used to pay an income stream. That is, your fund or super balance is no longer subjected to tax.
Additionally, while in receipt of an income stream from super, an opportunity exists to salary sacrifice salary and wages that would otherwise be taxed at your highest marginal tax rate into superannuation where the contributed amounts will only be taxed at 15%.
Meanwhile, under the age of 60, a superannuation income stream attracts a 15% tax rebate and over the age of 60, it becomes tax free. The effect of doing all this is that you can have the same take home ‘pay’ but tax arbitrage allows your super balance to grow.
Unfortunately, TRISs have been identified as at being risk in this year’s Federal Budget. While they may be retained for genuine cases of transitioning to retirement (reduced working hours and supplementing income from super accounts), it is likely that their use as a tax planning tool where working hours are maintained will be restricted.
If they are to be removed, it is likely that it will be from Budget night (or earlier if the Government makes any announcements prior to then).
If you are eligible for a TRIS and it is appropriate for you to do so, consideration to commencing a TRIS as soon as possible would be advisable.
Reserving Strategies and double deductions – For those with a self-managed super fund (SMSF) and who are making deductible personal contributions, you may be able to make a double contribution to your fund this financial year without repercussions from exceeding the contributions caps.
This strategy is achievable by ensuring at least two contributions are made during the year, one of which is made after 3 June.
SMSFs have the ability to ‘reserve’ contributions for up to 28 days before they allocate them to a member account.
Deductions for contributions however are available in the year in which they are made. Therefore, the double deduction is available in this financial year but for super purposes, the second contribution is allocated in the next financial year (any concessional contributions in the next financial year must factor in this allocated amount when considering contributions caps).
This works well for those whose income is either higher this year or is expected to be lower next year, making a double deduction for super contributions this year far more attractive.
Re-contribution strategies – This involves the withdrawal of super benefits and re-contributing those amounts as a non-concessional contribution (tax free).
This strategy is worth considering where there is a possibility that in the event of the person’s death that their benefits will be paid to adult, non-financially dependent children.
Taxable components when paid to these beneficiaries attracts a 16.5% tax rate (whether it is paid directly from the super fund or through an estate). No tax will be paid on tax free components.
This strategy works well for those aged between 60 and 65 (and 65 – 75 who are still working) who can access their super tax free and are eligible to re-contribute as a non-concessional contribution.
This strategy has been rumoured to be at risk during the Federal Budget, as it could be seen to be inconsistent with superannuation policy of provision of retirement benefits.
Getting Advice - Care needs to be taken when implementing any of the above strategies. Individual circumstances need to be considered to confirm appropriateness and eligibility criteria. There are other strategies available also to improve retirement savings that a superannuation specialist adviser can discuss with you.
PwC Private Clients has a specialist superannuation team. Should you wish to discuss any of your superannuation matters please contact Liz Westover on (02) 8266 0000.
