The 2016/17 Federal Budget became a lightning rod for discussion on tax concessions for super. There was heated debate in the lead-up to the budget regarding the merits of paring back the generous tax concessions that super enjoys. While there has been some tightening of the rules, super still remains a heavily tax effective investment medium and retains its pre-eminence as a way of encouraging Australians to invest for a comfortable retirement.
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The treatment of contribution caps seems to be one area where there is constant tweaking. These ‘caps’ relate to the maximum levels of annual super contributions that attract concessional tax treatment. They are an important factor in the ability of personal investors to boost their super and maximise tax benefits – especially towards the end of their working lives.
Let’s take a closer look at what has changed, bearing in mind that these proposals still need to be passed into legislation before they officially apply.
Understanding concessional and non-concessional contributions
To fully understand how the changes to caps may affect you, let’s do a refresher on the difference between concessional and non-concessional contributions.
- Non-concessional super contributions are voluntary contributions you make from your after-tax income. Because you have already paid income tax on the money used for these contributions, they have the benefit of not attracting any contribution tax when deposited into your super fund.
- Concessional contributions relate to contributions made from pre-tax income for which a tax deduction has been claimed. This includes Super Guarantee contributions, voluntary contributions made by the self-employed and salary sacrifice contributions made by the employed. These tax-deductible contributions will attract a 15% contribution tax when deposited into your super, which is more favourable than paying marginal income tax -especially if you are in higher tax brackets.
Both non-concessional and concessional contributions are subject to maximum limits and if these limits are exceeded then penalty tax rates may apply to the excess.
So what are the changes to the non-concessional cap?
Until now, the status quo on non-concessional caps was a maximum annual contribution of $180,000. Those under 65 also had the option to bring forward the two following year’s cap amounts so that they could effectively make a $540,000 non-concessional contribution in one year.
The proposal confirmed in the budget is for this cap to be changed from a yearly amount to an overall lifetime maximum of $500,000 from 3 May 2016. Any non-concessional contributions you may have made since 1 July 2007 are included in this $500,000 limit, although if you have already exceeded this amount with contributions made before budget night then no excess contribution penalty will apply. If you do make excess contributions after budget night, you will have the option to have them refunded, so that penalty tax can be avoided.
While these restrictions to the non-concessional cap came as a surprise to many, there is still an opportunity for those who have not reached the cap to boost their super and enjoy the tax-effective treatment on fund earnings within the super environment.
Concessional contribution caps
The concessional contributions cap will reduce from $30,000 to $25,000 per year from 1 July 2017. The previous system which offered potentially higher limits for those over 50 will also be changed to be the same for everyone.
An important feature to note about the new rules is that if your super balance is less than $500,000, you will have the option to carry forward any unused concessional contribution cap from year to year over a rolling five year period. So, for example, if you only use up $15,000 of your concessional cap in the first year after 1 July 2017, you can carry forward the unused $10,000 to the following financial year so that your total cap for that year is $35,000. This carry forward principle can be accrued for five years.
Additional change for high income earners
Up until now, those who were earning over $300,000 per year were required to pay a higher super contribution tax rate of 30% on their concessional contributions (still more favourable than their marginal income tax rate). This threshold has now been reduced to capture those with incomes above $250,000.
The opportunity remains
While the proposed changes are certainly more restrictive than existing rules, this must be put into the broader context of comparing super to other forms of non-super investment. Many people would not have been able to use up their contribution cap limits under the old system anyway and will still be able to boost their super if they are moving closer to retirement age.
The tax benefit of deductible contributions and the favourable tax on earnings within super are still a major benefit that is unique to superannuation. If you feel you need to assess your situation regarding the new rules or if you want to learn more about how you can maximise your position using super, then it may be a good idea to discuss your situation with a financial planner.
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