Could the rule changes that recently took place to Super actually present you with some great opportunities to build your retirement wealth from July 2017?
There has been a lot of noise in the media about the new $1.6m pension cap which commences in July 2017. But for many, this new rule is not really going to present a problem. Some would argue that it would be ‘a nice problem to have’, because for many Australians’ their Super balance is considerably lower.
In fact in 2014 the average Super balance for an Australian about to retire, between the age of 60 and 64, was $292,500 for males and $138,500 for females. About 20% of the new pension cap.
And these figures had actually increased since 2013, mainly thanks to some of the increased incentives to invest into Super, and a fairly steady wage growth increasing Super guarantee contributions.
So if the big pension cap headline has little bearing on your retirement strategy in coming years, then you may be wondering what you should be aware of which could have some benefit to your retirement plan.
Well, out of the Budget changes finalised in February 2017, came three very positive ways you can build wealth in Super outlined in detail below.
Employees Making Tax Deductible Contributions
From 1 July 2017, you can now make tax deductible contributions to your Super to top up any Super guarantee or Salary sacrifice contributions already being made.
In the past you may have missed out on fully utilising your Super contributions caps for tax deductible contributions because you had to manage your personal cash flow along with the timing of salary sacrifice and Super guarantee. Any unused portion of the cap each month remained unused.
From July 17, you can now make a contribution in June to top up any shortfall up to the cap, and be able to claim on tax deduction on the amount contributed. You may find this effective if you need to carefully manage cash flow throughout the financial year and then come into lump sums later in the year from payments such as investment dividends, commissions, bonuses or maybe even a tax refund.
It’s important to note that when you make your contributions that you do not breach the new caps and that you have the contributions appropriately classified by your Super fund.
Tax Deductible Contribution Catch-up
If you have a Super balance under $500,000 then this new rule will be appealing as it will allow you to respectively go back and use any of those unused caps, discussed above, for the previous five years, in order to build your retirement wealth.
Not only will this allow you to get some additional wealth into Super, which is a very tax effective investment vehicle, these contributions will also be tax deductible, so in the year these are made, your personal tax liability could be significantly reduced.
From July 2018, you will be able to accrue any unused tax deductible contribution cap.
You can then use the catch-up provision to make a contribution to Super so long as your total Super balance remains below $500,000 and you only count the unused cap within the last five years of the time of the contributions.
Any unused cap outside of the 5 year period will expire and not be accessible.
The rule comes into effect from July 2017, but you will not be able to access any previous unused annual cap until the 2018 financial year.
It will be important to maintain accurate contribution cap records to be able to fully maximise the benefit of this rule and to ensure that you don’t exceed your allowable caps and that all contributions are appropriate classified by the Super fund and claimed by your accountant.
Tax Deductible Spouse Contribution
The ability to make a contribution to your spouse’s Super account, on their behalf, and claim a tax offset of up to $540, based on the contribution made, is not a new strategy.
What has changed is the level of income your spouse can earn to allow them to qualify for this benefit.
From July 17, the income threshold will increase from $10,800 to $37,000.
This effectively enables you to make contributions for a spouse whose Super Guarantee may only be up to about $3,500 per year.
You will need to be aware of some additional rules around after tax contribution caps ($100k p.a.) and transfer balance caps ($1.9m), which can reduce your ability to access this benefit if either of these caps have been reached in the year the contributions are made.
Actions you can take before July 2017
With the final months of this financial year closing in, it’s worth remembering that from 30 June 2017, all contributions caps will be reducing.
After tax contributions (non-concessional) will reduce from $180,000 to $100,000 a year, including a reduction of the three year bring forward rule going from $540,000 to $300,000.
Plus, the Tax Deductible Contribution Cap will also reduce from a maximum of $35,000 to $25,000 a year, irrespective of your age.
Focus of the three changes
The reduction in contribution caps and the three additional rule changes are an incentive to fully use your contribution caps each year. This has really drawn a focus on regular investment into Super for retirement.
This means it’s more important now than ever, to start early and to maintain a regular contribution strategy to Super in order to boost your retirement wealth.
If building your retirement wealth and maximising your pre-retirement cash flow to take advantage of these changes, is important to you, you should contact us now, and give yourself the best opportunity to hit your retirement goals.
We will walk you through the various strategies that are available to you, some of which we’ve discussed above, assess your circumstances and work with you to tailor a plan to meet your needs.
Contact us now. Click here and leave your details and we’ll have an RSM Retirement Specialist contact you.
We’ll also send you a copy of the RSM ‘How Much Do I Need to Retire’ report to help your review your Retirement Goals, and register you for our regular Super Pathways Newsletter, to keep you up to speed with all Super changes.
ASFA “AFSA Superannuation account balances by age and gender” – December 2015