The 2016-17 Federal Budget delivered a surprise number of changes to superannuation with 11 announced changes including a $1.6 million cap on contributions in one of its biggest reforms since 1 July 2007.
Charis Liew, Manager at William Buck Chartered Accountants, says there is a lot of misunderstanding about the changes coming into effect from 1 July 2017.
“We are seeing a number of clients assuming the $1.6 million cap means the end of superannuation contributions. However, the reality is quite different, if individuals have more than $1.6 million in their super fund it does not mean they have to suddenly pull it out and relocate their wealth elsewhere.”
“Since 2007, there have been clear tax advantages of accumulating wealth in superannuation. During the accumulation phase, superannuation funds are taxed at 15 per cent. When an individual decides to retire and switch to pension phase, their superannuation is taxed at zero per cent, meaning it is not taxed at all. This has created a great incentive to put money into super to get to the point where you can switch on the pension.”
“By introducing the $1.6 million cap, the government is trying to avoid large numbers of retirees throwing all their money into super and switching on a pension – these changes are effectively reducing the number of funds that are paying little or no tax.”
“This is leading people to think that they need to take anything over $1.6 million out of their superannuation which is just not the case. It simply means anything above that cap gets taxed at 15 per cent. Even though it is going to be taxed at 15 per cent, it is still one of the most concessionally taxed environments right now,” says Charis.
Who will the changes impact
Those who will be most impacted by the changes will be people aged between 50 and 65 years who are either transitioning to retirement or thinking about retirement, and 65 and older who are now able to access their super.
“Individuals over 50 should be actively thinking about their super and putting away as much as they can but the $1.6 million cap should not be a deterrent to do this, particularly those who have businesses, or have recently sold their business and might suddenly accumulate a large amount of wealth which they want to get into their super quickly. There are concessions available to help you do this, such as the small business CGT concessions,” says Charis.
“In regards to the coming changes, those individuals who haven’t fully retired in the 50-65 age bracket are understandably starting to question how much of their wealth outside of their super fund that they can start to put into super. If they leave it outside of super, in a bank account for example, any future earnings will be taxed at their marginal tax rate, whereas if they get it into super, it could be taxed at 15 per cent.”
Charis says the $1.6 million cap is just a fraction of all the broader changes and you can understand why baby boomers with a good nest egg in super are concerned because they don’t understand what the implications mean to them.
“For those looking to still build their wealth to put into super before the changes become iron-clad, there a still several strategies to maximise your super – and not in just a quick fix manner but long term strategies.”
Small business CGT concessions
The small business CGT concessions won’t be impacted by the lowered caps, however this requires a certain amount of capital in order to be classified as a small business. The CGT cap is a lifetime limit and is currently $1.415 million (indexed each year) if the taxpayer is eligible for the 15 year CGT exemption, or $500,000 (unindexed) if the tax payer claims the CGT retirement exemption.
As this cap is a tax concession, if an individual operated a small business and they decided to sell it, normally they would have to pay tax on that sale but there are concessions available if you meet certain criteria. If we look at mum and dad business owners who were self-employed and were not able to put any money into their superannuation because they needed the cashflow for their business, then they decided to sell the business, they can put the money following the sale into super and start drawing a pension from it. This is possible under this particular cap which is outside the concessional and non-concessional contributions caps, and one of the better ways to get a large amount of money into super in one go.
Small business CGT concessions, while they can be difficult to navigate to satisfy all of the conditions, can be very beneficial. This is where a trusted advisor can help you.
Self Managed Super Funds
According to the ATO in June 2016, there were 1,083,425 total members of SMSFs, while the average assets per member equated to $589,636 for the 2014-15 year. They continue to be a popular choice for individuals who like to plan for their retirement and we would advise you, if you are operating your own SMSF, to choose the assets within the fund wisely. While a younger generation would normally have their super in high growth, high risk assets to increase their wealth during the accumulation stage, those close to retirement do not want to put their entire nest egg in high growth assets. However, if you choose those assets strategically, they still have the opportunity to perform well and further boost your total wealth in retirement.
From 1 July 2017, there will be transitional provisions for individuals who were still hoping to put away up to $540,000 and factoring in the lowering of the bring-forward cap to $300,000. What is important to highlight during this stage is that just because you might have “missed the boat” so to speak, there are still ways you can potentially get more into your super using that cap. Talk to your advisor about your options.
“What will be most interesting to see over the next 12 months is how superannuation funds deal with all these changes and how they manage them,” says Charis.
“When the government announced the last major changes to superannuation in 2007, they were introduced as the simpler super rules. It’s definitely not simple anymore and therein lies the challenge for the government.”
“They are either going to have to make it simpler for people to understand and to administer their super, or we may start to see an increase over time in the number of people exiting the superannuation environment altogether due to sheer complexity or an increasing reliance on government payments to supplement their retirement, such as Centrelink or the Age Pension.”
“When they keep on playing around with the rules, it creates a lack of confidence in the superannuation system. When people lose confidence in super they are not going to start putting money aside for super and that could have much broader implications for our economy. We need to consider the super industry as a whole or find the right balance so that people can effectively self-fund their retirement with rules they can understand,” adds Charis.
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