Welcome. It’s Guy Freeman from My Wealth Solutions. We’re here with a budget update.
Now that the dust is settled, we thought it’d be a good idea to just go through some of the major changes. Just as a bit of a summary, again, it’s disappointing from our point of view to see the government tinkering again with superannuation. This leads more people to be less confident in the system. In saying that, there is a degree of fairness, but there are some major changes that are going to affect some strategies that are actually in place now for people with their super, and also going forward. Let’s have a run through some of the major ones.
- 01:00 – Super 1.6 Million pension Cap
- 03.00 – High income earners – Super issues
- 04:00 – Reduction of tax deductible contributions
- 05:00 – Lifetime limit of $500,000 non-concessional
- 06:00 – Spouse offset
- 08.00 – Annuities – tax exemption
- 09.00 – TRAP’s
The first one being the introduction of the $1.6 million cap per individual. What this actually means is that if your balance is above 1.6 million in superannuation and it’s transferred into pension, you actually need to take back anything above the 1.6 back into superannuation phase being taxed to 15%. If you remember pension phase has no tax, superannuation accumulation phase 15% tax. This is also going forward as well as any existing balances. Now, if you’re part of a couple, that 1.6 million is each. Effectively, with some good planning, you can get that up to 3.2 million. The other strategies around that is to make sure that we’re actually spending any money that’s outside the super system to fund retirement and letting our tax free entitlements grow inside super.
Our next big change with the budget is for the high-income earners. Just going back onto the cap, there are some strategies that we can utilise. Big one is the super splitting strategy where you can share your concessional contributions with your spouse. We need to consider making a non-concessional contributions up to $500,000 into the spouse’s account with the lower balance, so we can use both those $1.6 million caps as mentioned above. We also want to make sure that if we’re both working or there’s a partner working with a lower super balance that we are making as much in the way of contributions as possible, leading up to retirement.
High income earners, some changes there. There’s actually going to be a tax of 30% on concessional contributions if your combined income and super is greater than 250,000. Now, this used to be 300,000. Essentially, the threshold has been reduced by 50,000 and is one that’s going to hurt the higher income earners. Some strategies to consider here, really maximizing a non-reportable fringe benefits, including utilizing the otherwise deductible rule. This is things like being able to claim our income protection that’s otherwise deductible, and then also some investment property cost. There’s still some really good planning in that that we can achieve there.
Next major update, lowering the tax deductible contribution to $25,000. What we mean by tax deductible contribution, it’s a combination of what your employer is putting in for you in the super, so your SG guarantee, as well as any salary sacrifice. Anybody that’s under the age of 50 has been reduced to 25,000. Anyone that’s over the age of 50 has been reduced to 30,000. Again, just some more ways that they are really increasing their revenues to beat their budget deficit.
Next one is our $500,000 life time limit for non-concessional contributions. What we’re really talking about here when we say non-concessional is our post tax contributions into super. We now have a life limit of 500,000. Looking at especially for the small business owner, it retrospectively goes back until the 1st of July 2007. This is a massive reduction in the amount that we can contribute into our super. It has been previous that it’s been $180,000 per annum for our non-concessional, so after tax contributions in the super.
What I mean after tax, say you have money in the bank account that you saved up and you want to contribute it in, that’s a non-concessional. We also had to bring forward the rule 540,000, so bring forward 3 years. That’s all being abolished, and we now have a $500,000 life time limit. A major strategy to consider here is look at utilizing … There’s some changes in the age that we can contribute up until now, so we’ll just talk about a bit more of those in a few moments.
Next one is the spouse offset. There’s some changes there. For the low-income spouses, the current tax offset super threshold will increase from 10,800 to 37,000. Essentially, it used to be if you were earning up $10,800 you would be able to receive a tax benefit if you contributed on behalf of your spouse. It’s not increased to $37,000. This should open up a lot more people being able to utilize this strategy, and the benefit is up to $540 as a tax benefit. That’s a good one all around for low-income earning partners.
Next one is for people under age 75 can now claim tax deductions for personal superannuation contributions. Another major benefit to try and equalise out accounts for people not earning income or who want to top up their super effectively, even if they are over the age of 65. Really with this one, the limit stays at 25,000, and it also removes the 10% rule for substantially self-employed. Essentially, you had to prove that you had less than 10% of your income from employed sources, but that’s now been abolished, another generally good change. Strategies considered here, offset any other taxable income for a longer period of time, because you can do it up until age 75 now, and making sure that we’ve utilized the amount that we can put into super, especially on that $500,000 non-concessional limit.
Next major change that is another good one is the change in annuities. Essentially, from July 2017, a tax exemption on earnings in the retirement phase for products such as annuities and groups style products will now be tax exempt. The really opportunity here is for people with balances of 1.6 million already in super is to transfer anything above and beyond that, having a look at annuity to see if that’s suitable, and it will now be tax exempt.
Now, there’s some big changes, proposed changes I should say, to transition to retirement pensions. There’s a lot of people with these things set up at the moment, and also having a look at the strategy moving forward into retirement. What the government is actually suggesting here is that the tax exempt status of the earnings is actually removed. At the moment, if you have money in a transition to retirement pension, there is nil tax on the earning, so they’re actually looking to remove that. It could be huge ramification. We still need to get some clarification around that one, but that looks like the way that they’ll be moving forward.
A quick one on the anti-detriment, this is a fairly updated and interesting provision that was introduced during the Keating years, and it’s to do with tax on super funds and it’s now to be removed. There was a benefit that you are able to claim back in once a death benefit was paid, but now that has been abolished.
I guess this is a world we live in, and we need to just make the most of the changes. If you’re someone that’s looking to maximise the tax deductible contributions are really, really important now to start looking at those changes. Coming closer to retirement, that 500k life time limit, that’s a huge change to the current 180 per year, or the 3-year bring forward 540. If you have over 1.6 million in your account, there’s some different strategies there that you should be having a chat to your financial advisor about.
As always, I hope you enjoyed this update.
If you have any questions, please don’t hesitate to get in touch.