As part of the 2016 Federal Budget and subsequent announcements, the Government is making significant changes to super contribution rules.
On Wednesday 23 November 2016, the Federal Government’s proposed changes to super rules passed through Parliament. It’s worth understanding how the new rules will affect you and your financial strategy.
CHANGES AT A GLANCE: HOW WILL THE NEW RULES AFFECT YOU?
|Current rule||New rule (from 1 July 2017)|
|Concessional (pre-tax) contributions|
|$30,000 annual contributions cap ($35,000 if you were 49 or over on 30 June 2016)||$25,000 annual contributions cap regardless of age|
|Contributions are taxed at 15% if your total income (including concessional contributions) is under $300,000; 30% if you earn more||30% tax on contributions starts at once you earn $250,000|
|Non-concessional (after-tax) contributions|
|$180,000 annual contributions cap||$100,000 annual contributions cap. No further non-concessional contributions permitted if your total super balance at the start of the year is $1.6 million or more.|
|‘Bring forward’ rule allows three years’ worth of contributions (i.e. $540,000) to be made any time during a three year period if under 65 (any time during the year)||‘Bring forward’ rule allows a maximum of $300,000 to be made any time during a three year period if under 65 (any time during the year)|
Changes to concessional contributions
Pre-tax or concessional super contributions are the contributions you make without paying your marginal rate of income tax on them. They include:
- Compulsory contributions from your employer, such as Super Guarantee (SG) contributions
- Voluntary employer contributions such as salary sacrifice contributions that you choose to make from your before-tax income
- Personal tax-deductible contributions – for example, the ones you make if you’re self-employed (note that from 1 July, all eligible contributors will be able to make personal tax-deductible super contributions).
These contributions are usually taxed at the low rate of 15%.
Currently, you can make up to $30,000 in concessional contributions in a financial year if you were less than 49 at 30 June 2016, or $35,000 if you were older.
This will now be changed to an annual cap of $25,000 for everyone from 1 July 2017.
Changes to non-concessional contributions
Also known as after-tax contributions, these are contributions you make from sources that have already been taxed. They generally include:
- Contributions from your take-home pay or savings, where no tax deduction has been claimed
- Certain contributions made by your spouse on your behalf.
Currently these are capped at $180,000 a year. Or, if you’re under the age of 65 (any time during the year), you are able to apply the ‘bring-forward’ rule. This allows you to make up to three years’ worth of non-concessional contributions (currently $540,000) at any point during a three-year period.
The Government has reduced the annual cap to $100,000 from 1 July 2017.
Under the new rules, if you’re eligible you’ll still be able to apply the bring-forward rule and contribute up to $300,000 at any time during a three-year period.
In addition, from 1 July 2017 the Government will no longer allow you to make any further non-concessional contributions once your total super balance reaches $1.6 million.
Who can contribute to super?
Generally speaking, anyone under the age of 65 can make concessional or non-concessional contributions to their super.
If you’re aged 65 to 74 you have to pass a work test before you can contribute. This means you need to have worked (for gain or reward) for at least 40 hours within a 30 day period to be able to contribute for that financial year.
If you’re 75 or over, you’re usually not able to make voluntary contributions to super.
These eligibility rules don’t apply to your employer’s compulsory contributions (e.g. their SG contributions). They can be made at any time, regardless of your age.
What happens if you go over the caps?
These penalties apply if you exceed the super contributions caps:
- Concessional contributions: The amount of your excess contributions are included in your assessable income and effectively taxed at your marginal tax rate. You’ll also have to pay an interest charge. You can also choose to withdraw up to 85% of any excess concessional contributions, although if you choose not to withdraw them, the excess amount will also count towards your non-concessional contributions cap.
- Non-concessional contributions: You can choose to withdraw the excess amount and 85% of an ‘associated earnings amount’, which is what your excess contributions are deemed to earn while in your super account. The total amount of associated earnings will be included in your assessable income and taxed at your marginal rate, with a 15% offset. Otherwise, if you don’t withdraw the excess amount, it will be taxed at 49%.
It’s important to get the right advice
If you’re using the current contributions caps to boost your super, the Government’s changes could have a significant impact on your retirement planning.
That’s why you should speak to us, as we can review your situation and build a strategy to help you get the most out of your super contributions.
Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.
Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A PDS for Colonial First State’s products are available at colonialfirststate.com.au or by calling 13 13 36.