In this year’s Federal Budget and in subsequent announcements, the Coalition, government proposed widespread changes to super and tax rules. Although these reforms are yet to be legislated, it’s important to know how to protect your financial strategy.
Not long after May’s Budget announcement, Australia went to the polls for what was to be a very close election. Although the Coalition eventually came out on top, the question remains: what does the election result mean for the Budget proposals?
Half a year on, the future of the reforms is still in limbo as Labor and the other parties consider which ones they’ll support. The government has also subsequently announced some changes to its original proposals. But with many of the proposals scheduled to take effect on 1 July 2017, it’s worth understanding how they could affect your financial strategy if they become law.
Here are some of the major Budget reforms – and how they could affect your retirement planning.
Reduced caps on super contributions
One of the main ways Australians save for their retirement is through pre-tax or ‘concessional’ contributions to super. These are the contributions made by your employer or through salary sacrificing, which are usually taxed at the low rate of 15%. At the moment these contributions are capped annually at $30,000 if you’re under 50 or $35,000 if you’re 50 or older, but the government is proposing an annual cap of $25,000 across the board from 1 July 2017.
And what about after-tax or ‘non-concessional’ contributions? These are currently capped at $180,000 a year (or $540,000 spread over three years if you’re eligible). Although the government initially proposed an immediate lifetime cap of $500,000, they have now instead proposed reducing the annual cap to $100,000 a year (or $300,000 in a three-year period if you’re eligible) from 1 July 2017. In addition, once your total super balance exceeds $1.6 million, you’d no longer be able to make further after tax contributions from 1 July 2017.
If you’re making the most of the current contribution caps to grow your super, these proposals could throw a spanner in the works. So if you think you’ll be impacted, speak to your financial adviser. They’ll show how you can adjust your strategy to make the most of the new caps and also perhaps invest in other assets outside super.
Contributions tax for high income earners
While most concessional contributions are taxed at 15%, this tax rate is doubled on your contributions if your annual income is $300,000 or more. However, the government is looking to reduce the threshold for this ‘Division 293 tax’ by $50,000. In this case, from 1 July 2017, part or all of your concessional contributions will be taxed at 30% if you earn above $250,000. So if this reform is likely to affect you, ask your financial adviser about the most tax-effective retirement strategy for your circumstances.
Offsets for low earners
If you’re on a low income, the good news is that you’ll still get a tax break on your concessional contributions. If it’s passed by parliament, the government’s proposed Low Income Superannuation Tax Offset (LISTO) scheme will replace the current Low Income Superannuation Contribution (LISC) scheme, which is due to finish up on 30 June 2017. Under the new LISTO scheme, if your income is less than $37,000 a year, and you make concessional contributions (including your employers Super Guarantee), you’ll get a tax offset of up to $500 a year added to your super balance.
The Coalition is also pushing to increase the current threshold for the spouse super tax offset from $10,800 to $37,000. So if you’re earning less than $37,000 your spouse will get an 18% offset for contributions they make to your super – up to a maximum rebate of $540.
Tax changes for TTR pensions
Current transition-to-retirement (TTR) rules help pre-retirees grow their nest egg as much as possible during their final years of work. If you’re still working but you’ve reached your preservation age (the age you’re allowed to access your super), you can start drawing a pension from your super fund.
This means you can salary sacrifice part of your earnings into super, with your pension income making up the shortfall in your take-home pay.
There are currently two key benefits of a TTR pension strategy:
- Income from assets supporting your TTR balance are tax free (instead of being taxed at up to 15% like regular super assets)
- The TTR payments you receive might be subject to less tax than the salary you’ve sacrificed into super would have been (eg, TTR pension payments are normally tax free once you reach age 60).
However, the government is proposing to remove the tax-exempt status of income from assets that support TTR income streams.
If this is legislated, earnings within your TTR pension will be taxed at 15% from 1 July 2017 – regardless of when you set it up.
If these changes become law, a TTR strategy may no longer be the most tax-effective way to boost your retirement savings.
Talk to your financial adviser about alternative strategies that will help you meet your lifestyle goals.
Ask your financial adviser
No matter what stage of life you’re at, these and other Budget proposals could have a major impact on your financial strategy. That’s why it’s worth getting in touch with your financial adviser, so you’ll be well prepared if and when the changes take effect. Your adviser can help adjust your strategy if needed, so you can make the most of the reforms that will benefit you and avoid losing out from the ones that won’t.