Over the past six months there have been huge changes to superannuation law as a result of announcements in last May’s Federal Budget.  The Superannuation (Objective) Bill 2016, Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016, and Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016 took effect on 29 November. 

In this, the second of a two-part update (click her to view Part 1), we will explore opportunities for concessional contributions.

CONCESSIONAL CONTRIBUTIONS

Concessional Contributions (CC) are generally either personal tax deductible contributions, or employer contributions made before tax (salary sacrifice) or to satisfy Super Guarantee Contributions (SGC). 

The new CC proposal will not be effective until 1 July 2017 so the current CC rules remain in operation until 30 June 2017:

  • CC of up to $30,000 can be made or
  • CC of up to $35,000 can be made if you are aged 49 or over on 1 July 2017.

After 1 July 2017, CC of $25,000 per annum can be made, irrespective of age.

There is no change to the eligibility rules to contribute, in that you must be aged under 65 or have worked more than 40 hours in a 30-day period during the financial year.

10% RULE ABOLISHED FROM 1 JULY 2017

Pleasingly, the 10% rule for personal tax deductible contributions will be removed from 1 July.  Currently, to claim a personal tax deductible contribution to superannuation you must have less than 10% of your total income from salary or wages.  This makes it very difficult for individuals who income from both salary and self-employment.  Examples might include a farmer who also has employment income, or a carpenter who is self-employed for part of a year, and employed for the remainder of the year. 

In practical terms, does this means salary sacrifice is dead from 1st July?

CASE IN POINT

Bob is a 60 year-old fitter and turner employed by a small business. He is trying to maximise superannuation contributions in his last working years. He has asked his employer to salary sacrifice $27,400 in 2016,in addition to the SGC of $7,600, for a total of $35,000.  Unfortunately, Bob’s employer takes the view that if Bob is salary sacrificing $27,400 of his $80,000 salary then it only has to pay SGC on the reduced amount of $52,600, not on Bob’s gross salary of $80,000.  This results in Bob’s employer only contributing SGC of $4,997 instead of $7,600 for the year.  While this is legal it disadvantages Bob in two ways:

1)      Less money going into his super

2)      More tax payable. 

As from 1 July, anyone can claim a personal tax deductible contribution to superannuation, Bob can choose to cease his salary sacrifice. His employer will then be required to pay SGC on Bob’s entire $80,000 salary.  Bob can then set up a regular contribution of $2,283.33 per month into his super from his bank account.  However, in July 2017 it is critical that Bob notify his super fund that he intends to claim a tax deduction on his personal contribution of $27,400 for the year.

WHO WILL BE AFFECTED? 

From 1 July, the strategy outlined above will work well for those that:

  • Have income from both employment and self-employment
  • Have unexpected additional taxable income in a year (capital gains on sale of a property or shares) and want to make a lump sum contribution which they claim as a tax deduction
  • Want to be able to control the timing of a contribution
  • Want to ensure they are getting the maximum SGC to which they are entitled, as well as making deductible contributions to superannuation
  • Want to save into their mortgage offset account and then make a personal deduction contribution to super just prior to the end of financial year.

Remember that for the current 2016/2017 tax year there is no change to the 10% rule. 

CATCH UP CONCESSIONAL CONTRIBUTIONS

One of the best changes in the legislation is the ability to catch up on Concessional Contributions.  This rule only applies to contributions made after 1 July 2018 and works as follows: 

  • The individual’s member balance is less than $500,000 at 30 June of the previous financial year
  • Unused CC expire after five years.
 
CASE IN POINT

Jill’s total super balance as at 30 June 2023 was $400,000. She had the following pattern of concessional contributions:

2018/2019 2019/2020 2020/2021 2021/2022 2022/2023

Unused CC

($10k)

Unused CC

($5k)

Unused CC

($15k)

Unused CC

($10k)

Unused CC

($5k)

 

CC for 2023/2024
2023/2024 ordinary CC cap $25,000
Unused cap (previous five years) $45,000
Jill's total available CC in 2023/2024 $70,000

 

WHO WILL BE AFFECTED?

This will be of great assistance for  people with:

  • variable taxable income or broken work patterns
  • greater disposable income later in life (usually post mortgage and kids)
  • People who are still working, aged 65 – 74 years, and who expect a larger assessable income in the future (eg a large capital gain from sale of property prior to retirement).

Remember though that to be able to take advantage of the unused CC in the previous five years, your member balance must be under $500,000.

You should seek advice prior to making any concessional contributions this year and understand when the different rules come into operation. 

If you like what we have to say, and how we say it, follow us on FacebookLinkedIn and Twitter.

Kylie Wright is a CFP® and is an SMSF Specialist Adviser™. Before doing anything with your super, please speak to an Ulton Wealth Manager to ensure the decisions you make are appropriate for your circumstances. 

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