How to boost your superannuation before rule change kicks in

Posted 24 October, 2016

Source: The Australian 

With the federal government’s draft legislation on the proposed changes to superannuation now released to the market, there is no time to wait for people approaching retirement who want to boost their superannuation.

Peter Hogan, technical director of the Self Managed Superannuation Fund Association, says there are five points which should be on the “to do” list for people wanting to maximise the potential opportunities in super in the current financial year before the tougher changes come into effect on July 1, 2017.

Maximise concessions

With the proposed cuts in the concessional super caps, employees in particular have to act now if they want to take advantage of higher salary sacrifice opportunities available this financial year.

At the moment, people 49 and over can put as much as $35,000 in a year into their super on a concessional basis (including the compulsory 9.5 per cent super guarantee contributions). The figures goes down to $25,000 a year for people of all ages from July 1.

Hogan points out that it is mostly people over 50 who are in this situation, with some free cash to boost their super before retirement. For employees, the salary sacrifice contributions have to be taken out of their regular pay. It is not practical to do a lump sum in the last minute.

So those wanting to boost their salary sacrificing to take advantage of the higher caps have to start making the changes at their pay office as soon as possible.

Post-tax contributions

The current financial year also provides a one-off opportunity for people with extra cash, maybe from a one-off windfall, inheritance or sale of an asset — to put as much as $540,000 into their super from post-tax assets.

A backflip by Treasurer Scott Morrison on the May budget announcement of a $500,000 lifetime cap on post-tax contributions has provided a reprieve for some people who may have been organising their affairs to do this.

“The old laws still apply until June 30,” Hogan says.

This allows people to put in $180,000 a year in post-tax contributions, which can also be made in a lump of up to three years’ worth, or $540,000 (bringing forward contributions for two years).

The new caps

From July 1 the post-tax super contribution cap goes down from $180,000 a year to $100,000. And when the total amount in super hits $1.6 million, no more post-tax contributions can be made at all.

People will still be able to make three years’ worth of contributions in one year (a maximum of $300,000 from July 1 with no more for the next two financial years).

But, as Hogan points out, the combination of the significantly lower annual cap and the impact of the impact of the $1.6m maximum represents a significant cutback from what has been allowed in the past.

Review tax situation

People in pension mode, with super funds of more than $1.6m, will be hit by the changes to come into effect from July 1, 2017. From that date, assets above $1.6m will have to be moved back into accumulation mode where earnings are taxed at 15 per cent.

This raises questions for funds with unrealised capital gains such as shares. At the moment these assets can be sold tax- free when the funds is in pension mode so capital gains are not an issue.

But with a maximum of $1.6m allowed to be in the tax-free fund as of July 1, trustees of self-managed super funds might want to ­review their portfolio for capital gains tax implications.

(The actual amount in the tax-free fund can go up and down with the market from July 1. The $1.6m is the total lifetime amount which can be moved or tipped into a tax free fund.)

The Tax Office frowns on transactions which deliberately sell and buy the same shares to wash out the capital gains tax liabilities. But for people with funds of $1.6m or more who may be feeling some assets are richly priced, it could be time to take some profits and re­invest them elsewhere.

Hogan points out that the federal government is proposing to provide some one-off capital gains tax relief for people in pension mode who will be hit by the changes from July 1, 2017.

For people with funds in pension mode, who have to move assets above $1.6m back into accumulation mode, the government is allowing a traditional arrangement where people can elect to do this at cost basis, which is the market value as of June 30.

Transition phase

This financial year is still a good year to use transition to retirement strategies where they suit an individual’s circumstances for people over 56 who are still working. But the attractiveness of TTR from a tax point of view cuts out from July 1.

From July 1 a TTR arrangement could still be used to allow someone cutting back on their work to pull some money out of super ahead of their retirement. But those seeking to use TTR for its tax benefits will be disappointed from July.

People approaching retirement need to start thinking now about how to position themselves.