Last chance for contributions under current super system
Should investors make the most of the current super contribution rules before much tougher rules apply from July 1, 2017?
This tax year, tax deductible concessional contributions of up to $35,000 (for people aged 50 and over) and $30,000 (for under-50s) are permitted. Next tax year, the maximum allowed will be $25,000 for everyone. The new rules still allow additional tax deductible contributions even for those with large account balances already.
The situation, however, is completely different for those with $1.6 million or more already wanting to make further non-concessional (after-tax) contributions to their fund. The existing annual limits of $180,000 or up to $540,000 for those under 65 able to bring forward two years' contributions apply only until June 30. From then, those with assessed balances in excess of $1.6 million won't be able to make any further after-tax contributions to private superannuation accounts.
Tighter rules will also apply to those with assessed balances of less than $1.6 million, with the maximum annual non-concessional contribution limited to $100,000 or $300,000 under the two-year carry-forward arrangements.
So this tax year is for many the last chance to make a large contribution to super funded by inheritances, sale of properties and other assets or even by borrowing. The value of this last-chance opportunity varies widely with each individual's situation and the costs involved in obtaining the additional money to put into super. Selling a property or other assets can involve incurring a capital gains tax liability while the costs of borrowing are increased because they aren't tax deductible.
Younger people lose out because all new super contributions are untouchable until age 65 or retirement after preservation age, currently 60 for most fund members. The benefits of seizing this last-chance opportunity is thus greater for older people already retired or about to retire.
To benefit from putting more in super, retirees also need to face higher tax bills on money invested in personal names. Up to the first $1.6 million, super can be transferred to tax-free pension accounts where age 60, no tax is payable. For larger balances above $1.6 million, the money will have to be invested in accumulation accounts subject to 15 per cent income tax.
Where the funds are readily available, the risks for older people of adding to their super are greatly reduced by the ability to withdraw part or all of their super tax-free when retired. Borrowing money even for a short time to put money into super involves more risk because the returns from super funds are far from guaranteed.
The key message as for all investment decisions is to consider both the costs and potential benefits from taking advantage of the current non-concessional contribution rules while they still apply.