The clock is ticking for investors who want to take advantage of the more generous tax concessions available in super this financial year. As of 1 July, new rules come into effect that will reduce contribution limits.
Until then, individuals under 65 can make a non-concessional (after-tax) contribution of up to $540,000 under the bring-forward rule which allows you to bring forward two years’ contributions. That means couples can put up to $1.08 million into super while the opportunity lasts.
From 1 July, the cap on non-concessional contributions will reduce from $180,000 a year to $100,000 or $300,000 under the bring forward rule.
But this is only one of the wide ranging super changes you need to plan for if you want to take full advantage of the existing rules.
Concessional contribution caps
Tighter rules will also apply to tax-deductible concessional contributions. This financial year contributions of up to $35,000 are permitted for people aged 50 and over, or $30,000 for those under 50. But from 1 July, the limit will be $25,000 for everyone. These limits include the 9.5% compulsory super contributions made by your employer.
These changes to the concessional and non-concessional caps provide an incentive to take full advantage of the existing rules if you can. This is especially so if you have an opportunity to make a large non-concessional contribution funded by an inheritance, the sale of a property or other assets.
Before you bring forward a sale or take any other action, be aware that there could be tax or other considerations so it’s important to get advice.
There’s an added incentive for people who already have large account balances to act now. From July 1, non-concessional contributions won’t be allowed if your super balance is higher than $1.6 million.
Pension account limits
Super has two phases, an accumulation phase where you grow your retirement savings in a concessional tax environment, and pension phase where no tax is paid on earnings or withdrawals. Under existing rules, there are no limits on the amount of money you can hold in super. But from July 1, a maximum of $1.6 million can be held by a retiree in a tax-free pension account.
Non-concessional contributions before 1 July that push the balance above $1.6 million can stay in super.
But individuals who have more than $1.6 million in a pension account on that date will be required to put the excess back into an accumulation account where earnings are taxed at 15%, or take the excess out of super entirely.
Transition to retirement tax changes
Earnings in a transition to retirement (TTR) pension will lose their tax exemption from 1 July. All earnings on income and capital gains will be taxed at the concessional super rate of 15%. Capital gains on assets held for longer than 12 months will be taxed at the discount rate of 10%.
If you are one of the many people using a TTR strategy in combination with salary sacrifice to boost your super, the loss of the tax exemption may reduce the total amount you accumulate for retirement. While TTR pensions are still attractive, you may like to talk to us about additional ways to boost your retirement savings.
High earners to pay more tax
Individuals who earn $300,000 or more currently pay tax at a rate of 30% on their super contributions, instead of the 15% everyone else pays. But from 1 July, the higher tax rate will apply to incomes of $250,000 or more.
If you expect to earn between $250,000 and $300,000 next financial year, you may want to make the most of your allowable concessional contributions before 30 June.
The reforms that will be ushered in on 1 July amount to the biggest shake-up of super in a decade. As always, if you would like to discuss how the changes might affect you and what you can do to prepare, please call us on 03 5434 7600.