Now that the dust has settled on the reforms, we have suggested some options below you may wish to include in your current wealth accumulation plan to help you stay ahead of the game.
You can have up to $1.6M in a tax-free pension
Although from 1 July 2017 a limit of $1.6m was applied to how much superannuation can be transferred from accumulation into a tax-free pension account, the same preferential tax treatment has been maintained for that first $1.6m of pension.
If you don’t have $1.6m in superannuation yet, you can still continue to make superannuation contributions and enjoy a tax-free pension of up to $1.6m.
For people, lucky enough to have amounts in superannuation greater than $1.6m, the good news is that the excess can be held in an accumulation account, which is subject to tax at preferential rates when compared to the standard income tax rates.
There are some complicated rules regarding this, and we would be happy to assist you with these.
The Australian Tax Office (the ATO) maintains a record of your balance and whether you have reached the $1.6m limit in respect of pensions, so you should keep your own records so that you can plan appropriately and not get any nasty surprises from the ATO.
If you have an SMSF which had to transfer assets from a pension account into accumulation in order to comply with these new rules, it can access capital gains tax (CGT) relief to re-set the cost base of those assets.
An election to take this capital gains tax relief must be made by the time the fund lodges its tax return for the 2017 year, which may not have occurred yet, so you still have time to think about this and to take advice.
You can make contributions to superannuation from your pre-tax earnings
Anyone (who is below the age of 75, or anyone between the ages of 65-74 who works at least 40 hours over 30 consecutive days in a financial year) can make extra deductible contributions - you don’t have to be self-employed or ask your employer to let you salary sacrifice.
From 1 July 2017, anyone can make concessional (deductible) contributions of up to $25,000 per year from pre-tax earnings.
To encourage you to build up your superannuation, provided your superannuation balance is below $500,000 you will be able to “carry forward” any unused part of this concessional cap for up to 5 years to make catch up concessional contributions.
This rule comes in as from 1 July 2018. If this is something you want to do, you should keep proper records and speak with your adviser to ensure you have satisfied the technicalities.
If your income and concessional superannuation contributions taken together exceed $250,000, you may be liable to tax of 30% (instead of the standard 15%) on your superannuation contributions.
You can also make after tax contributions
If you have less than $1.6M in superannuation, you can still make after tax contributions up to $100,000 per year.
If you are aged under 65, you are able to “bring forward” three years’ worth of after tax contributions and make a total after tax contribution of $300,000 in a single year.
Some technical transitional rules apply so for some people that amount may be more or less than $300,000, and this may be monitored by the ATO, so you should keep proper records and speak with your adviser to clarify how this will work for you.
If you have a superannuation balance of $1.6mor more, then you will be unable to make additional after tax contributions.
Technical traps
• Transition to retirement pensions. From 1 July 2017, the earnings on assets that support a transition to retirement pension will no longer be tax free and are now taxed similarly to the accumulation phase.
• Loss of segregation. If you have at least $1.6M in superannuation and you are taking a pension (in any fund) you are no longer able, for tax purposes, to use the segregation method to hold specific assets in specific superannuation accounts to support a pension.
• Estate planning. Payment of a death benefit pension may cause the recipient to exceed the $1.6m pension account limit. If that limit would be exceeded, the recipient may need to either commute some of their own pension (if they have one), or else take the death benefit as a lump sum.
As always, superannuation rules can be quite complicated, but we are happy to help you or your accountant, so please call us with any queries.
Heather Gray is a partner and Larissa Howard is a senior associate with Hall & Wilcox.
