Two more slugs to superannuation – but super still makes sense
This year’s Federal Budget contained two disappointing changes to concessional (pre-tax or tax deductible) superannuation contributions.
However, the other benefits of super still make it the most favourable investment vehicle.
But to maximise the benefits of super, you now need to take even more advice than before (which is included as part of First Samuel’s integrated service offering).
Two major changes
The recent budget:
• Doubled the contributions tax to 30% from 1-Jul-12 on concessional contributions made by people who are earning $300,000 or more
• Deferred (until 1-Jul-14) the proposed higher contribution annual limit of $50,000 for those age 50 (plus) with accumulated superannuation benefits of less than $500,000
These changes were announced as an “egalitarian” measure. Coincidently, they raise considerable revenue to the government.
To balance this, low income workers who generate annual income of less than $37,000 (and are subject to a marginal tax rate of 15% or less) will have the superannuation guarantee contributions tax waived or rebated.
Of course, the extra tax from the high earners is expected to be much greater than the rebates given to the low earners (i.e. the government is overcompensating itself).
It is very disheartening to see the government defer for two years the proposed higher limit for those aged 50 (plus).
And this makes it even more important to monitor your superannuation contributions (to all superannuation funds). Because if you exceed your annual limit a penalty tax will apply.
As with many superannuation changes that don’t affect politicians or senior public servants, a change that looks simple at first glance is complex underneath. For example, the higher contributions tax uses another definition of income.
Income for this purpose includes taxable income, concessional superannuation contributions (including employer super- annuation guarantee contributions), net investment losses, fringe benefits, target foreign income and tax free government pensions and benefits, less child support.
So making a concessional contribution and/ or incurring an investment loss won’t help you remain below the threshold. However, if your income excluding concessional contributions is below $300,000 and making a concessional contribution pushes you above the threshold, only that part of the contribution in excess of the threshold will be subject to the higher tax.
Does superannuation still make sense?
Notwithstanding these changes, superannuation still makes a lot of sense. The changes don’t remove the tax efficiencies of making contributions; they merely reduce them and make it less easy to accumulate wealth in superannuation.
The benefits of investing in superannuation remain as follows:
• Investment income and capital gains generated from assets within superannuation are subject to a maximum of 15% tax while in accumulation phase and 0% tax while in pension phase;
• Superannuation pensions (and lump sum withdrawals) are tax free after age 60; and
• Concessional superannuation contributions are subject to tax savings based on your marginal tax rate less 15%, unless you earn less than $37,000 or more than $300,000 which from 1-Jul-12, will be limited to 15% tax saving (plus medicare).
What should you now do?
• Maximise concessional contributions for the current financial year. For those age 50 (plus) up to $50,000 can still be contributed and will be subject to a flat contributions tax of 15%
• If you are age 50 or above and are making regular concessional superannuation contributions (in particular salary sacrifice arrangements) it is important these arrangements be reviewed prior to 30-Jun-12
• Consider making regular non-concessional superannuation contributions in order to maximise your superannuation opportunity over the long term
Benefit of non-concessional contributions
This last point is significant. Non-concessional contributions are subject to annual limits of $150,000 per person. Up to $450,000 can be contributed in a lump sum making use of the following 2 years’ limits if you are under age 65. Limits cannot be carried forward and operate on a ‘use it or lose it’ basis.
Currently you cannot contribute to superannuation beyond age 64 unless you are working.
Superannuation requires more planning than ever and regular non-concessional contributions may be necessary in order to ensure you maximise your superannuation opportunity.
Please contact your strategist to discuss your position further.