June 30 is behind us and the biggest super changes in a decade have come and gone but while the reforms have created new opportunities, there are also a number of changes that advisers need to navigate carefully with their clients.
Broadly speaking, these can be broken into the three categories of contributions, pension phase, and super and estate planning.
To begin, this three-part series looks at the first port of call for most advisers – contributions – and the key conversations advisers need to have with clients.
The annual concessional contribution (CC) cap has been reduced to $25,000 from $30,000 (for people under 49 at June 30 2016) or $35,000 (49 and older on June 30 2016).
Clients who have been making salary sacrifice contributions should review their contribution strategies and the arrangements they have made with their employer to ensure they don’t exceed the reduced CC cap in 2017-18.
When doing this, all CCs to be made in 2017-18 need to be taken into account. This includes salary sacrifice, the super guarantee (SG) and now, potentially, personal deductible super contributions.
It is also important to consider any bonuses or other lump sum entitlements the client may become entitled to.
Personal deductible contributions
The removal of the 10 per cent test now enables clients to make personal deductible super contributions (PDCs) regardless of their employment status.
This change opens the prospect of new opportunities. It has enabled certain people to make PDCs (and potentially target the CC cap) where it was previously not possible. Some examples are where:
- An employer does not offer salary sacrifice.
- People switch from being self-employed to employed during the course of the year. Under the old rules, it is likely they would have failed the 10 per cent test due to their employment income.
- Australian residents working overseas for a foreign employer and their employer can’t or won’t contribute to an Australian super fund.
- Clients receive bonuses or redundancy payments and wish to make CCs but there is no salary sacrifice arrangement in place to enable them to do so.
Moreover, clients who are already making salary sacrifice contributions now have some additional options. They can:
- Continue with their salary sacrifice
- Switch to making PDCs
- Opt for a combination of both.
The best approach will depend on a range of factors. Key issues to consider include:
- Whether salary sacrificing reduces other benefits such as leave loading, holiday pay and SG contributions. Where it does, it may be preferable to maximise SG and other benefits by making PDCs rather than salary sacrificing to super.
- Whether the client is able to contribute under a current and valid salary sacrifice arrangement, as entitlements already declared and earned cannot be salary sacrificed.
- When making PDCs, the entire contribution can be made and the deduction amount determined at the end of the financial year when the client’s cash flow and tax position is clearer.
A spouse contribution tax offset is now available where the receiving spouse earns up to $40,000 a year (previously $13,800 pa). It may therefore be worthwhile to re-consider spouse super contributions for couples where one of them is a low income earner.
Future catch-up contributions
The catch-up contribution regime enables a person to start to accrue unused CCs from July 1, 2018. The first year a client can make catch-up CCs will be during the 2019-20 financial year.
However, eligibility to make a catch-up CC will be based, in part, on the individual’s total super balance (TSB) on the prior June 30. It cannot exceed $500,000.
This may impact recommended contribution patterns now, where a client intends to make use of the catch-up regime in the future. This includes where the client intends to realise a large capital gain in a future year and make a large personal deductible contribution.
Where a person would otherwise look to make non-concessional contributions (NCCs) into super over the coming financial years, consideration should be given to the impact these contributions will have on the TSB.
It may be worthwhile considering any benefit of investing these amounts outside super now, to ensure the TSB is not pushed above $500,000. The person may then remain eligible to make a large tax deductible catch-up CC in the future and could then consider making an NCC with the available capital afterwards if eligible. (Eligibility conditions include meeting a work test if 65 or over at the time the contribution is made, contributing within the caps, and having a total super balance of no more than the general transfer balance cap on the prior June 30.) The net benefit of this strategy will depend on a number of variables, including:
- The income tax cost of investing outside super.
- Any CGT payable on making an in-specie contribution of the asset or selling down the asset to make an NCC in the future.
- The resulting benefit being the relative value of the future tax deduction.
Once you’ve discussed contributions with relevant clients, it’s time to turn to pension phase changes with relevant clients. The post-super reforms pension phase changes will be published in Part 2.
Richard Edwards is a technical writer at MLC.