You don't have to have more than $1.6 million in superannuation to warrant taking action before July 1. You're going to kick yourself — or your partner — if your household does not take advantage of the current more generous tax breaks while you still can. For retirees, a strategic tweak could even help you get the full age pension. Or if one of you is over the $1.6 million cap, "sharing" a few hundred thousand dollars will cut your tax bill (only possible if one of you is older or retired, so this is not an option for younger couples). And if you run a transition to retirement (TTR) pension but you've already retired, you can't rest on your laurels — otherwise you could find yourself facing unnecessary tax on your investment earnings.
For those who are still working and wanting to get bigger amounts into super (perhaps from an asset sale), you've got just under 16 weeks to do so. This is absolutely vital if your super balance is already close to $1.6 million because after July 1 you will no longer be able to make non-concessonal (or after-tax) contributions if you have more than that amount. You can, however, continue "salary-sacrificing" (or making concessional or pre-tax contributions) even if your super balance is at or above $1.6 million.
Even if you're nowhere near that cap and you salary-sacrifice, you will need to make some changes. After July 1, the maximum anyone can salary-sacrifice is $25,000 a year — and remember, that includes the compulsory super contributions made on your behalf by your employer.
"The current window of opportunity hasn't received a lot of attention," says Andrew Yee, director of superannuation at HLB Mann Judd Sydney. "But it's important that people are aware of the full impact of the changes from July 1 this year and take action now to make the contributions while they still can."
"It's worth taking the time to understand the changes because even with the reforms, superannuation is still one of the most tax-effective ways to save for retirement," adds Scott Ellis, head of wealth at HSBC Australia.
Whether you are still "accumulating" or retired, use the following action plan as a guide to what you still may need to do.
Last chance for a big hit: this financial year you can contribute $180,000 to super as an after-tax contribution (from July 1 this will shrink to $100,000 a year). Or you can trigger the "bring forward" rule that allows you to make three years of contributions in one — ie, up to $540,000. After July 1 the bring forward rule will allow only $300,000 over three years. If you've contributed less than $540,000 over the 2015-16 and 2016-17 financial years, says Michael Hallinan, special counsel superannuation at SUPERCentral, the most you can contribute in the next financial year is the lesser of $100,000 and the unused portion of $540,000.
"We believe that it represents a super contribution opportunity of a magnitude not seen since the 2007 financial year when the government allowed everyone a 'one-off' non-concessional contribution limit of $1 million," says HLB Mann Judd's Yee. "For those with more than $1.6 million in super, this may be their last opportunity to make non-concessional contributions."
A word of warning if you're considering selling assets to make these "last chance" big contributions. Colin Lewis, senior manager strategic advice at Perpetual Private, remembers well what happened in 2006-07 when transition rules (before super contribution caps were introduced) allowed people to put in $1 million before the end of the financial year.
"Back in 2006-07 we saw people selling investments, including properties, to get money into super," he says. "They paid tax to free up the funds to contribute and then we had the global financial crisis! So if you're thinking of doing it this time round, you should be mindful that any investment decision should be made on its own merit and should not be tax-driven. If there's a tax benefit along the way, that's a bonus."
As for borrowing to put more into super: "Generally this is not advisable as the interest cost is not tax-deductible. If you do it, then it should only be on a very short-term basis. Say you wish to contribute before July 1 but don't have the funds. You'd only consider borrowing to contribute where you'll repay the debt quickly. For example where you've sold an investment property before July 1 but settlement will occur shortly thereafter."
Make the most of higher pre-tax caps: if you're 50 or over you can contribute $35,000 before July 1. If you're younger, it's $30,000.
One strategy is to split this year's higher cap to boost your partner's super balance. Let's look at Jenny, 51, who contributes $35,000 this financial year, taking her total super balance to $1 million. In July 2017, suggests HSBC's Ellis, she can submit an application form to her super fund to split the maximum amount (85 per cent of the $35,000) with her husband Felix. 55, who is the main caregiver to their three children. He has $300,000 in super.
His super fund will receive a rollover of $29,750 from Jenny's super fund in the new financial year, which does not count towards his concessional or non-concessional caps.
Splitting super with a spouse can also be a useful way to access super sooner. Let's say Mike, 52, contributes the full $35,000 this year, bringing his super balance to $900,000. Anna, 54, is the main carer of their two children and is not in paid work. She has $400,000 in super. In July 2017, Mike submits an application form to his super fund to split the maximum amount (85% of the $35,000) with Anna. The result? Anna's super fund will receive a rollover of $29,750 from Mike's super fund, which increase her balance to $429,750. Anna is older than Mike and will reach her preservation age sooner than Mike. So as a family, says Ellis, they are able to access a greater amount of capital sooner.
Prepare for more super tax if you earn more than $250,000: as Yee points out, if you're earning more than $300,000 a year you're already paying 30 (rather than 15) per cent tax on your super contributions. This income threshold will be lowered to $250,000 after July 1. Maximise options after July 1: if your spouse earns $37,000 or less, you can contribute on their behalf to get a tax offset of up to $540 (the current cap is less generous at $10,800). Further, if your total eligible income is less than $51,021 and you make a personal after-tax super contribution you could get a government co-contribution of up to $500.
A change in the next financial year is that you'll be able to claim a tax deduction on all personal contributions to super even if you're self-employed or in part-time work (this applies to everyone under 75).
So what does this mean? Ellis cites the example of Jasmin, 28, who works three days a week as an accountant and earns $60,000 a year. She also has a side business from which she earns $35,000 per annum. This year she can't claim a tax deduction for personal concessional contributions because her employment income of $60,000 a year is greater than 10 per cent of her total annual income of $95,000.
But after July 1, she will be able to make concessional contributions up to her concessional contribution cap ($25,000 a year) and receive a tax deduction as part of her tax return. Her concessional contribution will be taxed at 15 per cent — a saving of 24 per cent in tax payable (given her marginal tax rate is 39 per cent including the Medicare levy). To get the deduction, says Ellis, she must notify her super fund with her intention to claim the tax deduction by submitting a Notice of intent to Claim form (available from the ATO website) before she lodges her tax return.
Rollover excess pension balance: if your pension balance is higher than $1.6 million, you'll have to move the excess either to a super accumulation account or outside super to avoid penalty tax.
Equalise pension balances between spouses: remember that the $1.6 million cap applies per person. So if one of you has a much lower balance, it's worth "sharing the love". Let's use Frank and Judy as an example.
Frank, 67, works part-time and earns $65,000 a year. Judy, 62, is retired. Frank has $1.9 million in his account-based pension, Judy's holds $800,000. The couple also owns an investment property in Judy's name, worth $950,000. Rental income is $40,000 a year. At the moment all the earnings in their account-based pensions are tax-free.
After July 1, Frank will have to reduce his pension balance to $1.6 million. His best choice, says Ellis, is to make a lump sum withdrawal of $300,000 and then for Judy to contribute this as a non-concessional contribution into her super fund.
Although Frank still works, because he's over 65 he can withdraw lump sums (paid to him tax-free as he's over 60). Because Judy is under 65, she can use the "bring forward" rule and contribute up to $540,000 before June 30. (If she was 65 or older and did not meet the work test, she would not be able to contribute into super. If she met the work test, the maximum she could contribute before June 30 would be $180,000.)
Judy can start a new account-based pension using the combined $1.1 million. Or if her existing pension was started before January 1, 2015 and the pension income was excluded from the Commonwealth Seniors Health Card (CSHC) income test, says Ellis, she can start a second pension with the $300,000. All the earnings from their pensions will be tax-free.
Another option for Frank, adds Ellis, is to transfer $300,000 back into a superannuation account where the earnings will be taxed at 15 per cent. Assuming 3 per cent cash return, Frank will have to pay $1,350 in extra tax in the first 12 months. His other option is to make a lump-sum withdrawal of $300,000 and invest it outside super.
Strategic restructure to get the full age pension: Ellis cites the case of Mary, 67, and Bob, 61, who are retired homeowners. Mary receives a part age pension based on their assessable assets of $750,000 (home contents of $10,000, a holiday home valued at $140,000 and Mary's $600,000 superannuation). Bob's $200,000 super is not assessed as he is under the age pension age.
A smart option for Mary is to withdraw $300,000 tax-free (as she is over 60) from her super. Bob can then contribute the $300,000 to his super account as a non-concessional contribution. Because Bob is under 65, he can use the "bring-forward" rule to contribute up to $540,000 before June 30. As he is under age pension age, his new super balance of $500,000 will not be counted in determining Mary's pension entitlement. Mary's super balance is reduced to $300,000, which means that their assessable assets are cut to $450,000. Assuming they are not affected by the income test, says Ellis, Mary would be entitled to the full age pension.
Sort TTR paperwork: if you have a TTR pension but recently stopped working, you'll need to submit a Retirement Declaration Form to the trustee of your TTR fund before June 30. If you don't, says Ellis, earnings will be taxed at 15 per cent from July 1. But if you submit the form (available from most super fund websites), the TTR pension will be converted to a "normal" pension account with the earnings remaining tax-free. If you're continuing to work part-time and have met a condition of release (like turning 65), advisers also recommend converting the TTR into an account-based pension to continue the tax-exempt investment earnings.