The government has made a uniquely lame effort at explaining the changes that are looming for superannuation rules on July 1.
With less than four months to go, there is widespread misunderstanding of how the rules will work. After chairing a series of Q&A sessions on the issue over recent weeks and with help from a range of advisers — especially Andrew Heaven at WealthPartners — a clear picture is emerging.
Here are the six most common misconceptions held by investors:
1. Misunderstanding the $1.6m balance cap
It’s an individual cap, a per capita cap … a sum of $1.6 million is allowed for each person entering retirement as the amount with which they can fund a tax-free pension. Advisers say this is the single most common misunderstanding — for some reason the government has not articulated the rules are to be applied per head.
Most DIY funds have at least two members — most commonly a married couple — and the rules mean for the typical fund the balance cap is effectively $1.6m times two, a total of $3.2m.
Similarly, if the two members have $1.6m each in institutional funds, they will both be allowed to run tax-free income in parallel. What’s more, you are only tested once on the $1.6m — you are not assessed against this cap yearly.
2. Underestimating the SGC contribution
Also known as the “pre-tax” cap, this is the commonly used allowance where you can make contributions directly out of your pre-tax salary.
The process is known as “salary sacrifice”. In this area the rules have not actually changed but the numbers have.
The amount you are able to contribute pre-tax from July 1 will be $25,000 for anyone at any age. In making this contribution your SGC of 9.5 per cent is included (Superannuation Guarantee Contribution is the portion of your salary your employer puts into your super).
So if you make $100,000 a year, your SGC is $9500. Now, allowing that the $9500 has already been taken into consideration … your effective maximum amount of “voluntary” pre-tax contribution is $25,000 minus $9500, which is $15,500 — in other words the SGC must be subtracted to get an accurate number.
3. Assuming the tax-free fund can be topped up
You cannot top up the initial starting balance that funds your tax- free income, never ever.
When you retire the dollar amount you start with is final … it cannot be added to five years later should you come into more money or should the fund dwindle to very low levels.
The maximum you can place in this fund is the balance cap $1.6m. If you have more than $1.6m you can still leave it in the super system, in what is known as “accumulation” where the tax on earnings is 15 per cent.
4. Believing retirees have no tax- free alternatives outside super.
Oh yes, they do. The way it works, our personal tax system (commonly known as marginal tax) applies to all ages.
Under the ATO personal tax rules the first $18,201 is tax free, and this is before we add the range of offsets available to almost every retiree, which will comfortably bring the tax-free total above $20,000 in most cases. And remember that is for earnings. Using the assumption of 5 per cent average earnings on investments (which is how they devised the $1.6m balance cap originally), then each individual retiree could have an extra $400,000 in funds effectively funding a tax-free retirement income.
To extrapolate further, if you add that $400000 to the $1.6m balance cap, an Australian resident retiree can have $2m funding a tax-free retirement income under the adjusted tax system from July 1.
What’s more, these calculations are done only on the headline tax free rates. Andrew Heaven suggests that if you apply the SATO (Senior Age Pension Tax Offsets) the actual tax-free income per couple is $28, 974 per couple or $32,279 for singles.
5. Assuming you will be penalised should you lose a member of the fund
Industry statistics suggest there is an average of 2.2 members in each DIY fund — typically a married couple. Most couples make arrangements that if one dies the other get the money in the fund.
Now, from July 1 that means some people may find that an inheritance from their deceased spouse has pushed the amount in their fund over $1.6m.
Strictly under the rules this places the fund in breach of the $1.6m cap. But the government has allowed a 12-month grace period to allow surviving members of couples to rearrange their affairs before the cap laws apply to them.
This is, of course, unless the beneficiary has already used up the $1.6m balance cap.
6. Expecting the ‘work tests’ no longer apply
In its original announcements on the changed super rules in the May budget last year the government gave the distinct impression that the controversial and unpopular “work tests” would be scrapped.
If you are aged 65 to 74 and you want to keep contributing to super — you must have worked for at least 40 hours over 30 consecutive days in the financial year you make the contributions.
It is often assumed that since the issue was aired by the government it had become a reality. Unfortunately, they never scrapped these rules — they still apply.
The Australian, March 18, 2017