Superannuation catch-up rules a great opportunity
THE new financial year that ends on June 30, 2019 is when the realities of the new super system will really kick in.
One of the best new allowances are enhancements to ''catch-up rules'' which allow you to combine several years' super contributions into a single hit.
Even though you will need to wait until next financial year to begin utilising the unused amounts under the concessional contribution cap, the smartest investors will start taking action now.
Announced in the 2016 federal budget, the catch-up contribution reforms were targeted at four groups of people to give them more flexibility in building their super accounts:
- Women, as they often have more interrupted work patterns than men due to raising families;
- Empty nesters: people raising children and paying mortgages may not be able to make additional super contributions until children leave home and the mortgage is paid off;
- Self-employed: those starting up businesses or with variable, lumpy annual incomes may put nothing in super one year, but then want to max out super contributions in other years;
- People not working though not classified as unemployed: people who take time out of the workforce to study, look after family or due to physical or mental illnesses.
Under the new rules, any unused amount under the concessional contribution cap can be utilised in a later financial year on a five-year rolling basis. The current pre-tax super cap is $25,000 per year and includes mandatory employer SG payments and salary sacrifice amounts. These contributions attract contributions tax at 15 per cent (plus an extra 15 per cent tax where your income is greater $250,000). Amounts carried forward that have not been used after five years expire.
In theory, a person can now have no pre-tax super contributions for five financial years and then make a $150,000 pre-tax super contribution in the sixth financial year. The government has confirmed the catch-up rules are available for people aged between 65 to 74 who meet the work test.
Although the catch-up rules are targeted at certain groups, all Australians who meet the eligibility criteria can utilise them. The main criteria is that your total super balance must be less than $500,000 at the start of the financial year. The term ''total superannuation balance'' has some technicalities we'll discuss later.
With this in mind, the attractiveness of making after-tax super contributions may have diminished for some, particularly if it pushes the super balance over $500,000, making you ineligible for the carry-forward provisions.
Take a couple in their 50s, each with a $300,000 super balance and still working, sell an investment property with $500,000 net proceeds. If they add $250,000 to each of their super accounts, they'll be prohibited from using the pre-tax catch-up rules. Not an issue if they have the capacity to salary sacrifice up to the caps each year, but it becomes an issue if they would have benefited from being able to accumulate unused pre-tax caps for future years and then, closer to retirement, make larger pre-tax super contributions.
Gaming the catch-up rules can lead to an overall tax benefit where a large income or capital gains event is expected to occur in a future financial year.
As this event may push you into a higher marginal tax bracket, by having unused pre-tax super caps available, you could salary-sacrifice all of your accumulated unused pre-tax cap and effectively reduce your taxable income in that year to a lower tax bracket.
In other words, if an event such as selling some shares pushed you into the 47 per cent tax bracket, salary-sacrificing an amount more than $25,000 (by having some catch-up cap available) may drop your taxable income below $180,000 and result in less tax to pay.
In regard to the $500,000 super balance cut-off, it is calculated based on your June 30 super balance of the prior financial year. So for those with close to $500,000 in super, it may work out better to hold off ploughing the maximum $25,000 per year into super, and rather, in the financial year that your employer super contributions and investment returns push you over $500,000 balance, maximise all the unused catch-up cap to maximise salary sacrifice in one last hurrah.
And if you're thinking about being tricky and starting a transition-to-retirement pension to get your super accumulation balance back below $500,000, think again. The $500,000 rule applies to your total super balance, which is calculated on not only the money in your super accumulation account, but also your ATO-calculated transfer balance account. This includes money moved into the retirement phase, such as transition-to-retirement pensions.
James Gerrard is the principal and director of Sydney financial planning firm www.FinancialAdvisor.com.au