Superannuation Tax Planning Opportunities

Before making any superannuation contributions please discuss this with our office. There are strict eligibility requirements. Most importantly, regardless of the type of contribution being made the Super Fund must receive the contributions before June 30. Transfers and deposits must clear before June 30.

Concesssional Superannuation Contributions

These are amounts you can claim a tax deduction on which your superfund pays contributions tax of 15%. Currently, if you are 49 years of age or over you can claim a tax deduction up to $35,000. If you are under the age of 49 you can cliam up to $30,000.  From the 1/7/2017 the maximum amount will be reduced to $25,000 regardless of age.

  • Tax Tip #1: For the 2017 financial year, if you are 49 years of age or over you can still contribute up to $35,000 and  up to $30,000 if you are under the age of 49. This amount is tax deductible. For those on the marginal tax rate of 47% a concessional contribution of $35,000 could save you $11,200 in tax and help boost your retirement savings. 

 Non- Concessional Super Contributions 

The maximum non-deductible contribution for most eligible taxpayers is $180,000 p.a. or $540,000 over a 3 year period for those under 65 years of age. From 1 July 2017 this will decrease to $100,000 p.a. or $300,000 over 3 years. Individuals with superannuation balances of more than $1.6 million will no longer be able to make non-deductible contributions after 1 July 2017 . They will however, still be entitled to make concessional contributions of up to $25,000 p.a.

  • Tax Tip #2 :  Because the new rules apply from the 1 July 2017, the current rules still apply for the 2017 financial year. This provides individuals with a great opportunity to maximise their limit of $180,000 or $540,000 under the bring forward rule for those under 65. But they must make this contribution before the 30th June 2017. This will also be the last opportunity for individuals, with super balances of more than $1.6 million to make non-deductible contributions before 30th June 2017. Superannuation Tax on High Income Earners

Double Contributions Tax for High-Income Earners

Taxpayers who receive ‘income’ of $300,000 or more in 2016/2017 will have their tax deductible superannuation contributions taxed at 30% rather than 15%. Please note that the definition of ‘income’ is not ‘taxable income’ but is a special definition similar to that used for the Medicare Levy Surcharge. Note that the government will decrease this income threshold from $300,000 to $250,000 per year from 1 July, 2017.

  • Tax Tip #3:  If you income is greater than $250,000 for 2016/17 you should aim to divert investment income to someone with a lower marginal tax rate and maximise tax deductions to minimise the additional tax on your superannuation contributions.

Changes to Transition to Retirement Pensions

Transition to Retirement Pensions were originally introduced to help people in moving towards retirement by reducing their work hours while using their superannuation to supplement their income. However they have been increasingly used for tax minimisation purposes, rather than their intended purpose. At present, a person can commence a (TTR) once they have reached their preservation age (being 56 in the 2017 year) increasing until they reach 60. Any income earned by assets in pension phase are currently tax free within a superannuation fund. Currently, individuals in receipt of a (TTR) can enjoy the following benefits: 

  • Tax –free earnings from assets supporting a (TRT) in their superfund.
  • Ability to reduce their tax liability by sacrificing their salary into super.
  • Drawing down a tax –effective income stream. If the person is under 60 – get the benefit of a 15% tax  offset.
  • If the person is age 60 and over they benefits are even greater, as (TRT) payments from super are completely tax-free!

From 1 July 2017 income form assets supporting a (TRT) will no longer be tax-free and will instead be taxed in the superfund.

  • Tax Tip #4: The removal of tax benefits associated with (TRT) will been significanly reduced the benefits  particularly for high income earners under the age of 60. This is because from 1 July 2017 superfunds will now pay 15% tax on their income and 10% on capital gains (for assets held more than twelve months).  Most Australians currently receiving (TRT) will now need to review such an arrangement to decide whether such a strategy is still financially viable from 1July 2017. We expect many individuals receiving (TRT) to cease them and revert to accumulation phase.
  • Tax Tip #5 :  If you are 60 years of age and retired, the tax benefits of an "account based pension" (ABP) are worth considering because the superfund will continue to be tax free for up to $1.6 million in "pension account assets" and the income paid to the taxpayer under an (ABP) is completely tax-free. This could be an opportunity for those nearing retirement to take advanatge of the tax free income on up to $1.6 million of pension assets.

New $1.6 Million Transfer Balance Cap

From 1 July 2017 currently, when a person reaches a condition of release they can choose to use some or all of their super balance to commence an income stream such as an "Account Based Pension" (ABP) or a "Transition to Retirement Income Stream" (TRIS). Currently, all income from assets that are used to support an income stream are tax-free in the super fund and there has essentially been no limit as to how much income of the fund can enjoy tax-free.

In order to better target tax concessions and reduce the extent that superannuation is used for tax minimisation the government will introduce a new $1.6 million transfer cap from the 1 July 2017 indexed in $100,000 increments.The purpose of this cap is to limit the total amount of superannuation balance that can be transferred from  concessionally  taxed “accumulation account” to a tax-free “pension account”.

This legislation is retrospective in nature and will have a detrimental effect individuals currently in receipt of an (ABP) or (TRT), who have more than $1.6 million in assets in their “pension account”.

From 1 July 2017 any amounts above $1.6 million in the “pension account” will need to be transferred back to the individuals “accumulation account” which is taxed at 15% on income and 10% on capital gains for assets held for more than 12 months (previously, these amounts were tax-free).

There is no limitations as to the number of transfers that can be made into the “pension account” providing the individual has cap space. The amount of the cap space is determined by a proportionate method, which measures the percentage of the cap previously utilised.

For example, if an individual has previously transferred $1.2 million (being 75% of the $1.6million cap) into their “pension account” then they will have access to 25% of the current cap (which would be $400,000). If the cap is subsequently indexed then the available cap will be calculated by applying the remaining percentage to the existing cap. So, if the cap has been indexed to $1.7 million, then the available cap would be $425,000 (being 25% of $1.7 million) instead.

  • Tax Tip #6 : Where the values of the underlying pension accounts subsequently grow, any increase is not taken into account when calculating how much of the $1.6 million cap has been used. As such income arising from any subsequent increase in the balance will remain tax free. WARNING: Unfortunately, the same does not apply with respect to a decline in assets or a reduction due to pension payments. Additional amounts cannot be transferred into the “pension account” to top-up the pension balance where the entire $1.6 million transfer balance cap has been fully utilised.  

Government Co-Contribution

If your income is less than $36,021 for 2016/17 you can make a non-concessional contribution of up to $1,000 and the Government will match this contribution with a co-contribution of 50% of the amount you have contributed. If you earn more than $36,021 and less than $51,021 you will receive a reduced amount.  To be eligible, individuals must earn at least 10% of their income from carrying on a business or as an employee, be a permanent resident of Australia and be under 71 years of age at the end of the financial year.

  • Tax Tip #7: If you or any member of your family have an income less than $51,021, consider making a personal contribution into your superfund and receive up to $500 (TAX FREE)  from the government into your superfund. This could be useful for children and spouses and who have part -time jobs or have lower levels of income for the 2017 financial year due to only working part of the year.

Other 2017 Year End Tax Planning Opportunities

Disclaimer: This guide contains general information only. Regrettably, no responsibility can be accepted for errors, omissions or possible misleading statements or for any action taken as a result of any material in this guide. It is not designed to be a substitute for professional advice, as such a brief guide cannot hope to cover all circumstances and conditions applying to the law as it relates to these items.