With the superannuation announcement from Budget night now having been passed onto law by Parliament, many people may be thinking what’s next. But thinking like that could mean you miss the real opportunity. Rather than being faced with uncertainty, right now you actually face into a period of certainty. You have just under seven months to prepare and take action with knowledge about how superannuation will operate into the future.
Whilst there have been a number of changes made as a result of this legislation, it’s important to break the changes down to those that require action now, and those that don’t require action until 1 July 2017.
As an initial starting point, focussing on those matters that have an impact this financial year. Take the new rules around non-concessional (or after tax) contributions as an example – they don’t apply until 1 July 2017. It’s important to be aware how the non-concessional contribution rules will apply into the future, but there isn’t a lot you can do about them at this point. Instead, your focus should be on what you can do now that could have the biggest impact to your super balance at 30 June 2017.
The existing contribution rules that have applied for almost the last ten years (ignoring the changes to the limits) still apply this year. Depending on your contribution history, this means you could potentially contribute up to $540,000 this financial year. There are rules that need to be met to contribute to this level, but what’s important is that if you do qualify and are able to make this sort of contribution, you need to do it before 1 July.
Of course, not everyone has a lazy $540,000 lying around to contribute to super, but if you have a self-managed super fund (SMSF), you also need to remember what some of your other options are. In addition to cash contributions, you can make in-specie asset contributions. This simply means that you can transfer certain assets from your own name into that of your SMSF. Shares and managed funds are among the most commonly transferred assets, but if you owned a commercial property in your own name, such as one you use in your own business, then you could consider transferring it (or a share of it) to your SMSF.
It’s important to remember that the super rules work on an individual basis, so a couple could potentially transfer a $1 million property to their SMSF if they meet all the right conditions.
The other significant change to super that has many people concerned is the $1.6M limitation that will apply from 1 July 2017 for super pensions. Again, remember that this limit is per person, so if you are in a SMSF with more than $1.6M total balance, you don’t need to be concerned – it’s a question of how much each member has.
And this then leads to another common misconception – there is no limit to how much you can have in super. There are contributions limitations, and there is now a limit on how much can be transferred to a superannuation retirement pension, but there is no limit on how much you can have in super. If you are lucky enough to have or potentially get to a position of having more than $1.6M in super yourself, all these new rules say is that the amount over $1.6M needs to stay in accumulation phase – it can’t be transferred to a pension account. Being in an accumulation account, it will be subject to the standard 15% tax rate in super, but that’s really the only impact.
Of course, it would be good if things were as “simple” as that, but there are a number of other considerations. If you have a transition to retirement pension, or you have more than $1.6M in a pension, there is an ability to reset the cost bases of underlying assets in your SMSF to their market value, and essentially reduce (or eliminate) current unrealised gains. Whilst there a certain steps to take to do this, including deciding when, the decision is evidence when the 2016/17 tax return is lodged for your SMSF, so it’s important to ensure the tax agent to your fund is aware of this so it is done right.
It’s understandable that many people feel that super rules may be uncertain as they have changed over time. But I think it’s important to consider the following. There is no guarantee that the super rules won’t change again at some point in the future, but it feels like we may have a couple of years ahead of us without substantive changes. If you still think that the area of super is uncertain, then perhaps it’s important to go back to the fundamentals. The purpose of super is about providing a mechanism for people to save towards their own retirement. Super always has been, and I suspect always will be, a concessionally taxed environment to encourage this. There is nothing on the horizon that can take away from the certainty that when planned for within the existing rules (of the day), a well planned approach to super can help Australians towards a more comfortable retirement. And the most certain way to guarantee your outcome is to work with your experienced financial adviser and licensed accountant to work out how the rules apply to you.
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