Archive | Superannuation

Salary sacrifice into super or tax deductible contributions?

Salary sacrifice into super or tax deductible contributions

It’s a known fact, Australians, on average, are living longer. Retirees commonly spend over twenty years in retirement and the need to accumulate savings while they are still working to fund this retirement period has never been greater.

Using a salary sacrificing strategy where your employer contributes some of your salary into superannuation before tax is deducted has proven to be an effective way for many to accumulate wealth for retirement. For the self-employed, this strategy has been achieved by claiming a tax deduction on super contributions.

What’s changed?

There have been two recent changes to super rules which may impact those salary sacrificing or making tax deductible contributions – one positive and one negative.

Contribution limits reduce

From 1 July 2017, instead of a $30,000 cap on contributions for those under 50 or the higher $35,000 cap for those 50 plus, the concessional contributions cap will be $25,000 for everyone.

Concessional superannuation contributions are contributions made by your employer on your behalf or personal contributions where you claim a tax deduction. The following table provides examples of the types of contributions that will count towards your $25,000 cap.

Salary-sacrifice-#1

If you exceed your concessional contributions cap of $25,000, the excess amount will be taxed at your marginal tax rate, instead of the concessional 15% that applies to most concessional contributions. Plus an additional interest charge will have to be paid to the Australian Taxation Office (ATO). So now is the perfect time to review your current contribution amounts to ensure that you don’t exceed the new limit.

Tax deduction available to more people

The second change that commenced from 1 July 2017 is that anyone eligible to make contributions to super now has the opportunity to claim a tax deduction for that contribution, irrespective of your employment situation. Previously, only the self-employed or those earning little or no income as an employee could make tax deductible contributions.

This is an important change for many workers as they will now have greater flexibility, especially if their employer places restrictions on their ability to salary sacrifice.

Consider these scenarios.

Salary-sacrifice-#2

Case study

Oscar is 45 years of age and earns $110,000 a year designing software. After meeting his ongoing commitments, he has the capacity to invest an additional $14,000 per year for his retirement in 20 years time.

If Oscar was to make tax deductible contributions to superannuation of $14,000 in addition to the SG contributions his employer already makes, he could achieve a tax saving of $3,360 and that’s just in one year as shown in the following table.

Salary-sacrifice-#3

Over a 20 year period, the financial benefit of Oscar making tax deductible contributions to super compared to investing outside the super environment is significant. At age 65, it is estimated that Oscar will have an extra $115,000 to invest for his retirement.

If you would like to know more about these changes and how they will impact you, please talk to us.

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Life events can impact your super

Life events can impact your super

Superannuation is often a part of our financial planning that is left in the background, but certain life events may mean you need to make some fundamental decisions about it. Here are some key tips on what you may need to consider.

Getting married

Tying the knot can change a lot of things in our finances. Budgeting, saving, spending and buying insurance are all issues that we will tend to reappraise as a couple, but super is often left out of calculations. Issues such as the amount of insurance cover you both have in super and beneficiary nominations are critical to avoid surprises later on.

While it is not possible to combine your super funds, it is important that you discuss and coordinate your investment strategies and consider your retirement goals as a couple. This ensures you are on the same page in terms of your expectations of retirement lifestyle and can fund it appropriately.

Having children

If one partner eventually decides to leave work to raise children then this may cause a significant interruption to your super accumulation that should be dealt with. Extra expenses and less income may mean you need to cut back on contributions for a while, but you should plan how this shortfall will be made up by boosting contributions in future years when circumstances allow.

You should also take advantage of any government assistance available on your super, such as the spouse contribution scheme. If your spouse is earning very little or nothing at all, then you may qualify for a rebate of up to $540 p.a. on any contributions you make to their super.

Talk to your adviser for further information.

Redundancy

Redundancy is something that many people will unfortunately deal with in an increasingly economically rational world. How you plan your spending and make decisions, regarding employment will likely be top of mind when this occurs, but super should not be left out of the decision making process.

Payments made to you on redundancy can be quite complex to deal with and can have serious taxation consequences. There may be opportunities in relation to using part of your redundancy payment to make super contributions and there may also be issues to deal with in relation to any insurance cover you had in your employer’s super fund.

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The window of opportunity looms

The window of opportunity looms

A range of superannuation changes are proposed to commence from 1 July 2017. While at the time of writing they are yet to be passed into law and may still change, you may want to discuss concerns on these issues with your adviser.

Non-concessional (after tax) contributions

Under current rules, an annual cap of $180,000 (or up to $540,000 for those under 65) applies to non-concessional contributions, such as personal super contributions made from after-tax income and your own savings.

From 1 July 2017, this may reduce to $100,000 per year, with the ability to bring forward future year contributions still available for those under 65. Non- concessional contributions will not be allowed if your total superannuation balance exceeds $1.6million.

Any excess non-concessional contributions over these limits will need to be refunded or harsh penalty tax rates of up to 47% plus Medicare Levy may apply.

Concessional (before-tax) contributions

For concessional contributions, (such as Super Guarantee contributions, tax deductible contributions and pre-tax salary sacrifice contributions), the contributions cap will reduce to $25,000 per year for everyone from 1 July 2017. There will no longer be a higher cap for those 50 and over. Commencing from 1 July 2018, if your superannuation balance is less than $500,000, you will have the ability to carry forward any unused concessional contribution cap over a rolling five year period.

Currently, if you earn over $300,000 per year (total income plus non-excessive concessional contributions), you are required to pay a tax of 30% on concessional contributions. This income threshold will reduce to $250,000 from 1 July 2017 resulting in more high income earners being required to pay the 30% rate.

Restrictions lifted on who can claim super tax deduction

From 1 July 2017, there will be no employment restriction placed on who can claim a tax deduction for personal superannuation contributions, (so this opportunity is no longer restricted to the self- employed).

$1.6 million limit on transferring superannuation to a retirement income account

From 1 July 2017, a cap of $1.6 million will be placed on the amount of superannuation that you can transfer to a superannuation income stream (e.g. account based pension) where there is no tax on the earnings. The balance of your superannuation will be required to remain in an accumulation account where earnings are taxed at a maximum rate of 15% or must be withdrawn.

If you already own a superannuation pension with a balance greater than $1.6 million, you will be required to transfer the excess amount back to superannuation or withdraw the funds by 1 July 2017.

Transition to retirement pension changes

A Transition to Retirement (TTR) pension can be commenced with preserved superannuation funds once you reach preservation age even if you are still working. From 1 July 2017, the current tax exemption on earnings generated within a TTR pension will be removed. Instead, the tax rate on earnings will be 15%.

The tax treatment of income payments received from a TTR pension will not change (e.g. tax free income for those 60 and over).

Income threshold increases for spouse contributions

The tax offset for contributions to superannuation on behalf of your spouse earning less than $13,800 p.a. is proposed to increase to $40,000. The maximum tax offset of $540 per year will be available where the spouse’s income is less than $37,000 p.a.

Super tax offset available for low income earners

A Low Income Superannuation Tax Offset will apply from 1 July 2017 which will replace the existing Low Income Superannuation Contribution. This tax offset (up to a maximum of $500), will be used to reduce the contributions tax on concessional contributions and is available if your adjusted taxable income is less than $37,000.

Additional death benefit payment abolished

From 1 July 2017, the additional payment that is sometimes available when a death benefit lump sum is received (known as the anti-detriment payment), will be abolished.

Members of Defined Benefit Schemes

The Government has announced that they will also make changes for members of defined benefit schemes and constitutionally protected funds to ensure that the new super reforms broadly apply to these groups as well.

Work test to still apply for those 65 to 74

There was a proposal to abolish the work test that currently applies to those between 65 and 74, which required them to be gainfully employed for at least 40 hours in a 30 day period to make personal contributions to superannuation. This proposal has now been withdrawn.

Your adviser is ready to answer any queries you may have on any of these issues.

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Budget super changes

Budget super changes

The 2016/17 Federal Budget contained some major superannuation changes. Some highlights are below, but bear in mind these proposals still need to be passed into legislation.

Contribution cap changes

From 7.30pm (AEST) on 3 May 2016, a lifetime non-concessional cap of $500,000 will replace the current annual caps. This cap includes all non-concessional contributions made since 1 July 2007 and any excess contributions will need to be refunded or a penalty tax of up to 49% may apply.

If you have already contributed more than $500,000 of non-concessional contributions between 1 July 2007 and budget night, no excess will apply however any future contributions from budget night may exceed the cap.

Concessional contributions caps have also been reduced to $25,000 per year for all ages from 1 July 2017. If your superannuation balance is less than $500,000, you can carry forward any unused cap amounts over a rolling five year period. A 30% tax on concessional contributions will now apply to those on $250,000 p.a. income.

$1.6million cap on super pensions

From 1 July 2017, a cap of $1.6 million will be placed on the amount of superannuation that you can transfer to a superannuation pension. Any balance in excess of this must remain in an accumulation account where earnings are taxed at a maximum of 15%. Those who already exceed this cap will be required to transfer the excess amount back to superannuation by 1 July 2017.

Other highlights include:

  • Abolition of the work test for those up to age 75 who want to make super contributions.
  • The tax exemption on TTR pension earnings will be removed from 1 July 2017 – earnings to be taxed at 15%.
  • From 1 July 2017, there will be no employment restriction placed on who can claim a tax deduction for personal superannuation contributions.
  • The $540 p.a. tax offset on spouse contributions has been opened up with proposed increases to the threshold to $37,000 and the age limit to 75 starting 1 July 2017.
  • From 1 July 2017 a low income concessional contribution tax offset of up to $500 is available if your adjusted taxable income is less than $37,000.

Your adviser can provide more details on how these changes may affect you.

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Women and superannuation: Tips for success

Women and superannuation - Tips for success

When it comes to super savings, women in Australia are likely to have significantly less than men. The average Australian woman retires with around half the balance of the average man. This is because women (still!) earn less than men for equivalent jobs and they’re more likely to have a career break to raise children.

Combine this with a longer life expectancy and women are less likely to have enough for a comfortable retirement. Very few women think their super will be enough for retirement, and unfortunately many women don’t know how much they’ll need for a comfortable retirement or are leaving this issue to their partners.

Superannuation is one of the most important and efficient investments you can make. It is concessionally taxed, has flexibility with insurance and can provide added incentives when you contribute money.

Acknowledging that wages for women are still generally less than those of men and that women are more likely to take time away from paid employment to raise their families, growing superannuation can seem almost impossible.

However, none of the above will matter as retirement draws nearer. So, regardless of age or circumstances, women need to understand superannuation and start contributing as soon as possible.

Here are some tips that may help the process:

1. Have one superannuation fund

Many women have worked for a number of different employers and can end up with relatively small amounts in a number of superannuation funds. Multiple super accounts usually equals multiple fees. Consolidating your superannuation into one account will make it easier for you to track your retirement savings.

2. Find any lost superannuation

If you have changed jobs a few times, or had short term work contracts, you may have super accounts that you have forgotten or didn’t know about. You may have moved house and lost track of your superannuation. To search for lost super visit www.unclaimedsuper.com.au or call the tax office on 13 10 20.

3. Use salary sacrifice into superannuation

If you are currently working, you could talk to your employer about sacrificing some of your pre-tax income into super. Salary sacrifice can have tax advantages as you may reduce the amount of income tax you pay. This is not for everyone so you should seek financial advice as to whether this would be beneficial to you.

4. Make additional contributions

If you have some spare cash, you may want to make after tax contributions to superannuation. Many of the superannuation funds have the option to set up a regular direct debit, BPay or electronic funds transfer. Making additional contributions may give you access to the government co-contribution.

5. Government co-contribution

You may be eligible for a free boost to your superannuation. If you earn less than a specified amount and make a voluntary after-tax contribution to superannuation, the government could contribute up to $500 each financial year to your super account. This is a great incentive and could give your superannuation a real boost. Of course, these figures may change with Government policy.  To ensure you understand the conditions, seek financial advice.

6. Super splitting

You may be able to share part of the super contributions you or your partner make each financial year. Most funds now have super splitting available.

7. Tax deductions

Are you self-employed? That is, do you earn less than 10% of your income from an employer? If so, you may be eligible to claim a tax deduction for any voluntary super contributions you make. Be careful as contribution limits do apply.

8. Check your insurance

You may be surprised to find that you have Death and Total and Permanent Disability insurance through your superannuation fund. Some superannuation policies also offer Income Protection insurance. This is often a cost-effective way to structure your insurances. Insurance is a vital part of your financial security and you should make sure you have enough cover to protect you and your family. Again, this is not relevant for everyone so you should seek financial advice as to whether this would be beneficial to you.

9. Choose your super fund

Many of us do not make an active investment selection for our superannuation entitlements. Most people do have choice and you should make sure you are comfortable with how your retirement savings are invested. Do your research or seek advice.

10. Seek advice

There is a common theme. Research your fund and make informed choices when it comes to superannuation as this can make a real difference come retirement time. The internet has many great websites if you would like to do your own research.

Why not schedule a meeting with your financial adviser now?

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Make sure your super passes into the right hands

Make sure your super passes into the right hands

Your super can potentially be your biggest asset, so it is vital to make sure it benefits the right people if you were to pass on prematurely. While the objective is simple, achieving that objective may be more involved than you think.

Your super can amount to hundreds of thousands of dollars and in most cases is only rivalled by the family home as your largest single asset. While it is primarily intended to provide income in your retirement, it takes on a very different role if you were to die prematurely. Your beneficiaries, such as your spouse and children, may rely on accrued benefits and any insurance payments in your super to fund their ongoing livelihood and financial security.

This means that arrangements you make for your super to be passed on efficiently and accurately are essential, but such arrangements can come unstuck if they are not planned carefully.

Is a ‘nomination of beneficiary’ on your super enough?

You may be aware that you are able to make a directive to your super fund known as a ‘nomination of beneficiary’, which allows you to specify who should receive your super balance if you pass on. This allows the super balance to be allocated directly to the nominated beneficiaries without having to be processed through your estate.

While on the surface this may seem like a reasonable and efficient way to deal with this issue, nominating a beneficiary may not turn out the way you want, if your beneficiary’s circumstances change in the future.

For example, once the money has been paid to a child, your super fund has no further control over it and it simply forms part of that child’s assets. If that child is married at the time of receiving the super monies and then down the track has a divorce, the super you have left to them may be split along with other assets as part of the divorce settlement. Would you be happy for an estranged son or daughter in law to benefit from your super?

Concerns over mismanagement

Another potential outcome of passing on your super via a nomination of beneficiary is the risk of the funds being mismanaged or spent frivolously or contrary to what you intended. For example, one of your children may come under the influence of friends or a spouse who has undesirable motives. The money may be wasted on unnecessary spending or poorly invested, resulting in your intended beneficiary not being looked after as you would have hoped.

A trust arrangement may be the answer

Rather than relying on a nomination of beneficiary approach to bequeathing your super, a more practical solution may be to set up a trust into which your super is paid upon death. You can set rules and conditions within the trust that govern how funds are distributed and what they can be used for.

A trust can effectively limit any risks of funds being misused and protect them from acrimonious divorce settlements. It can even shield the inheritance you pass on from any bankruptcy proceedings if one of your beneficiaries has a business failure after your death.

A trust simply allows you to maximise control over your estate when you are not there to do it yourself.

Professional advice is essential

Setting up a trust can, of course, be quite a complex process and requires skilled attention to ensure it is personalised to your requirements and legally robust enough to fulfil its intentions. This makes it essential to engage professional legal assistance. Apart from the initial set up, there will also be ongoing taxation matters to deal with to keep the trust compliant. While all of this may incur cost, it can be a small price to pay for the peace of mind that it can provide.

If you would like to investigate further, we are happy to discuss how this may work for your situation and to refer you to the proper legal assistance to get things organised, so feel free to contact us anytime.

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Adapt your super to respond to changes

Adapt your super strategy to respond to changes

The evolution of the superannuation and social security systems continues to take twists and turns that can throw up challenges for your retirement planning, but can also present opportunities to boost your retirement savings position.

Some recent changes, in particular, are worth noting, while some existing opportunities may also be well worth revisiting, so that you can take full advantage of the tax savings available. Topping up your super may well be a worthwhile option for you.

Changes to the Superannuation Guarantee regime

Last year, the Superannuation Guarantee rate increased to 9.5%, which is a welcome addition toward the retirement nest egg of many employees. The government, however, has decided to slow the further progress of SG contributions and the next projected increase in the rate has been postponed until 2021.

What does this mean for your situation if you are an employee?

SG contributions form an important basis for retirement savings, but it is unlikely that they will be enough on their own to fund the kind of retirement lifestyle that you desire. The delay in SG increases makes it even more vital to re-think how much you are contributing voluntarily so that you are not caught short at retirement.

Change to age pension qualification age

Future age pension eligibility has also been tightened up and may require a revision of your planning – especially if you have a desire to retire early.

The previous government’s intention was for age pension eligibility to be lifted to age 67 by 2023, but recent announcements indicate that the eligibility age will now be lifted to 70 by the year 2035.

Those born prior to July 1952 will dodge this bullet, but once this proposal becomes legislation, 70 will become the new age pension age for anyone born after 1965.

Can you benefit from a lift in contribution caps?

Those who are seeking to top up their super may benefit from an upward change recently made to the concessional limits for before-tax contributions for the 2014/15 financial year. You can now make a concessional contribution of:

  • up to $30,000 a year if you are under 50, or
  • $35,000 if you turn 50 during this tax year or if you are older.

The change applies to a range of contribution types, including super guarantee contributions, contributions made via salary sacrifice and other contributions on which you are eligible to claim a tax deduction or reduce your taxable income.

Don’t forget existing incentives?

Of course there are a range of other incentives that can boost your retirement nest egg with help from the government. These longstanding inducements are there for the taking, so it is important to check what you may be eligible for. For those earning less than $49,488 a year, the government will chip in an extra tax free super contribution of up to $500 as an incentive for you to make your own after-tax contribution to your super.

Another incentive is available to those who have a non-working or low-income spouse. By simply making a contribution on their behalf, you may qualify for an 18% tax offset on contributions of up to $3,000. That’s a potential tax benefit of up to $540. Even if they earn up to $13,800 they may still qualify for some level of support from this tax offset.

Of course there are the usual tax concessions open to those who make voluntary contributions. For the self-employed, they can take advantage of deductibility on personal contributions, while employees can gain a tax benefit from making salary sacrifice contributions by arrangement with their employers.

Talk to your adviser if you have concern over whether your retirement savings are sufficient to fund your retirement lifestyle, or if you want to top up your super to maximise the benefit of the incentives that may be available to you.

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Unlocking your super – what are the rules?

Unlocking your super - what are the rules?

Superannuation is intended to encourage and preserve saving for retirement, so it is not surprising that there are strict conditions placed on how you can access the money you have accumulated.

Generally, accessing superannuation requires you to satisfy what is known as a ‘condition of release’, as well as any rules imposed by your particular fund. A condition of release can be granted on a number of grounds, so let’s take a look at the more commonly used ones.

Genuine retirement

Retirement is obviously the major reason that a condition of release would be satisfied, but what technically constitutes retirement?

Firstly, you must have reached your ‘preservation age’, which will be between age 55 and 60, depending on your date of birth. You will also need to sign a declaration to confirm that you have genuinely retired with no intention of returning to gainful employment, although you may work up to 10 hours a week. If circumstances change post-retirement and you need to go back to earning an income, you are permitted to return to full or part time work.

Reaching age 65

Regardless of whether you actually retire from work or not, you can gain access to your superannuation without restriction once you reach age 65.

Partial access if you are over 55 and still working

Partial access to your superannuation is possible if you have reached age 55, but still want to continue working. This can be done by drawing a non-commutable pension income, which can be up to 10% of your account balance per year. This is part of a ‘transition to retirement’ strategy and can be used to help you gain a more tax-effective income before retirement, while boosting your superannuation accumulation with extra contributions.

Severe financial hardship

Government regulations also provide for access to superannuation benefits if you suffer ‘severe financial hardship’. These rules are strictly defined and may only give partial access.

An example would be if you are unemployed and have been receiving social security benefits for at least 26 weeks and are unable to meet immediate family expenses.

You can access up to $10,000 for any 12 month period if you are below preservation age. Once you pass preservation age, you may be able to access your full superannuation benefit if you have been receiving government income support for at least 39 weeks, after reaching preservation age.

Compassionate grounds

You may apply to gain access to some or all of your superannuation if there are extraordinary circumstances impacting on you or an immediate family member, such as a life-threatening illness, imminent mortgage foreclosure as a result of overdue loan repayments, medical or palliative care expenses or even a dependant’s funeral.

Terminal medical condition

If you are unfortunate enough to be diagnosed with a terminal medical condition that can be verified to the satisfaction of your fund, you will be able to access your superannuation benefits early without any tax payable. A terminal medical condition is generally defined as an illness or injury that is likely to result in the death within 12 months after the date of the certification.

Can you access super if you leave Australia permanently?

Accessing your superannuation is generally not allowed simply on the basis of you making a permanent move overseas. An exception is if you are a non-resident of Australia and have accumulated superannuation benefits while working in Australia.

Permanent disability or death

You can access your superannuation benefits if you suffer a health condition that leaves you permanently incapacitated and unlikely to ever be able to work in a job for which you’re qualified by education, training or experience. Assessment for a permanent disability claim can be quite rigorous to ensure it is genuinely a permanent incapacity.

If you die, your spouse or other dependants can access your superannuation benefits along with any life insurance amount that may have been implemented under the superannuation fund.

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