Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 248

How the super contribution changes may benefit you

The superannuation changes that started on 1 July last year were not just about capping the amount of capital that can be transferred to the retirement pension phase. They also included big changes to tax deductible and non-deductible contributions.

Given that we are in the last quarter of the financial year 2017/18 (FY18), let’s have a look at those changes that apply now and others that will start from next financial year. With only a couple of months until 30 June, it’s time to review the basic rules in case these opportunities apply to you.

Concessional contributions

For FY18, the concessional contribution cap is $25,000 for everyone who is eligible to make these contributions. There is no longer a higher cap for anyone 50 or over. Anyone who has a salary sacrifice arrangement in place and has previously contributed more than $25,000 of concessional contributions in an income year should now make adjustments to these arrangements to ensure they don’t exceed the lower $25,000 concessional contribution cap.

Tax deduction for personal contributions

The change allows a tax deduction claim for personal contributions, but there is a bit of a catch as personal super contributions claimed as an income tax deduction count towards the concessional contribution cap of $25,000 for FY18. The cap also includes contributions made by your employer such as employer contributions for super guarantee purposes or under salary sacrifice agreements.

Don’t forget to tell the fund if you are claiming a deduction for super contributions by completing a notice and keeping it with the fund records. If you do make deductible contributions, the amount you claim cannot create or add to a loss that you may have made in your personal tax return. Any personal contributions which are not claimed as a tax deduction (or the deduction is disallowed) count towards your non-concessional contribution cap.

Remember what it was like before 1 July 2017. If you were an employee you could only claim a personal tax deduction for superannuation contributions if you qualified under the ‘10% test’. This meant that nearly all employees missed out on claiming a tax deduction for personal super contributions, but things have changed since 1 July last year.

Non-concessional contribution cap linked to total super balance

The annual non-concessional contribution (NCC) cap for FY18 is $100,000 (reduced from $180,000 in FY 2016/17). However, if the total amount you have in super on 30 June in the previous financial year is not less than $1.6 million, you won’t be able to make a NCC for that financial year.

For example, if we look at FY18 and the balances of the following two individuals, we can see what a difference a small amount either side of each person’s total superannuation balance (TSB) can have on their respective NCC cap.

A person’s TSB also determines how many years of the standard NCC cap a person can ‘bring forward’ where they qualify under the bring forward rule. This means that there are now ‘trigger points’ for the NCC cap, as follows:

The TSB test for NCCs is also important where a person qualifies for the bring forward rule but does not fully use the maximum bring forward amount in the first year.

For example, Cynthia, aged 60, at 30 June 2017 has $1.48 million TSB and has not previously triggered the bring forward rule. Consequently, for FY18, her NCC cap is $200,000 (refer to the table above). If Cynthia makes the maximum NCC of $200,000 in FY18, her NCC cap in FY 2018/19 is zero. Further, her TSB is likely to exceed $1.6 million after the NCC and fund earnings are allocated. However, the test is based on her TSB on the previous 30 June, not what her TSB is after the contribution is made.

Let’s say, however, that Cynthia does not make her maximum allowable NCC in FY18 but makes an NCC of $160,000. Based on the above table, Cynthia may think that she can make a further NCC of $40,000 in FY 2018/19, being year two of the two-year bring forward period.

This is only true if Cynthia’s TSB at 30 June 2018 is less than $1.6 million. If, however, her TSB at 30 June 2018 is more than $1.6 million, which it could be once you allocate fund earnings, then even though she has not fully utilised her bring forward amount, her NCC cap is zero for FY 2018/19, and she is unable to make a NCC without it being treated as excessive.

The ‘work test’ lives

The work test still applies for those 65 and above when they make a contribution to super (no personal contributions after age 75). This requires a person to be ‘gainfully employed’ for at least 40 hours in 30 consecutive days in the financial year the personal contribution is made. This test should be satisfied before the contribution is made.

Downsizer contributions

For those aged at least 65 (no age 75 cut off for this one), from 1 July 2018, there is a new type of personal contribution which allows those who qualify to contribute up to $300,000 to superannuation from the sale of their family home that has been owned for at least 10 years on a once-only basis. This only applies where a contract for the sale of a qualifying home has been made on or after 1 July 2018.

The eligibility criteria and more details are on the ATO’s website.

Changes were not all bad

So, if you think the super changes shut the door on concessional and non-concessional contributions you may need to think again. For some, it may have opened the door a little to claim personal tax deduction for super contributions and, if you sell your family home, it may let you to make non-deductible contributions to super after you have reached 65.

 

Mark Ellem is Executive Manager, SMSF Technical Services at SuperConcepts, a sponsor of Cuffelinks and a leading provider of innovative SMSF services, training, and administration. This article is general information only and does not consider the circumstances of any individual.

RELATED ARTICLES

How SMSF contribution reserving can use the higher caps

What super changes should you know from 1 July?

All’s fair in love and super: why couples should equalise super

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Latest Updates

Superannuation

The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.

Property

RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.

Shares

4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.

Shares

Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.

Shares

Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.

Superannuation

Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.