Complex rules with Super start on 1 July – take these actions before 30 June to avoid getting caught.
The end of the financial year is rapidly approaching and planning is much harder this year, with the complexity of also taking into consideration the new changes to tax and superannuation starting on 1 July.
Delay looking at this now and it could cost you thousands after 1 July.
Now, I must be honest and blunt. These changes are the most complex I have seen in 15 years and there is no doubt in my mind, there is going to be thousands of Australians who get caught out by these changes. Not only those who haven’t considered what to do before the end of financial year but also those who make the wrong decisions by not considering everything necessary to make the best decision.
At the end of the day, making the wrong decision can cost you so if you haven’t looked at these changes, be quick before it’s too late.
Now these rules can’t be explained fully in this article due to their complexity but here are some points to give you an idea of what you need to be talking to your advisers about and the traps to avoid. Don’t just talk about the benefits, but identify any disadvantage and how you will be impacted long term.
Paying more tax from 1 July
If you have a transition to retire pension, the earnings on the investments supporting these pensions will be taxed come 1 July. Currently, they are tax free. Consider whether you will continue with this type of pension or roll them back into an accumulation account. There are many benefits of keeping them going so don’t take the decision lightly. It’s not just about the tax – consider your other investments, your personal marginal tax rate, estate planning and cash flow just to name a few as these will influence your decision before 30 June. Getting this wrong may mean much more tax down the track.
Currently individuals under 65 can make a non-concessional (after-tax) contribution of $180,000 per year or up to $540,000 under the bring-forward rule which allows you to bring forward two years’ contributions. That means couples can put up to $1.08 million into super while the opportunity lasts.
If you are over 65 and met the relevant work test, you can also make a non-concessional (after-tax) contribution of $180,000 per year but you can’t take advantage of the bring-forward rule. From July 1, the cap on non-concessional contributions will reduce from $180,000 a year to $100,000 or $300,000 under the bring forward rule but this depends on your entire superannuation balance across both pension and accumulation accounts and takes into consideration multiple super fund balances. If your entire superannuation balance exceeds $1.4 million these will also be affected on a transitional basis. Consider these limitations on future planning and talk to your advisers about investments outside of super, your ability to move funds into super before 30 June, your estate planning and smart strategies to maximise your ability to reduce tax before 30 June.
A new limit on tax free pensions
Super has two phases, an accumulation phase where you grow your retirement savings in a concessional tax environment – generally taxed at 15% on earnings, and pension phase where no tax is paid on earnings or withdrawals. Under existing rules, there are no limits on the amount of money you can hold in super tax free. But from July 1, a maximum of $1.6 million will be allowed to be held by a retiree in a tax-free pension account.
If you have a transition to retire pension, this doesn’t affect you despite what you may have read in the news. Again, these rules are complex so ensure you are seeking advice based on your circumstances.
Amounts above this $1.6 million cap do not have to be taken out of the superannuation environment so don’t fall into this trap. Talk to your adviser about your options and consider smart strategies that incorporate minimising tax, using your spouse’s superannuation caps and estate planning opportunities before 30 June.
Capital Gains Tax Relief
As part of the new measures, transitional Capital Gains Tax rules have been introduced for some individuals who are affected or are needing to act, in order to comply with the new rules. Talk to your adviser to see if you are eligible.
The concept of the CGT relief is designed to preserve the tax-exempt status of unrealised capital gains accrued on investments that are supporting pensions and are forced out of the tax-exempt phase into the taxable phase.
It is an optional application and once the election is made, it is an irrevocable election. The fact that it is irrevocable is why this decision is vital.
If the CGT relief is applied, you may have a tax bill to pay now but less than what you would in the future. But it could be the complete opposite also. This is, by far, where most of the time needs to be focused. Talk to your adviser about your intentions with investments, whether you are thinking of changing funds, unrealised gains in your super fund, preferences around when you are retiring and investments outside of superannuation.
It is this change, that most will be caught out, sending an enormous amount of revenue to the taxation office because of the complexity and misunderstanding of these rules.
If you are currently salary sacrificing your wage in pre-tax dollars, the contribution caps are decreases next year. This is the last year to take advantage of a larger deduction and save tax. Do your figures and ensure you are getting the best tax break and seek advice if you need before 30 June.
Don’t exceed caps
If you are currently salary sacrificing your pay into super in pre-tax dollars, ensure you adjust these amounts on 1 July otherwise you may exceed contribution caps. The contribution cap will reduce to $25,000 per year. This may result in the Taxation Office amending your tax return and resulting in an unexpected tax bill. Remember the onus is on the employee, not the employer when it comes to staying within your contribution caps.
The bottom line here is that you shouldn’t be taking any of these changes lightly. Doing so may mean a significant adjustment to your retirement lifestyle so don’t leave it until the last day of the financial year.
Why not increase the financial savviness of those around you – pay it forward and pass on these tips to your family, friends and kids.
Olivia Maragna is the co-founder of Aspire Retire Financial Services and is a respected and independent financial expert. Olivia’s advice is general in nature and readers should seek their own professional advice before making any financial decisions.
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