In 2016 the Federal government made some significant changes to superannuation that you may or may not be aware of. Importantly, self-employed people can now defer their contribution until May each year, giving them increased flexibility and short-term cash flow.
Employees can also make additional contributions via salary sacrifice; this involves forecasting their annual salary, which can be problematic. However, from 1 July 2017 the government has lifted this restriction so that employees can wait until the end of the financial year before deciding how much extra they want to contribute. Furthermore, from 1 July 2018, people will be able to access past years unused contribution limits (up to five year); this provides excellent planning opportunities.
This is where it gets interesting. The government has reduced the amount you can contribute from 1 July 2017; from wherein you can contribute up to $25K pa and claim a tax deduction, and/or up to $100K pa if you do not claim a tax deduction. Currently the former cap is between $30-$35K, and the later $180K.
What does this mean?
Michael reports that these changes make it more difficult to get money inside super.
“Therefore, if you are in your 40’s or 50’s and have a relatively low super balance, borrowing to invest might be an excellent way of essentially investing your future contributions today.”
He says, mathematically, this is a superior approach compared to incremental un-geared contributions (assuming you invest in quality assets).
“At the moment, a super fund in pension phase doesn’t pay any tax on investment earnings (usually super funds are taxed at a flat rate of 15%). However, the government will introduce a cap of $1.6 million from 1 July 2017.”
“Meaning, any monies more than $1.6 million will be taxed at 15%.”
Therefore, clients holding a high percentage of their wealth inside super need to be aware that they are at the governments politicking, increasing the risk.
“People that have a high super balance are ‘easy targets’ for governments looking to raise taxes.”
Just like your diet – diversification and moderation!
Super is less attractive if you earn over $250,000 p.a. If you earn over $250,000 p.a. from 1 July 2017 your super contributions will be taxed at a rate of 30% (instead of the lower 15%). Currently this threshold is $300,000 p.a. An employee on a salary of $240,000 would make contributions of at least $22,800 p.a. or $19,380 after the 15% contribution tax. Compare that to an employee on $260,000 p.a. who would make contributions of $24,700 or $17,290 after 30% tax. That’s a difference of over $2,000 p.a. or 12%.
In summary, Michael Yardney says it’s now critical for people earning over $250,000 p.a. to consider options other than super to reduce tax and build wealth.