Changes to Superannuation Contributions
Last year’s Federal budget included a number of changes to the Superannuation system, many of which come into effect on July 1.
One of the more publicised changes was the reduction of the amount of money we were able to contribute to Superannuation.
As of July 1, the concessional contribution cap reduces to $25,000 for everyone. Concessional contributions refer to those contributions for which we are able to claim a tax deduction or are deposited into super pre-tax. This includes employer contributions and salary sacrifice.
Currently this cap is $30,000 for most of us and $35,000 for those 50 and over. This reduction will affect people that are contributing heavily to Super, usually those nearing retirement.
One group highly affected will be those utilising the popular Transition to Retirement (TTR) income swap strategy, a tax reduction strategy for pre-retirees. The strategy involves those over 55 and still working, accessing a portion of their super creating a cash flow surplus, this is contributed to Super as a salary sacrifice. This allows fully taxed income be replaced by income that is taxed concessionally, the tax saving used to accelerate Superannuation savings.
With this strategy it is quite common for the tax deductible contributions to exceed $25,000, therefore many TTR’s will need to be recalibrated in the new financial year. It is advised anyone with a TTR income swap strategy in place to review their arrangements for next financial year to ensure they do not exceed the cap.
The Non-Concessional cap is also reducing from $180,000 pa to $100,000 pa. You are still able bring forward 2 years providing you are under age 65, bringing the total contribution allowed down from $540,000 to $300,000.
Although this limit seems quite high and it is unlikely to impact many people there are a few common scenarios where people would like to contribute more than $300,000.
Clients who have recently sold an investment property or received an inheritance are probably the 2 most common situations where they are likely to be restricted by the Non-concessional cap.
It is a common strategy for pre-retirees to sell their investment properties and contribute the proceeds into Superannuation. This provides more liquid assets in a tax free environment. This is in general a more reliable income source for retirement. The reduction in cap will see clients needing to plan further in advance moving forward.
The changes to the Superannuation contribution caps are forcing us to start planning our retirement earlier and making it more difficult for us to catch up in the last few years of our working life.