For this instalment I will be focussing on the Concessional Contribution Opportunities that arise from the changes to Superannuation commencing July 1 2017.
Concessional contributions are, in essence any superannuation contribution that is not a non-concessional contribution. Contributions included in the definition of non-concessional contributions are quite narrow so concessional contributions can cover a wide range of contributions.
However, in the most part concessional contributions include:
For individuals that have an adjustable taxable income that exceeds $300,000, an additional tax (Division 293 tax) of 15% is payable in respect of their concessional contributions.
Current position – 2016-17
Concessional contributions are limited by the concessional contribution cap.
For the 2016-17 financial year the concessional contribution cap is $30,000. However, individuals aged 49 or older on 30 June 2016 have a higher transitional concessional contribution cap of $35,000.
Concessional contributions are indexed in line with movements in Average Weekly Ordinary Time Earnings, and increase in $5,000 increments.
Where contributions exceed an individual’s concessional contribution cap in a particular financial year, the excessive contribution is included as assessable income and is taxed at the individual’s marginal tax rate. They are also liable for an excess contribution charge.
Analysing the Changes
The 2016 Budget contained a number of measures that will have an impact on concessional contributions. The legislation implementing these changes was passed in November 2016 and in this edition we will focus on the following points in depth.
Concessional contribution cap
The current concessional contribution caps of $30,000 and $35,000 will reduce to a flat $25,000 with effect from 1 July 2017. The higher cap for older individuals will also cease.
Example — Indexation
Unlike non-concessional contributions, where individuals with more than $1.6m in superannuation will be unable to make further non-concessional contributions after 30 June 2017, concessional contributions may continue to be made irrespective of the amount an individual already has accumulated in the superannuation system. In fact, the compulsory nature of the Superannuation Guarantee system requires employers to contribute 9.5% of their employee’s salary to superannuation.
Carry forward unused concessional contribution cap
There are many reasons why individuals may not maximise their concessional contribution cap. This may result from a career break, unemployment or unaffordability.
Currently, where a portion of the concessional contribution cap remains unused in a particular financial year, the unused portion of the cap is lost. However, the Budget measures include a provision that allows people with less than $500,000 in superannuation savings (at the end of the previous financial year), to carry forward any unused portion of their concessional contribution cap for a period of up to 5 years.
This measure will apply from 1 July 2018 and will apply to any unused portion of the concessional contribution cap that accrues from that date. Where the concessional contribution cap is not fully utilised in the years prior to 1 July 2018, the unused portion cannot be carried forward.
The following table illustrates how the carry forward works:
*Indexation of the concessional contribution cap is ignored for the purpose of this example
What opportunities exist before 1 July 2017?
A number of concessional contribution opportunities exist for the balance of the current financial year:
Maximise concessional contributions
Each employer is obliged to make contributions for their employees under the superannuation guarantee scheme. The current rate is 9.5% of an employee’s ordinary time earnings. An employer is not required to pay SG contributions on any part of their employee’s salary that exceeds the maximum contribution base. For 2017-18, the maximum contribution base is $51,620 per quarter.
Where existing employer contributions are less than an employee’s concessional contribution cap, there is an opportunity to increase employer contributions, subject to an employer agreeing, by entering into a salary sacrifice agreement, thereby foregoing salary and having it paid into superannuation. For a salary sacrifice arrangement to be effective, it must be prospective. That is, the arrangement must be in place before the work is done that gives rise to the remuneration.
As contributions made under a salary sacrifice arrangement are treated as an employer contribution, an employer may offset their SG contributions against the salary sacrificed contributions.
Any new or amended salary sacrifice arrangement that is to apply for the balance of the current financial year needs to be considered sooner rather than later. Self-employed individuals (sole traders and partners in partnerships), and individuals not actively engaged in the workforce may be eligible to claim a tax deduction for their personal contributions. Where appropriate, an opportunity to maximise such contributions, up to the relevant concessional contribution cap exists.
Individuals who turn 50 during the 2016-17 financial year have the opportunity to access the transitional concessional contribution cap of $35,000. The transitional cap for older workers will cease from 1 July 2017.
Salary sacrifice arrangements
Even if an individual is not intending to make additional contributions in the 2016-17 year, any individuals with salary sacrifice arrangements in place should be reviewed. As the concessional contribution cap will reduce to $25,000 for 2017-18, excessive salary sacrifice contributions that are based on the $30,000 or $35,000 concessional contribution cap, made in the early part of the new financial year may result in SG contributions for the later part of the year being excess contributions. This may result in the excess concessional contributions being taxed at the individual’s marginal tax rate in addition to attracting the excess contribution charge.
Where to from here?
The changes to concessional contributions that take effect from 1 July 2017 give you the opportunity to consult with us over the coming weeks and months.
Where it’s appropriate, you may be able to make concessional contributions of up to $30,000 or $35,000 in the current financial year.
Furthermore, where you have a salary sacrifice arrangement in place, they should be reviewed before the start of the new financial year to make sure that the arrangement does not result in an inadvertent breach of the concessional contribution cap in 2017-18.
We understand that while many clients may see the reduction in the concessional contribution cap as a negative thing, you should not overlook the potential opportunities it presents. From 1 July 2017, the removal of the 10% requirement for tax deductibility for personal contributions will open up additional opportunities for many people, particularly those who are currently unable to enter into a salary sacrifice arrangement.
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