Super changes July 1 guide: What you need to know, Super to-do-list

The sweeping super changes are set to launch. Here are the crucial things you need to know ahead of July 1, put together by our team of wealth experts.

The sweeping super changes that have been looming for months are ready to launch. The new system kicks off on July 1 but the misunderstanding around the new rules is still widespread. Luckily, we’ve put together a guide covering everything you need to know about how the changes will affect you, including seven crucial tips, super to-do list, super catch-up rules, and why you should know your limits.

Seven crucial things you need to know about super changes

1. The new pre-tax contribution “cap” is not really $25,000 because it includes your super guarantee contributions. Under the present mandatory superannuation system, your employer must put 9.5 per cent of your annual salary package into superannuation for you. If you wish to make a voluntary super­annuation contribution, that amount is included in the $25,000 pre-tax (concessional) cap. It seems many readers of The Australian — and we can safely ­assume the wider public — do not realise this is how it works: it means the actual pre-tax cap has just got a lot smaller than might first be evident. If you make $100,000 then your employer’s compulsory contribution is $9500 — in turn that means the amount you can voluntarily put into super on a pre-tax basis through so-called salary sacrifice is $25,000 minus $9500, or $15,500.

2. You can still put a multi-year sum into super — but not as much as you could before.

Inside our super system there is a procedure open to all, called the “three-year bring forward rule”, which applies to post-tax (non-concessional) contributions. It is still in place, only it’s just been sharply reduced. Until now you could put in $180,000 each year and under the “three-year bring forward” rule you could put in $180,000 x 3 — that is $540,000. From July 1 the post-tax annual limit is $100,000. The three-year bring forward rule is still in place so you can put in $100,000 x 3, that is $300,000.

3. The new super balance caps pertain to individuals — it’s a $1.6 million limit per head.

Many people operate their super as a couple. Naturally, enough many of the investors in DIY funds have interpreted the new rules as meaning the $1.6m cap is per fund — it’s not, it’s per person (or member) so with a ­couple the effective cap is $1.6m x 2 — that is $3.2m.

4. You can have more than $1.6m in super, you just can’t have more than that funding a tax-free pension. This is very often misunderstood by investors — it’s not a case of $1.6m is the most you can have in super from now on. The most you can have funding a tax-free pension income is $1.6m — if you have more than that you can keep it in super, that is it can remain within the super system. But the earnings on the money that is above $1.6m still in the super system will be taxed at the standard rate of tax for super (in accumulation) of 15 per cent.

5. There is a tax-free income alternative for retirees outside the super system. Our personal tax system is not based on age — it is based on income and under the current system the first $18,200 that anyone makes is tax free. So it is quite possible that people will take money out of the super system entirely and seek tax-free earnings rather than earnings which will be taxed at 15 per cent (see item 4 for more on this). On top of this many seniors are entitled to various tax offsets that can bring their tax-free earnings threshold well above $18,000.

6. There are two caps and they are both $1.6m. Yes, the boffins in Treasury thought it was not confusing enough with the multiplicity of rules in super so they introduced two new caps and they are the same dollar value, just to make sure everyone gets mixed up. There is the $1.6m transfer ­balance cap — put simply, this is the maximum amount with which you can kick off your tax-free pension fund at the time you retire. And there is the $1.6m total superannuation balance cap — this exists chiefly to police the issue of whether you can (at any age) put more into super. How it works is, they add just about everything in here from ­retirement pension account and accumulation accounts and if that number is over $1.6m, then you cannot make any further post-tax contributions to super. But you can make pre- tax contributions! Who knows why? As you may have gathered by now, if you are looking for logic here, you are looking in the wrong place.

7. If you don’t have $1.6m by the time of retirement, all is not lost … you can add to it later.

If you did not make to the $1.6m ceiling and somehow came upon more money later, then all is not lost: you can add to the fund to bring it up to the maximum limit subject to you satisfying contribution rules.

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Your Super to-do list

With the superannuation law changes taking effect next month it’s more important than ever for Self-managed super fund trustees to get their affairs in order at the end of this financial year. Here is SMSF specialist Monica Rule’s must-do list.

1. Valuations
From July 1 an SMSF member accessing a retirement pension can only have up to $1.6 million worth of assets in their retirement pension account. The limit applies to the total value of all their pensions and not per superannuation fund. If an SMSF member also has a lifetime pension or a market-linked pension then they will need to take into account the Special Value of those pensions to determine if they have exceeded the $1.6m transfer balance cap. In valuing an SMSF’s assets, please refer to the ATO publication, “Valuation guidelines for SMSFs”.

2. Contributions
As contribution limits are being reduced from July 1 to $25,000 per annum for concessional contributions and $100,000 per annum or $300,000 using the bring-forward provisions for non-concessional contributions, SMSF members need to ensure their contributions are received by their SMSF on or before June 30 to use the higher limits available under the current law. Making the contribution a day late would mean the contribution will be measured against the new reduced limits which may mean a member has made a contribution in excess of the new entitlement.

3. Employer contributions
Trustees should check whether superannuation guarantee contributions for the June 2016 quarter have been received by the SMSF in July 2016. If so, this contribution should be included in the concessional contribution cap for the 2016-2017 financial year.

4. Salary sacrificed contributions
Salary sacrifice contributions are concessional contributions. Trustees should check their records before contributing more to avoid exceeding the concessional contributions cap.

5. Tax deductions on personal superannuation contributions
Under the current law, the tax deduction is claimable by self-employed people, retirees and people who receive less than 10 per cent of their income from work performed as an employee. If you are eligible to claim a tax deduction then you will need to lodge a “Notice of intention to claim a tax deduction” with your SMSF trustee before you lodge your personal income tax return. Your SMSF trustee must also provide you with an acknowledgment of your intention to claim the deduction. By claiming the tax deduction, your non-concessional contributions will be reclassified as concessional contributions, counted towards your concessional contributions cap and your SMSF will pay the 15 per cent tax on the concessional contribution.

6. Spouse contributions
Spouse contributions must be received by the SMSF on or before June 30 in order for members to claim a tax offset on their contributions. The maximum tax offset claimable is 18 per cent of non-concessional contributions of up to $3000. The spouse’s annual income must be $10,800 or less for a member to receive the full tax offset.

The tax offset decreases as the spouse’s income exceeds $10,800 and cuts off when their income is $13,800 or more. From July 1 the income threshold for spouses will increase from $10,800 to $37,000 and the cut-off threshold will also increase from $13,800 to $40,000.

7. Contribution splitting
This technique is about to become much more important: due to the $1.6m limit on retirement pensions and eligibility to make further non-concessional contributions from July 1, contribution splitting can be used as a way to reduce a member’s superannuation balance and top up their spouse’s lower balance superannuation ­account.

The maximum amount that can be split for a financial year is 85 per cent of concessional contributions up to your concessional contributions cap. You must make the split in the financial year immediately after the one in which your contributions were made. This means you can split concessional contributions made into your SMSF during the 2015-2016 financial year in the 2016-2017 financial year. You can only split contributions you have made in the current financial year if your entire benefit is being withdrawn from your SMSF before June 30 as a rollover, transfer, lump-sum benefit or a combination of these.

8. Government superannuation co-contributions
To be eligible for the co-contribution, an SMSF member must earn at least 10 per cent of their income from business and/or employment, be a permanent resident of Australia, and under 71 years of age at the end of the financial year. The government will contribute 50c for each $1 of their non-concessional contribution to a maximum of $1000 made to their SMSF by June 30. To receive the maximum co-contribution of $500, the member’s total income must be less than $36,021. The co-contribution progressively reduces for income over $36,021 and cuts out altogether once the member’s income is $51,021 or more.

9. Low income superannuation contributions
If a member’s income is under $37,000 and they or their employer has made concessional con­tributions into their SMSF by June 30, they will be entitled to a refund of the 15 per cent contribution tax up to $500 paid by their SMSF on the concessional contributions. The earnings from these assets will be taxed at a maximum of 15 per cent. As well, from July 1, partial commutation of a retirement pension will be treated as a lump sum and will not count towards a member’s annual pension payment. A transition to retirement income stream cannot be commuted unless it contains an unrestricted non-preserved bene­fit. In which case, only the UNPB can be commuted and treated as a lump sum.

How to use the new super catch-up rules

From July 1, we get averaging for concessional contributions, also known as the “five-year catch-up provisions”. In essence, these will be a rolling five-year average, but you can only catch up in the past. That is, you can’t put in, say, $50,000 to cover the current year’s limit, plus the following year. Here are financial adviser Bruce Brammall’s points to note about the new rules.

• First, you will only be able to use these five-year provisions if you have less than a total of $500,000 in super. Above that you are restricted to the same annual, use-it-or-lose-it, $25,000 CC limit as everyone else.

• Second, this new rule will gain most of its power for employees because of the removal of another rule — the “10 per cent rule”. The 10 per cent rule meant that anyone who earned more than 10 per cent of their income from being an employee could not make personal deductible contributions. They had to, in effect, use salary sacrifice through their employers.

This changes apply from July 1. Anyone will be able to make CCs up to their limit, simply by contributing to super.

• Third, it is only on July 1, 2017 (that is, the start of FY18) that the rule begins to work. You won’t be able to start making extra contributions to make up for previous years until after FY19 begins, where you will be able to make contributions going back to FY18. It won’t be fully operational until FY22, when people will be potentially able to contribute for the four prior years (FY21, FY20, FY19 and FY18).

Know your limit

The $1.6 million limit on super­annuation has caused a great deal of confusion. Here’s Monica Rule again to clear it up.

Transfer balance cap. This is the maximum net assets value ($1.6m) that an SMSF member can have in their retirement pension account. If a member’s pension account is represented by a property with a market value of $2m but it has a $500,000 loan attached to it, then the net asset value of the property is $1.5m. If a member has more than $1.6m in their retirement pension account as of July 1 this year, they will incur a 15 per cent excess transfer balance tax calculated on the notional earnings of the excess amount. The notional earnings are calculated using the 90 day bank accepted bill rate, plus 7 per cent. This is applied from the date the excess occurs to the date the excess is rectified or the date the Australian Taxation Office issues a determination. However, any excess amount of less than $100,000 at June 30 this year will be disregarded by the ATO provided the excess is removed from the member’s retirement account by December 31, 2017.

Total superannuation balance. This is the total amount of a member’s accumulation account, plus their retirement pension account, plus any amount rolled over that has not been allocated to either of these accounts, minus any personal injury payment received by their SMSF for the member. The total amount is then used to determine whether the member can make any non-concessional contributions into their SMSF. If their total superannuation balance is $1.6m or more at June 30 this year, then they cannot make any non-concessional contributions in the 2017-18 financial year. However, an SMSF member can still make concessional contributions of up to $25,000 each financial year regardless of their total superannuation balance.

Tax exemption on pension assets earnings. If an SMSF is paying a retirement pension, then the way it calculates the tax exemption on the investment earnings of assets supporting the pension is based on whether an SMSF member accessing a retirement pension from their SMSF has a total superannuation balance of more than $1.6m in total across all of their superannuation funds at the start of the financial year. If they do, then the tax exemption must be calculated using the unsegregated assets method. The $1.6m limit applies to three areas but doesn’t stop you accumulating more than the limit in your SMSF. Being aware of how the limit applies to these areas will help you manage your SMSF and limit your tax bill.

Want to read more about the super changes?

• Robert Gottliebsen: ‘A clear incentive not to work’
• The coach: Should I open a second SMSF?
• Glenda Korporal: Why it’s time to sort out your super
• Your financial year personal tax cheat sheet