Q&A: How will the superannuation changes on 1 July 2017 affect me?
With major changes to superannuation in effect as of 1 July 2017, we asked Jo Brassett, Financial Advisor with Sydney-based Insurance Advisory Service, to walk us through the changes and their impact.
Q: How significant are the super changes in 2017?
The superannuation changes brought into effect on July 1, 2017 are the most significant in a decade.
Q: Why’s that?
They impact how and how much can be contributed into an individual’s superannuation over a lifetime. They will also impact how much can be transferred and be held in the tax-free pension phase.
This will affect us all in different ways, depending on personal circumstances and plans. For example, if you’re a tradesperson hoping to retire before age 65 after years of labour, you’ll need to calculate if you can still accumulate your target amount by your desired retirement age under the new structure.
Q: What are the major changes?
The new First Home Super Saver Scheme will allow up to $15,000 each year in both voluntary concessional and non-concessional (after tax) contributions to a total of $30,000 per person. This lets aspiring first-home buyers put up to $30,000 in their super account, saving on tax until they are ready to use the money for a deposit. When you’re running your own business, money can vary week to week. If you salary sacrifice a certain amount of your income into super, it’s a great way to enforce savings.
Q: Can you please explain concessional and non-concessional contributions?
Concessional contributions are those made from your before-tax income like employer contributions, salary sacrificed contributions and your contributions where a tax deduction has been claimed.
Non-concessional contributions are any contributions made into your super after tax has been paid including contributions you make from your after-tax income and contributions your spouse makes. Generally, they’re not taxed, except when they go over the cap
Q: So how does this fit in with the other key changes?
The concessional contributions limit for everyone has been reduced from $35,000 to $25,000 per annum, generally impacting self-employed business owners and sole traders who claim a tax deduction on their contributions.
The annual cap for non-concessional contributions is now $100,000 and these after-tax contributions are now restricted to those with less than $1.6m in superannuation. This could impact small business owners and sole traders who are ramping up their super savings later in life, as it will limit what you can contribute each year.
Q: Has the small business Capital Gains Tax (CGT) been affected by these changes?
Jo: For many small business owners, their business represents the main asset that will support their retirement. Special rules will continue to allow small business owners to make superannuation contributions that do not count toward their non-concessional contributions cap. (The small business CGT cap allows for the capital gain realised on the sale of any small business asset up to $500,000 per eligible taxpayer to be contributed to superannuation free of CGT where certain conditions are met.)
Q: Have my super obligations to my employees changed?
No, there have not been changes to an employer’s super obligations to their staff.
Q: So it’s business as usual?
Yes, the employer must pay a levy of 9.5% of an employee’s salary into a super fund. Generally, you must pay super contributions to your employees if they are 18 years or over and earning more than the threshold of $450 or more before tax in a month. The scheme applies to full time, part time and casual employees who are Australian residents or here on a working visa.
And, if you employ contractors who are paid entirely or principally by your business, then the contractor is considered an employee for super purposes.
If you’re a sole trader or in a partnership, you generally don’t have to make super guarantee (SGC) payments for yourself; however, you will need to comply with the superannuation guarantee contributions for your employees.
Company and Trust arrangements need to comply with the SGC for their employees and if they receive a Salary they will also need to comply for themselves as employees.
Q: So is super still a good investment?
The short answer is yes. For small business owners saving for their retirement, superannuation remains the best wealth accumulation structure from a tax perspective.
On top of the income tax benefits available on contributions, superannuation in the accumulation phase pays maximum tax of 15% on investment income and no tax when a super fund is paying a pension to its members.
Q: What else must small business owners keep in mind?
Too many self-employed people find they have very little money to live on in retirement, because they haven’t paid super for themselves throughout the life of their business.
If you’re planning on selling your business to fund your retirement, remember that many types of businesses can be hard to sell. Without you running it, your business may not be worth quite as much as you hoped. Make paying yourself super a non-negotiable to ensure you have a comfortable retirement. In most cases, you can claim a tax deduction for your personal super contributions.
Q: How much wealth should I try to be accumulating?
Let’s take a look at this estimate from the Association of Superannuation Funds of Australia (ASFA):
For a couple, the budget for a comfortable retirement is currently just shy of $60,000 per annum, and they will need $640,000 in super to support this lifestyle, assuming they are debt-free and are entitled to a part age pension. So based on this estimate, the current contributions caps are more than adequate for a couple to accumulate sufficient superannuation savings over their working life to support a comfortable lifestyle in retirement.
Q: What’s the biggest takeaway from these changes?
Despite the changes to the contribution cap, most Australians will be able to build an adequate retirement fund with forward planning and appropriate advice. It might help to talk to a financial advisor to ensure you put the right plan in place.
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