The new superannuation rules have been passed, but judging by the emails I am receiving, many of you are more confused than ever.
One reader says, “It has been widely reported that from July 2017, superannuation contributions will be tax deductible to the limit of the concessional amount of $25,000. Does that mean then the salary sacrifice will no longer apply? Can you please explain how the salary sacrifice and the tax-deductible contributions fit in with each other? Does one exclude the other?”
It's a great question, particularly as it gives me the opportunity to highlight the opportunities that will be available for employees after 30 June 2017.
Every eligible person can claim a tax deduction
Superannuation contributions fall into two categories, concessional, and non-concessional. The former were once called deductible contributions because they came from pre-tax dollars, while the latter were called un-deducted contributions because the funds came from after-tax dollars.
Until 1 July 2017 concessional contributions are capped at $30,000 for people under 50, and $35,000 for those aged 50 and over. Non-concessional contributions are limited to $180,000 a year but in certain cases you can bring forward an extra two years’ contributions and contribute $540,000 in one year.
From 1 July, the concessional cap will fall to $25,000 a year for everybody, and the non-concessional cap to $100,000. Furthermore, no non-concessional contributions will be allowed once you hold $1.6 million in pension phase. If you have the funds available take advice about making substantial contributions before 30 June.
It's long been a bone of contention that a self-employed person could make a concessional contribution and claim a tax deduction for it, but anybody who's employer was contributing for them was not allowed the same concession. It was easy to get around for anybody who had a good employer because the concessional contribution could simply be made by salary sacrifice.
There was no logic in the system, and it created an unequal situation whereby an employee who was allowed the salary sacrifice got a better deal from the taxman than an employee who was not allowed to salary sacrifice.
From 1 July, everybody who is eligible to contribute can make concessional contributions up to $25,000 a year and claim a tax deduction. To be eligible you must be under 65. Contributions are also allowed for those aged between 65 and 75 who can pass the work test which involves working just 40 hours in 30 consecutive days.
Salary sacrifice will still be allowed, but it will no longer be necessary to do that to get a tax deduction. Keep in mind that the $25,000 limit includes contributions from all sources including the employer 9.5%. Therefore, if you earned $100,000 a year, and your employer contributed $9,500, your maximum personal contribution would be $15,500.
Case study showing advantages of super
You are 55, earn $98,000 a year plus employer superannuation of $9,310 and have a cash surplus of $15,000 a year. You could invest the money in your own name outside super where earnings would be taxed at 39%, or contribute it to super as a non-concessional contribution where the earnings will be taxed at just 15%.
From 1 July 2017, you will have another option - make a concessional contribution of $15,000. You will lose $2,250 due to the 15% contributions tax but will still have $12,750 working for you in the low tax superannuation environment. Best of all, the tax deduction of $15,000 should get you a tax refund of $5,850 which you could contribute as a non-concessional contribution. This option magically turns your $15,000 into $18,600. That's a return of 24% in the first year.
It's unfortunate that the continual changes have made many people wary of super. As I have said repeatedly, it's still the best money tool available when used in the right places.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au