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Planning on making super contributions this financial year?

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As we move into the fourth quarter of the financial year, it is time we turn our mind to tax planning and the things we need to be considering as 30 June approaches.

You need to be very careful of the correct timing to make superannuation contributions. Every year we hear stories of people who made contributions to super, only to find out their contribution wasn’t made in time.

You would think that in this modern age of electronic transactions, making a super contribution by way of electronic transfer or BPAY would be pretty straightforward.

Let’s assume that I plan to make a personal contribution to super. On top of that, I intend to claim a tax deduction for my contribution in the current financial year.

Being like most people, I will leave it to the very last minute and on 29 June I will go online and transfer the contribution from my bank account to my super fund. I will use their BPAY code for the payment.

It is all so simple – what could possibly go wrong?

  1. When making a super contribution by way of electronic funds transfer, the contribution is not deemed to be made until it appears in my super fund’s bank account. If I initiate the transfer on 29 June 2018 (a Friday), it may not appear in my super fund’s bank account until early in the following week – around 2 or 3 July.
  2. As my contribution was not technically received by my super fund until early July, it is unlikely I will be able to claim a tax deduction for my contribution until the 2018-19 financial year. This may result in me paying more tax than planned this year.
  3. My contribution will be counted against my contribution cap for the 2018-19 financial year. While this may generally be fine, it can create an undesirable outcome if I have also planned to maximise my contributions in the 2018-19 year.
  4. What if I have turned 65 in the 2017-18 financial year and had retired at some point during the year. As I am now 65, I will need to meet the work test (be gainfully employed for at least 40 hours worked within a period of 30 consecutive days) for my super fund to be able to accept my (2018-19) contribution.
  5. Even if I wasn’t intending to claim a tax deduction for my contributions, but instead I wanted to maximise my non-concessional contributions, not having made my 2017-18 contribution in time will have similar ramifications, particularly where I intended to maximise contributions both this year and next.

As 30 June falls on a Saturday this year, planning ahead is so important.

Where possible make your super contributions early so there is plenty of time for it to be received.

 

Source:  Peter Kelly | Centrepoint Alliance

A comfortable retirement: what and how achievable is it?

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According to the Association of Superannuation Funds of Australia (ASFA) numbers, released for the September 2017 quarter, a couple will need $60,457 per annum to fund a comfortable lifestyle in retirement, assuming they own their own home and have no debt and a single person would need $44,011 per year.

So how can the income required for a comfortable retirement be funded, and how much should be put aside each year prior to retirement to accumulate the funds required to fund a comfortable retirement?

Funding a comfortable retirement

ASFA calculates that $640,000 is sufficient to fund a comfortable retirement lifestyle. Their calculations assume a couple owns their own home and will receive Government age pension support when they retire.

It is assumed that $640,000 is held in a superannuation fund and used to commence an account-based pension. However if the funds were held outside super in joint names, there wouldn’t be any significant change in the outcome, as the couple are unlikely to pay any income tax on the portfolio returns. It is also assumed that the couple’s home contents and car are valued at $25,000.

The couple, both aged 67, would only draw what they need from their superannuation account-based pension to top up their age pension income to the required level for a comfortable retirement. The level of income needed, based on ASFA’s model, decreases from approximately $60,000 per year prior to age 85, to approximately $55,000 per year – this reflects a relatively less active lifestyle as age increases.

Although their age pension entitlement is just $12,000 (approx.) per annum in the first year, that entitlement grows over time as their assets reduce – the couple become entitled to the full age pension from age 91.

This analysis indicates that the income needed could be maintained until age 99, well beyond the life expectancy of a 67 year old female (age 87.3 years) or male (age 84.6 years). The couple’s account-based pension would run out by age 101.

This outcome is sensitive to the earnings rate assumption (6.7 per cent per annum). ASFA’s assumption of 7.0 per cent per annum increases the age to which the income level can be maintained by a year, to age 100.

Other sensitive assumptions include the amount of non-financial assets ($25,000) and financial assets, for example cash holdings ($nil). These assumptions may affect the couple’s age pension entitlement, hence the amount of pension payments that need to be drawn from the account-based pension. Note that financial assets may have a net positive impact due to the additional income produced.

Saving for a comfortable retirement

Taking ASFA’s numbers ($640,000 for a couple, $545,000 for singles) as appropriate funding targets, then a natural question is:

How much should be saved each year to reach the relevant funding target?

We are focusing on a single person reaching the $545,000 (in today’s dollars) funding goal by age 67, which is the Government age pension eligibility age for those born on or after 1 January 1957.

A key feature of retirement funding for Australian employees is the compulsory superannuation contributions employers are required to make on behalf of certain employees – the Superannuation Guarantee (SG) system.

The current SG rate is 9.5 per cent of an employee’s Ordinary Time Earnings (OTE). Generally, OTE relates to ordinary hours (excluding overtime), and includes commissions, shift loadings and certain allowances. The 9.5 per cent rate will increase by 0.5 per cent per annum from 2021 to 2025, ultimately to 12 per cent.

The Average Weekly Ordinary Time Earnings (AWOTE) for the October 2017 quarter was $1,567.90 or $81,755 per year. In our modelling we have used $80,000 per year. Employees with this amount of income will have SG contributions of 9.5 per cent ($7,600 per year, paid quarterly) paid by their employer to a superannuation fund. These contributions are generally taxed at 15 per cent, so $6,460 is available to be invested by the superannuation fund each year.

Table 1 below shows that a 30 year old with earnings of $80,000 per year may accrue $536,000 in superannuation between now and retirement at age 67 from their future SG contributions alone, assuming no breaks in their employment. This amount is only slightly short of the comfortable retirement target of $545,000.

Table 1: future SG contributions accrual to age 67

Current age Current Ordinary Time Earnings
$40,000 $80,000 $120,000
       
20 $419,000 $837,000 $1,256,000
30 $268,000 $536,000 $804,000
40 $159,000 $319,000 $478,000
50 $81,000 $163,000 $244,000
60 $25,000 $51,000 $76,000

 

Table 2 below shows the amount the same individual in Table 1 would need to contribute to superannuation on an after-tax basis (non-concessional contributions) to reach the funding target of $545,000, assuming they have nothing in super currently. The 30 year old individual considered above would need to contribute only $124 per annum

Table 2: After-tax super contributions per annum to reach retirement goal at age 67

Current age Current Ordinary Time Earnings
$40,000 $80,000 $120,000
       
20 $1,109 – –
30 $3,773 $124 –
40 $8,723 $5,114 $1,495
50 $20,024 $16,506 $12,988
60 $64,940 $61,765 $58,587

These charts show that many Australians may be in a position to achieve a comfortable retirement, based on ASFA’s definition and assumptions. The Australian Superannuation Guarantee system is a significant part of achieving this outcome, which relies on the currently legislated increases in the SG rate to 12 per cent.

Before making any financial decisions you should seek personal financial advice from an Australian Financial Service licensee.

 

 

Source:  Macquarie

USING SUPER TO BUY YOUR FIRST HOME

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In the 2017 Federal Budget, the government announced its intention to introduce legislation that would allow first home buyers to access part of their super to purchase a home. The proposal is referred to as the First Home Super Saver (FHSS) scheme.

The relevant legislation was introduced into parliament in early September 2017 and at the time of preparing this article (late October 2017), the legislation is before the Senate.

How the scheme will work

The FHSS scheme will allow people to withdraw up to 85% of voluntary concessional contributions and up to 100% of non-concessional (after-tax) contributions, with the associated earnings on those contributions and use them towards the purchase of their first home.

Voluntary contributions include concessional contributions – contributions other than compulsory employer contributions, such as the 9.5% superannuation guarantee contributions – and non-concessional contributions – those made from after-tax income. A voluntary concessional contribution may include additional employer contributions made under a salary sacrifice arrangement and/or personal tax-deductible contributions.

The scheme will only allow access to voluntary contributions made from 1 July 2017. Voluntary contributions made in past years cannot be accessed under the FHSS scheme.

Contributions that may be withdrawn are limited to a maximum of $15,000 per annum, capped at a total of $30,000 plus associated earnings. This limit is ‘per person’. A couple may, therefore, have access to up to a combined $60,000 plus earnings.

Withdrawals under the FHSS scheme cannot be made before 1 July 2018.

Amounts withdrawn (other than non-concessional contributions) will be taxed at the individual’s marginal tax rate, however, a tax offset of 30% will apply.

Eligibility

There are a number of conditions that need to be met for a person to be eligible to participate in the FHSS scheme, including:

1. A person must not have previously held a freehold interest in real estate property in Australia in the past. This not only includes a principal residence but also extends to investment and commercial property.
2. While people under the age of 18 are able to make contributions to superannuation and are able to participate in the scheme, only a person aged 18 or over will be able to request the release of funds.
3. A person will only be able to submit a request for release of benefits provided they haven’t previously submitted a request. That is, payments under the scheme can only be accessed once.

Associated earnings

A person participating in the FHSS scheme may withdraw their contributions, plus associated earnings.

Rather than having to calculate the actual investment earnings on each contribution made under the scheme, a simplified approach is used to calculate the earnings.

For voluntary contributions made under the FHSS scheme during the 2017/18 financial year, the associated earnings will be calculated as if the contributions were made on 1 July 2017, irrespective of the date they are actually made. From 1 July 2018, associated earnings will be calculated from the first day of the month in which the contribution is made. Therefore, where contributions are made at different times during the year, associated earnings will need to be calculated in respect of each contribution.

Associated earnings have nothing to do with the actual investment earnings that may be derived by a superannuation fund in respect of the contributions. They are merely used to determine the amount that may be withdrawn from super under the FHSS scheme in addition to voluntary concessional contributions.

When calculating associated earnings, the ‘shortfall interest charge’ is used, and compounds daily. The shortfall interest rate is the 90 day Back Accepted Bill rate plus 3%. At the time of writing, the shortfall interest rate was 4.7%.

Releasing contributions

When a person wishes to withdraw contributions under the FHSS scheme, the Australian Taxation Office (ATO) will make an FHSS determination. The ATO will calculate the person’s eligible voluntary contributions and the associated earnings. The total amount is referred to as the ‘FHSS maximum release amount’.

If a person then wishes to withdraw that amount from the super, they will need to request the ATO to issue a release authority. This will then be given to their superannuation fund. A fund will be unable to release benefits under the FHSS without the release authority.

After funds have been released

Once the funds have been released, they must be used to assist with the purchase of a first home.

A person will have 12 months from the date of release to use the funds to enter a contract to purchase or construct their first home. The 12 month period may be extended at the ATO’s discretion.

Once the purchase is complete, the purchaser must live in the property for a period of at least six months in the first year. The FHSS scheme is not intended to be used to purchase an investment property.

Where a property is not purchased within 12 months, the released amount must be re-contributed back to super, or additional FHSS tax becomes payable. The tax payable on the released amount is equal to 20% of the amount released.

Is the FHSS scheme a good thing?

Making voluntary contributions to super with the view of withdrawing them to help purchase a first home will depend on an individual’s personal circumstances. Making additional voluntary contributions to super provides discipline. The money can’t simply be accessed for other purposes such as an overseas trip or a new car. It is set aside for the purchase of a first home, or it is locked away for retirement.

In the end, individuals will need to consider their own situation when deciding if the scheme is appropriate for them. Appropriate financial advice will be essential.

 

 

Source: Peter Kelly | Centrepoint Alliance

Amended Government superannuation package

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The Government has released an amended superannuation package.

Note: these changes are not yet legislated and still have to be introduced and made through Parliament.

Some measures remain largely unchanged while others such as the lifetime $500,000 non-concessional cap and the removal of the work test for over 65s have been replaced or scrapped altogether.

Once legislated, most measures will take effect from 1 July 2017. There are still many unanswered questions around the practical operation of many of the measures. We await the draft legislation for further details.

Objective of superannuation

The primary objective of superannuation is to provide income in retirement to substitute or supplement the age pension.

Non-concessional contributions (NCCs)
From 1 July 2017:
• the annual non-concessional contributions (NCC) cap will be reduced from $180,000 per year to $100,000 per year
• individuals under age 65 will be eligible to bring forward 3 years ($300,000) of NCCs
• individuals with a total superannuation balance of more than $1.6 million will be unable to make NCCs.

$1.6 million eligibility threshold
The $1.6 million eligibility threshold will be tested at 30 June of the previous financial year.
This means if the individual’s balance at the start of the financial year is more than $1.6 million they will not be able to make any further NCCs.

Individuals with balances close to $1.6 million will only be able to bring forward the annual cap amount for the number of years that would take their balance to $1.6 million.

Under transitional arrangements, if an individual has not fully utilised their NCC bring-forward cap before 1 July 2017, the remaining bring forward amount will be reassessed on 1 July 2017 to reflect the new annual caps.

The $1.6 million eligibility cap will be indexed in $100,000 increments in line with the consumer price index (CPI) ie the same as the $1.6 million pension cap.

Broadly commensurate treatment will apply to members of defined benefit schemes.

Work test
As currently, the work test will continue to apply for individuals aged between 65 and 74. This was previously proposed to be removed.

Individuals aged between 65 and 74 will be eligible to make annual NCCs of $100,000 from 1 July 2017 if they meet the work test (ie gainfully employed for 40 hours in 30 consecutive days) but cannot use the bring forward option.

Worked examples (provided by the Government)
Example 1 – bring-forward rule
Kylie’s (age 58) superannuation balance is $500,000. She sells an investment property and makes a $200,000 NCC in October 2017.

As Kylie has triggered the bring-forward option, she can make a further $100,000 NCC in 2018/19.

Kylie’s NCCs would reset in 2020/21 and she could make further contributions from then.

Example 2 – bring-forward rule
Molly (age 40) has a superannuation balance of $200,000.

In September 2016, she receives an inheritance of $250,000, which she contributes to superannuation, triggering the $540,000 3-year bring forward option.

From 1 July 2017, Molly can make a $110,000 NCC in 2017/18 and $20,000 in 2018/19. She can then access the new bring forward option from 2019/20 and contribute up to $300,000 in NCCs.

Note: This may mean an individual under age 65 in 2016/17 can trigger the current bring-forward option (subject to eligibility) and contribute an entire $540,000 in NCCs. It is unclear exactly how the remaining bring forward cap will apply from 1 July 2017 where less than $540,000 is contributed.

Example 3 – work test
Gary (age 72) a retiree, works around 40 hours in September every year and has a superannuation balance of $450,000.

As Gary meets the work test, he can make a $100,000 NCC in 2017/18.

However, as Gary is over age 65 he cannot access the 3-year bring forward option.

Example 4 – $1.6 million eligibility threshold
Eamon (52) has a total superannuation balance of $1.45 million. He can make a $200,000 NCC in 2017/18.

He cannot access the full 3-year bring forward option as this would take his balance over $1.6 million.

Eamon would also not be able to make any further NCCs.

CGT cap
Separate to the NCC cap, the current CGT cap of $1,415,000 (2016/17) continues to apply for small business owners.

Concessional contributions (CCs), contributions tax and catch up CCs
The annual concessional contributions (CCs) cap will be reduced to $25,000 (currently $30,000 and $35,000 if age 50 or over) from 1 July 2017 for all individuals.

The cap will index in line with Average Weekly Ordinary Time Earnings (AWOTE).

Individuals with adjusted taxable income of $250,000 (currently $300,000) will incur 30% tax on their concessional super contributions from 1 July 2017.

Catch-up CCs
This measure has been pushed out a further 12 months.
From 1 July 2018, unused CC cap amounts can be carried forward over 5-year periods accrued from 1 July 2018 where total super balance is under $500,000.

Example 5 – catch-up CCs
Anne has a superannuation balance of $200,000 but did not make any concessional superannuation contributions in 2018/19 as she took time off work to care for her child.

In 2019/20 she has the ability to contribute $50,000 into superannuation ($25,000 under the annual concessional cap and $25,000 from her unused 2018/19 cap which has been rolled over).

Tax deduction for personal super contributions
Individuals under age 75 and not just the wholly or substantially self-employed will be able to claim a tax deduction for their personal super contributions from 1 July 2017. This means more people will be able to make concessional contributions and it provides an alternative to salary sacrifice.

Example 6 – tax deduction for personal contributions
Chris has started his own online merchandise business but continue to work part-time at an accounting firm earning $10,000 as his business is growing.

His business earns $80,000 in his first year and he would like to contribute $15,000 of his $90,000 income to his superannuation.

Chris could claim a tax deduction for his $15,000 of superannuation contributions.

$1.6 million pension cap
A $1.6 million cap will apply on the amount that can be transferred into the superannuation pension phase from 1 July 2017. There will be no restriction on subsequent earnings.
Accumulated super in excess of $1.6 million can be retained in a member’s accumulation account (with earnings taxed at 15%) or moved outside super.

The cap will index in $100,000 increments in line with the consumer price index (CPI) and is expected to be around $1.7 million in 2020/21.

Transition to retirement (TTR)
Individuals who have reached preservation age can still access a transition to retirement (TTR) income stream but earnings on the amount supporting it will be taxed at 15%.

Innovative new retirement income stream products, such as deferred lifetime annuities and self-annuitisation products will become eligible for the earnings tax exemption.

Individuals will no longer be able to elect to draw lump sums from their TTR pension to reduce tax.

The tax treatment of income stream payments remains unchanged ie; for recipient’s age 60 or over the payments will be tax free, or taxed at the individual’s marginal tax rate less a 15% tax offset between preservation age and age 60.

Spouse contributions and tax offset
As currently, individuals can only make spouse contributions where the receiving spouse is under age 65 or age 65-70 and working.

The income threshold of a low income spouse for the purposes of the spouse contribution tax offset will increase from $13,800 to $40,000, from 1 July 2017.

Low income superannuation tax offset (LISTO)
The low income super contribution (LISC) will be replaced with the Low income superannuation tax offset (LISTO) from 1 July 2017.

The LISTO will automatically refund tax paid on low-income earners’ concessional contributions. The offset is capped at $500 where taxable income is less than $37,000.

Without the offset, low income earners would pay more tax than if they earned the income directly.

Anti-detriment
The anti-detriment will be abolished from 1 July 2017 as previously announced

Source: Asteron Life