Superannuation and investing in self-managed super funds (SMSFs) are undergoing reviews within the industry and within the political landscape.
The Coalition Government has passed new laws, and on July 1 new legislation will come into effect. These new rules, which are the biggest changes to superannuation over the last 10 years, will have a substantial impact on SMSFs.
What is an SMSF?
An SMSF is your very own personal superannuation fund that gives you total control over how your super benefit is invested. An SMSF is ideal for DIY investors who prefer to make their own investment choices for their retirement rather than leave their superannuation to be invested by others. There is no minimum amount required to set up an SMSF.
As for how common they are in Australia, recent figures from the Australian Taxation Office (ATO) reveal that in the five years to June 30, 2016, SMSF assets grew by 55% or $219.7bn. Between June 30, 2012 and June 30, 2016, the number of SMSFs grew from 440,000 to over 577,000, with almost 1.1 million members which represents 9% of all members in Australian super funds.
What are the benefits?
- Total control
This is unique in comparison to other superannuation funds whose fees increase as your super balance grows.
- Two accounts in one
- Consolidate investments
- Consolidate member accounts
What are the main changes?
Pre-tax (concessional) contributions
Reduction of concessional contributions cap to $25,000 per annum
Currently, individuals can make concessional (pre-tax) contributions up to $30,000 per year for those aged under 49 at June 30 of the previous financial year, and $35,000 otherwise.
“From July 1, 2017, the government will lower the annual concessional contributions cap to $25,000 for all individuals aged under 75. The cap will be indexed in $2,500 increments (instead of the current $5,000 increase) in line with wages growth,” they said.
Allowing personal concessional contributions regardless of employment situations
Currently, individuals are only allowed to claim a tax deduction in the personal tax return for personal contributions if they meet the 10% rule (i.e. employment income divided by assessable income is less than 10%).
From July 1, all individuals aged under 75 are allowed to make concessional superannuation contributions up to the concessional cap (including those aged 65 to 74 who meet the work test) regardless of their employment situations.
“This change will benefit individuals who are partly self-employed and partly salary earners, as well as individuals whose employers do not offer salary sacrifice,” they said.
After-tax (non-concessional) contributions
Increased constraint on non-concessional contributions
From July 1, the government will reduce the annual non-concessional (after tax) contribution cap from $180,000 to $100,000 per year.
“In addition, the government will introduce the $1.6m eligibility threshold, according to which individuals with a total superannuation balance of $1.6m or more at June 30 of the previous financial year will no longer be eligible to make non-concessional contributions. The above two changes in superannuation rules will affect the individual’s ability to bring forward non-concessional contributions,” Esuperfund said.
Transition to retirement pensions
People who have reached preservation age but are under 65 and not retired can still access a Transition to Retirement Pension (TRAP).
“However, from July 1, 2017, the government will remove the tax exempt status of income from assets supporting Transition to Retirement Pensions regardless of the date the TRAP commenced. The earnings on the amount supporting TRAPs will be taxed at up to 15% (i.e. the same tax rate applying to accumulation earnings),” they said.
The intent of this change is to ensure that TRAPs are not accessed primarily for tax minimisation purposes, but for the purpose of supporting individuals who remain in the workforce with reduced working hours.
Simple accounts-based pensions
From July 1, 2017, the government will introduce a $1.6m cap on the total amount that can be transferred into the tax-free retirement phase for simple account based pensions. “This is known as the general transfer balance cap. It will be indexed in $100,000 increments in line with CPI,” they said.
Superannuation benefits accumulated in excess of the cap can remain in the accumulation account, where the earnings will be taxed at up to 15%.
Your Investment Property. (2017). How do new SMSF rules impact you?. [online] Available at: http://www.yourinvestmentpropertymag.com.au/news/how-do-new-smsf-rules-impact-you-237413.aspx [Accessed 15 Jun. 2017].