By Graeme Colley
Whatever happens with the proposed changes to the contributions caps, it’s useful to consider your strategy for the rest of this financial year. Don’t fall into the trap of ignoring existing opportunities or the impact of future changes – as it could end up as a double edged sword.
From government announcements we have good sense of the changes that are likely apply from 1 July 2017. If the proposals are passed in their current form, it may well avail tax deductions for those who aren’t able to salary sacrifice, have a number of jobs, work part-time or miss out on compulsory super because of their circumstances.
One thing is for sure, however: we do know the current rules for tax deductible super contributions and need to think about them for this financial year. Whether we wish to maximise the amount contributed to super as employer contributions, or, if eligible, make tax deductible personal contributions, in the end it will all add to our retirement savings.
Salary sacrifice considerations
The first thing to consider, for those who salary sacrifice, is a review of their arrangement. The review should take into account whether any dollar adjustment is necessary up to the person’s age-based concessional contributions cap. Ensuring all contributions are made by 30 June 2017 will allow access to the maximum contribution in the next financial year.
For example, some employers make super guarantee (SG) contributions strictly in line with the rules, i.e. within 28 days after quarter-end. For the June quarter 2017, it could be that SG contributions won’t be made by some employers until 28 July 2017. Where contributions for the June quarter are made by the end of June 2017 (or, ideally, earlier) it will leave some buffer to allow maximum contributions in the 2017/18 financial year up to the relevant cap. If concessional contributions of less than the cap have been made by employers, it can allow individuals to make contributions during that year. The decision to claim a tax deduction can be made up to the time an income tax return is lodged during the next financial year.
If the concessional contributions caps are reduced as proposed, the first thing to do in the current tax year is to ensure salary sacrifice arrangements are in place to enable the maximum possible contribution. The next thing is to write a diary note for April or May next year, to ensure enough time for any appropriate salary sacrifice adjustments should the cap be reduced as proposed from 1 July 2017. This will help avoid an excess concessional contributions assessment in the 2017/18 financial year.
In specie contributions
It is possible to transfer assets such as shares into an SMSF instead of cash. These types of contributions are called ‘in specie’ contributions and can be a useful strategy, particularly for those lacking disposable cash. Whether the contribution is made in this financial year or FY 2017/18 will depend on the circumstances. Should the Budget proposals be realised, from 1 July 2017, the opportunity will be open to claim a tax deduction for in-specie contributions irrespective of your employment status. However, don’t forget the impact of the excess concessional contributions tax if the caps are exceeded – and the need to satisfy the work test if you are aged between 65 and 74.
Portioning out concessional contributions
For anyone with an SMSF, a common strategy is to boost super contributions in one year, temporarily allocate part to a reserve, and then transfer it to a member’s account in the next financial year. This can have some tax advantages as it is possible to make a concessional contribution up to double the cap for the member in one year, and have an amount up to the cap added to the member’s account in the current financial year and also in the following year. This avoids being caught by excess concessional contributions tax, however, it is worthwhile getting help from a professional to ensure it works effectively. The Budget proposal to reduce the concessional contributions cap may impact on the amount made as a concessional contribution in this financial year. This can be illustrated in the following example:
Marco is 54, self-employed, wishes to make a concessional super contribution and to maximise the amount he can tax deduct.
His adviser tells him he is eligible to claim a tax deduction for his personal superannuation contributions and with careful planning it is possible to obtain a tax deduction for more than the concessional contributions cap without triggering excess contributions. His adviser explains this can be done with the use of a reserve account, providing the contribution is made in June 2017. The cap for those aged 50 plus is $35,000 for FY 2016/17 – and will reduce to $25,000 for FY 2017/18 if Budget proposals are realised.
If Marco makes a $60,000 concessional contribution after 1 June 2017 and before 30 June, he could allocate $35,000 to his account in the fund and $25,000 would be allocated to a reserve account. The $35,000 would be counted against Marco’s concessional contributions cap for FY 2016/17. Providing the $25,000 was allocated to Marco’s account from the reserve between 1 July and 28 July 2017 it would count against his concessional contributions cap for FY 2017/18.
The benefit of this strategy is to obtain a tax deduction of $60,000 for super contributions in FY 2016/17 – and to avoid excess concessional contributions via use of the reserve.
Dealing with excess contributions
Anyone with excess concessional contributions has the option of having 85% of the excess refunded to them – or left in the fund and having it counted against their non-concessional contributions cap. If the excess remains in the fund it could potentially result in – or add to – an excess non-concessional contribution. The announcement in mid-September amending the original Budget proposal will reduce the annual non-concessional contribution cap – and in some cases may result in excess non-concessional contributions tax being imposed.
Although there is an element of ‘wait-and-see’ we need to consider what can be done for this financial year. There are a number of steps that can be undertaken to ensure the concessional contributions caps available for this year are used in the best way possible – particularly with the concessional contributions cap set to reduce from 1 July next year.
