Budget night used to have the all too familiar routine feeling about it. Speculation of dramatic changes being ‘leaked’, Australians hastily making changes to their superannuation plans or corporate structures based on nothing but speculation. Then…the moment arrives…tumbleweed rolling across Parliament House floors.
Was it a little different this time? We think so. Here are three strategies to start thinking about.
1. Balance your balances by splitting your super
With many limitations being placed on the ability to contribute into superannuation, now is the time to start planning ahead. From 1 July 2017, individuals who want to start a pension using their superannuation benefits will be limited to a $1,600,000 lifetime limit. This means if you have $2,000,000 in your superannuation fund, $400,000 will need to remain in accumulation and will attract a tax rate of 15% on earnings (compared to 0% in your pension fund).
Enter super splitting. As you plan ahead for retirement, individuals may consider splitting their superannuation contributions with their spouse. This includes redirecting 85% of your pre-tax superannuation contributions to your spouse’s account, which allows you to build on potentially a lower member balance, in turn, allowing individuals to move a larger sum of funds (in total) from accumulation to pension.
Furthermore, if your spouse has not utilised the $500,000 non-concessional or after-tax contribution cap, you may want to think about withdrawing $500,000 from your pension fund and making a contribution into your spouse’s member account. This will also help move more funds into pension mode.
You should also give some thought to how your portfolio is invested. You may consider holding all your Australian shares and high income paying investments in your pension account, international shares in your superannuation account, and cash and bonds in your personal name in order to better manage the income tax implications.
Finally, you may want to start thinking about when you actually commence your pension. A lower market value allows you to move the same number of shares/units, however at a lower price. Then again, we don’t subscribe to trying to time the market.
2. Manage your tax BEFORE the end of the financial year
Regardless of your employment status, from 1 July 2017, you can make personal superannuation contributions for which you can claim a tax deduction. Let’s say you earn $150,000 per year and your employer makes $14,250 of Superannuation Guarantee payments into your superannuation fund. You can now make concessional or pre-tax contributions of $10,750 (up to the $25,000 limit) before the end of the financial year and claim a tax deduction for it. Previously you may have had to liaise with your HR or payroll team to estimate your salary sacrifice contributions for the remainder of the year and review it again the following year…it was never a pleasant exercise, not to mention how often contributions were tipped over the limit.
This is a very flexible way to manage your personal finances, however, don’t be fooled, it requires planing and discipline.
3. $125,000 tax deduction in one year? Bring it on!
The Government will introduce a ‘catch-up’ program on concessional contributions (limit of $25,000 pa for which you can claim a tax deduction) by allowing unused concessional contributions caps to be carried forward on a rolling basis for up to five years for those with account balances of $500,000 of less. If you know of an upcoming asset sale, or for whatever reason, you expect to earn a much higher level of income in a particular year, think about holding off on those superannuation contributions until that particular financial year. You should have the ability to contribute five years worth of contributions ($125,000) and claim a tax deduction for it. That will certainly come in handy.
Furthermore, you could use part of the sale proceeds to boost your superannuation fund via a non-concessional or after-tax contribution. Remember, you’ll have a lifetime limit of $500,000, so don’t get caught out!
Whatever your situation, there is no doubt that the 2016 Budget has made planning and thinking ahead more important than ever for those managing their finances. Plan ahead, think long-term (not too long-term as the Government will probably change the rules again), and make smart decisions.
You can read more on superannuation and tax here.
(I’m still trying to work out how Prepare-Trial-and-Hire is abbreviated to PaTH).