Super still super
|Robert Deutsch CTA|
With all the seemingly bleak news associated with looming changes to superannuation, the question continues to resurface: is putting money into superannuation still a viable financial option? The resounding answer is an unequivocal and unqualified YES!
For those thinking about superannuation investment who are confused and frightened by all of the noise associated with the upcoming 30 June tax changes, it is important to understand how those changes are likely to affect the average investor.
For a start, the average investor is unlikely to have superannuation funds in excess of $1.6m in their lifetime. So much of the noise can be ignored. For those average investors, what is largely being restricted is the amount that can be put into superannuation each and every year.
As has been well-documented elsewhere, the limits on putting money into superannuation will change in two ways in particular as of 1 July 2017.
First, the amount of after-tax non-concessional contributions that can be made in the course of a year is to be reduced from $180,000 to $100,000 with effect from 1 July 2017. Attached to this change is a broad rule that, up until 30 June 2017, up to three years can be put in in one lump sum of $540,000. After 30 June 2017, the lump sum three-year amount will be restricted to $300,000.
Second, the amount of pre-tax income that can be put into superannuation will reduce from an amount of either $35,000 or $30,000 (depending on age) up to 30 June 2017 to an amount of $25,000 thereafter for everyone. Importantly, that will include the 9.5% compulsory superannuation which is paid by the employer.
To the extent that non-concessional contributions are made, there is no tax on the contribution inside the superannuation fund. To the extent that a concessional contribution is made, a 15% tax rate applies in the superannuation fund. However, a full tax deduction will be allowed to the employee who makes the contribution.
In other words, both of these important changes are relevant to the amount that can be put into superannuation and do not affect the tax on an ongoing basis inside the fund, or the way in which benefits extracted from funds are taxed.
If the contributor is over the age of 60 and has all of the assets of the fund dedicated to the payment of a pension, there is no tax on the earnings inside the fund. In addition, if, after the age of 60, the contributor ceases to work at any one employer, the contributor can extract the funds without further tax. After the age of 65, they can withdraw those funds with no further tax, even without ceasing an employment.
For those lucky few who have managed to secure more than $1.6m in superannuation, even after taking into account the above changes, the position is more complicated but, once properly understood, reveal a very favourable tax environment within the superannuation context.
In particular, once over the $1.6m magical number, no further non-concessional contributions can be made, and the amount over $1.6m needs to be effectively shifted from the pension to the accumulation side of the superannuation fund. In the accumulation side, 15% tax will apply within the superannuation fund.
The noise associated with these changes suggests that this is something horrific which should at all costs be avoided. However, the reality is quite the opposite.
If you are lucky enough to be in this position, you will have all assets exceeding $1.6m in an accumulation fund paying tax at 15%. Outside superannuation, the tax rate for a person with such a level of assets is likely to be the top marginal rate of 45% plus the Medicare levy — surely an outcome which makes superannuation even in the accumulation mode look very attractive.
As of June 2016, there was some $2t in total assets held within Australian superannuation, providing some form of long-term non-government funded retirement benefit to the 12 million Australians who constitute our working population.
If properly understood, the growth in this coverage is likely to accelerate in years to come, rather than diminish, as a result of the looming changes to superannuation.
Superannuation remains a preferred 'investment vehicle' when compared to the alternatives and especially to the relatively paltry amount that is payable to pensioners who utilise the traditional government-funded aged pension route.
* Robert Deutsch CTA is The Tax Institute’s Senior Tax Counsel. This article first appeared in the July issue of the Institute’s member-only journal, Taxation in Australia.
Robert will speak at the Institute's upcoming 2017 National Superannuation Conference in Sydney on 24-25 August. You can find out more on our website.