The new world of superannuation

Senior counsel at The Tax Institute, Bob Deutsch, talks about the new world of superannuation as all the changes have come into effect from July 1 2017 for your tax planning.

Introduction: Superannuation tax planning for new year

Ross Greenwood: Great to have your company here on Work.Life.Money right around Australia. One of the issues as you go to work tomorrow is going to be that you have a brand new financial year. In that brand new financial year, things will change for your taxation and also for your superannuation, and you’ve got to be across the new rules. The reason for that is if you go outside of the rules of either the tax or for super, quite clearly, there can be penalties if you get it wrong. Of course, if you’re inadvertently wrong, that can have consequences as also. I thought what we might try and do is get the Senior Tax Counsel at the Tax Institute. That’s Bob Deutsch.

He’s great with his time with us here to just take us through some of the things you know, need to know as you head off to work tomorrow or as you go through your day in this new financial year. Bob Deutsch is on the line right now. Bob, many thanks for your time; happy new financial year. It is a brand new world.

Interview: Bob Deutsch, Senior Tax Counsel at the Tax Institute

Bob Deutsch: You too. Well it’s great to be with you, Ross.

Ross Greenwood:  In regards to some of the key changes that take place, I know these changes in superannuation are being well documented. There’s also tax changes that come in as from pretty much the start of this new financial year.

Bob Deutsch: Yes. Some new tax rights coming starting last Saturday – yesterday — and a few other bits and pieces that will limit the way in which the tax will operate in the new year. The main changes that we’ve talked about in the past are in relation to superannuation, and there’s quite a lot of change in that area as well.

Ross Greenwood:  Okay. The one thing that many people, especially those over 50, are going to have to really encounter is that the time when they’re trying to fast track their superannuation, there are now significant limits on the amount of money they can get into their super funds, isn’t there?

Bob Deutsch: That’s right. The new rules that apply with effect from the 1rst of July relate to what we call the concessional contributions and the non-concessional contributions. Concessional contributions are essentially your after-tax money. Up until Friday, you could have put in amounts of 35 or $30,000 depending on your age. Now everybody is restricted this current year to $25,000. That’s your maximum for your concessional contribution. Also, they’ve limited the amount you can put in by way of non-concessional contributions. These are amounts that you can put into super where you don’t get a tax deduction. Previously, the annual amount was $180,000.

That’s for the current year, this has been pulled back to 100,000. There’s some significant limitations on the amounts of money that you can get into the superannuation nest.

Ross Greenwood:  Okay. The other one is at the very top, and we know for those people with large balances, if they go into a pension phase in that superannuation fund, then they’re going to be limited in the future to $1.6 million. But that’s not the limit of their superannuation, because they can leave the excess in a traditional superannuation fund which will incur a tax of 15% on the earnings. That’s pretty much how that works, isn’t it?

Bob Deutsch: That’s right, Ross, and that’s a very important point you just made. A lot of people misunderstand; they think that there’s some new rule that you can’t have more than $1.6 million in super. That is not correct, and it’s very important to get that message across. You can have as much money as you like in super, there is no limit. What is limited is the amount of money that you can have in super which is supporting a pension. That is restricted to 1.6 million, and that has to be adhered to very rigidly, otherwise there will be significant penalties.

If you want to have $5 million in the super, provided that you meet those rules about how much you can contribute that I referred to earlier, you can have 5 million in there, but only 1.6 per person can be used to support your superannuation pension.

Ross Greenwood:  The truth I was going to say is it is still worthwhile. The reason I say that is for the 2017/18 financial year, you have to look at the tax scales. You pay zero tax between zero and $18,200. You pay 19% tax when your income is between $18,237; that’s where a lot of people who are of pensionable age might be. Then between $37,000 and $87,000, you’ll pay 32.5% in tax. Now, the fact of the matter is, if a person’s paying 15% tax if they’ve got money in a superannuation fund, that’s still better than most of those tax rights that might otherwise pay.

Bob Deutsch: Absolutely. Unless you’re under 18,200, you’re going to be paying a higher tax rate than if you had your money in superannuation, but superannuation tax is still a very good deal. Again, it’s point that been lost in all the noise that’s been going on with super. People think, “There’s so many changes. This is terrible. I better get out of it;” it’s quite the opposite. Provided that you comply with the rules and you follow the basic principles that I’ve been outlining, superannuation tax is still a terrific deal. As you say, the rates — essentially, apart from the zero rate — all the rates are higher than the 15% that you’re getting from superannuation tax.

You’d be mad not to look at superannuation seriously if you’ve got capital that you can contribute to it.

Ross Greenwood:  There’s something else that’s really important here, and that is a person who, let’s say, has $200,000 in superannuation. We go to the other end of the scale; they might be getting out of that superannuation fund on an annual basis maybe $10,000 — let’s say, that they might be getting per year. Now, they’re not going to be paying any tax on that, even a person on $400,000, $20,000. In other words, the vast majority of the people with lower balances in their superannuation fund are probably going to get their income topped up by the age pension as well.

From that point of view, it’s not one of those situations where you necessarily have to panic if you don’t find you’ve got vast amounts, the 1.6 million in the superannuation, or whatever it is.

Bob Deutsch: Yes, that’s right. Marrying up the superannuation outcomes with the age pension is a very important element of the whole jigsaw puzzle. It’s quite complicated and people get scared by it, but they shouldn’t. If they get some reasonable advice — which I would encourage people to pursue some reasonable advice from some people who understand the system — they would do very well to understand how much they can have in superannuation and still gain the benefit of the age pension. I think that’s a very important element of that overall jigsaw puzzle.

Ross Greenwood:  I’ll tell you what. It’s going to be a really interesting observation to see how people adapt to these about, trying to figure out how much money they can put into superannuation. Because even though we’re talking about this 1.6 million limit, for a lot of younger people these days, it might be even harder to achieve that over a period of time. As I say, always great with these time, the Senior Tax Counsel at the Tax Institute of Australia, Bob Deutsch. You have a great weekend, won’t you, Bob?

Bob Deutsch: Thanks, you too, Ross.

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