Despite continuing concerns about the impact of the new super rules, developing and implementing superannuation savings strategies have been greatly simplified. The most significant change has been the strict upper limit on total superannuation account balances of $1.6 million that can be converted into tax-free retirement accounts.
The $1.6 million cap does not preclude having a separate accumulation account where the accumulating income is subject to a maximum tax rate of 15 per cent. Allowing for the refund of imputation tax credits and the lower 10 per cent capital gains tax on assets held for longer than 12 months, the effective tax rate on accumulation fund income can be as low as 8 per cent.
There is thus a considerable benefit to accumulating as much money in superannuation as possible before retirement. Once the total superannuation account balance including the notional assessed value of any defined benefit fund entitlement exceeds $1.6 million, the new rules prevent any further after-tax non-concessional contributions into super.
All further growth in account balances can come only from investment earnings and new tax-deductible concessional contributions of up to $25,000 annually. Clearly, the new arrangements provide tangible benefits to people achieving high compounding returns in their funds, and those who are able by meeting the work test after age 65 to make tax-deductible contributions up till age 75.
The restriction on making new non-concessional contributions once the total balance exceeds $1.6 million encourages building up super balances as early as possible to allow time for future fund earnings to boost the total balance above this amount at retirement. When the $1.6 million total is unlikely to be reached, there's still a benefit to be gained from both after-tax and tax-deductible super contributions.
While the new lower $25,000 limit on tax deductible contributions limits large catch-up contributions later in life, it's now far easier to reach the annual $25,000 cap because there is no longer any need to negotiate salary sacrifice contributions with employers.
Now all that's required is to make a personal contribution to a superannuation fund accepting tax-deductible concessional contributions. The Tax Office will, at the end of the financial year, check that the combined annual total of compulsory and other employer and tax deductible personal contributions do not exceed $25,000. Where they do, the excess will be subject to penalty tax.
Previously, taxpayers receiving compulsory super on more than 10 per cent of their annual income were not eligible to claim personal tax deductible super contributions. While not yet widely recognised, this change makes the superannuation system much more accessible to the whole population by allowing all eligible taxpayers to access the maximum available taxation assistance for their super contributions.
Daryl Dixon is the executive chairman of Dixon Advisory. firstname.lastname@example.org