Every time governments change the super rules in a major way there can be two distinct courses of action – one is taking advantage of existing rules before they change as a window of opportunity, and the other is adapting to new rules so you can apply them correctly when they come into force.
In calendar 2017, there are two distinct halves in many aspects of super: the six months leading up to June 30 when the old rules apply and the six months beyond July 1 when the new ones come into force. Both are worth examining separately, especially when it comes to making contributions to super.
When accumulating savings for retirement through superannuation, there are two ways this can be achieved.
First, by making regular contributions – either tax-deductible (also called tax-concessional) or after-tax (non-concessional) contributions. The latter may be sourced from savings in a bank account, from the sale of investments like shares or property, from downsizing a family home or from an inheritance, to name a few. More exotic is transferring listed shares directly from personal ownership into an SMSF, a strategy described as an in specie transfer.
Second, super can accumulate as a result of the investment earnings these contributions generate.
Making sizeable after-tax amounts is a way of maximising the investment returns potential of super savings and taking advantage of the concessional taxes on super investment earnings.
All contributions are topical in the period leading up to June 30 because greater amounts can be contributed compared to what will be allowed after July 1.
Window of opportunity
Deductible contribution limits are $30,000 for anyone aged 48 or under on June 30, 2016 or $35,000 if you were 49 or over on this date.
From July 1, they will be either 20 per cent or 40 per cent less when these limits become $25,000 for everyone.
This reduction is important because the pre-June 30 entitlement offers a window of opportunity to contribute more during this time.
In a summary of potential super strategies worth considering, Jordan George, policy head with the SMSF Association, includes maximising the current contribution rules before the lower $25,000 deductible limit starts on July 1 as well as the lower $100,000 annual non-concessional limit.
This appears to be the consensus when it comes to advice on making super contributions before June 30, especially for those over 50 who can contribute $35,000 in tax-deductible amounts.
As far as making after-tax contributions, the annual limit up to June 30 is 80 per cent more at $180,000 than the $100,000 after July 1.
With these contributions, there is no tax concession entitlement. If the contribution comes from selling an asset, you must pay personal income tax in the form of capital gains tax on any profits the investments have earned and can only contribute the after-tax amount. This also applies to in specie contributions like a portfolio of shares.
Bring forward strategy
Should the proceeds from any investment sales exceed $180,000, you can contribute up to $540,000 before June 30 under the super rule that allows you to bring forward three years of non-concessional contributions into one year.
This three-year rule has an important restriction. In each of the previous two years you must not have exceeded $180,000 in non-concessional contributions. Where you have, you will need to factor in how changed non-concessional rules will influence contribution entitlements (given complex transitional rules apply to those who may have triggered the bring-forward rule).
For those considering a January to June strategy, financial planner Nerida Cole from Dixon Advisory says it is important to think carefully about any contributions you plan to make and what they mean in terms of future contributions beyond July 1.
You need to know, for instance, that the $540,000 bring forward rule will apply for the remainder of the 2016-17 income year for those eligible to claim this.
But if the bring forward provision is triggered but the full $540,000 amount is not used, then the bring forward amounts available in 2017-18 and 2018-19 will be reduced.
As an illustration of how this works, consider the example of James Smith* who is 54 with $1.2 million in his SMSF. He personally owns a share portfolio valued at $520,000 which he wants to transfer into his SMSF based on a view the market is about to increase in value substantially.
If he transfers the portfolio before June 30, the contribution will count towards his non-concessional contribution cap and he will trigger the bring forward rule, allowing him to contribute up to $540,000.
Transition rules
But because he has not used his non-concessional contribution cap entirely before July 1, he will fall under transitional rules.
These rules state that where the bring forward rule was triggered in the 2016-17 financial year, his transitional cap for the three years starting on July 1, 2016, will be $380,000. This is made up of $180,000 for the 2016-17 year, and $100,000 for each of the 2017-18 and 2018-19 financial years.
As James's contribution of $520,000 exceeds his $380,000 transitional non-concessional contribution cap, he can make no more of these contributions until the 2019-20 financial year. But as far as the $380,000 transitional cap is concerned, he will not be assessed as breaching this because he made the contribution before July 1.
According to financial planner Matthew Scholten of Godfrey Pembroke, reviewing your scope to make non-concessional contributions can be approached in various ways.
He has a client aged 70 who is semi-retired but still working and able to make contributions.
By selling a number of personally owned investments over the past year, he has accumulated around $275,000 that is sitting in a cash account outside super. Because of his age, he can't use the bring forward provision which only applies for those under age 65.
But he can contribute $180,000 before June 30 under the current rules and up to $100,000 under the July 1 rules.
Another interesting aspect of this client is that he has an account-based super pension with a balance of around $1.3 million so the non concession contributions will take him right up to the $1.6 million limit that will entitle him to a tax-free pension.
*From contribution examples prepared by the SMSF Association
Any comments to John.Wasiliev@fairfaxmedia.com.au
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