From 1 July 2017, superannuation laws will be reformed, and you need to know what's going on — unless you like donating extra tax to the ATO.
Not me!
Here are three changes that I believe are especially important because they will affect many Australians, not just those about to retire on a yacht.
Make sure you speak to a qualified tax accountant or financial adviser before making any changes.
Lower before-tax contribution limits
From 1 July, everyone under 65 (and between 65 and 74, if they meet the work test) will be able to contribute $25,000 per year to super as a concessional contribution. Contribute any more than that and they'll face more tax. That's down from $30,000 — or $35,000 for anyone over 49, so be careful.
Before tax contributions include an employer's super guarantee and salary sacrifice arrangement, among some other things.
This change will be painful if you have been using salary sacrifice to maximise the current $30,000 or $35,000 per year limit to boost your super.
Tax deductions – yay!
Under the current rules, if someone is self-employed (welcome to the party!) they couldn't earn more than 10% of their income on a salary and claim a tax deduction for a contribution to super.
For example, if I earn $70,000 as a writer on ABN, but also work as a part-time mud wrestling coach and get paid $20,000 as an employee (PAYG), I couldn't claim a tax deduction for contributing to super. That's because more than 10% of my income came from an employer.
Damn…
However, under the new rules, anyone up to 65 can claim a tax deduction for contributing to super – fist pump! But remember the new limit of $25,000 applies to concessional contributions.
And if you are a little more spritely (between 65 and 74 and satisfy the 'work test') you, too, may be able to claim a tax deduction.
I think this reform is a good concession because not every employer offers a salary sacrifice arrangement. So not everyone is able to maximise their before-tax contributions to super. What's more, the current rules were useless for many half-employed half-self-employed people.
Spouse tax offset
If you are in a relationship where one person in the partnership earns most of the money, pay attention to this one.
If you know someone whose wife is six months pregnant and already has three pups under four (holla!) (just kidding), they may be pleased to know that better tax benefits are becoming available.
Currently, the breadwinner could claim a tax offset for contributing to their partner's super fund — if the partner earns less than $10,800. However, from 1 July, the receiving spouse can earn up to $40,000!
If they are over 65 (you're having another kid?!) and under 70, their spouse must meet the work test.
Foolish Takeaway
Previously, I wrote that if you're under 40, it is worth contributing to super via the super guarantee (mandatory for employees) and maybe a little more. However, don't bother maximising the super caps unless you can afford to do so. I believe the government is going to make it harder and harder to retire early and implement many more changes to super rules before you retire. That's what us finance geeks call "legislative risk".
For anyone over 40, take heed of the upcoming changes and speak to your adviser if you have one. If you don't have a trusted adviser, pull our your smartphone and google "super reforms 2017 treasury". Click on the first search result. Read it.
