09
May
2012

Budget Changes to Superannuation

The Budget and how it affects you

The latest federal budget has introduced a number of proposals that will affect the superannuation system; this will greatly influence superannuation strategies, particularly for those nearing retirement and high income earners.

The first and more highly publicised announcement surrounded the increased contributions tax for high income earners; those earning more than $300,000 pa, there are 128,000 individuals who meet these criteria.  This is in reality a return of surcharge tax. This proposal will thankfully only impact on very few, however they are extremely disadvantaged.  The incentive to salary sacrifice is greatly reduced, and the excess tax on SG contributions will increase contributions tax by $2366 (given the maximum contribution rate of $43,820 per quarter) and those that contribute the maximum $25,000 will pay an extra $3750 in contribution tax.

Although the benefit of the Salary sacrifice is reduced, individuals in this group still receive a tax advantage of 15%, this is significant enough to justify the salary sacrifice strategy, none the less I imagine that the increase in contributions tax will see many move away from salary sacrifice as a strategy.

Although this increased contribution tax is seen by many as a disincentive to the super system, the fact that so few are impacted and the bulk of the contributions limit is mandated, I expect this to have a low influence on super inflows and the government will argue rightly or wrongly that the increased tax is not overly high, and is a more or less a reduction of incentive instead of an increased tax, they will argue that the high income earners are still receiving a 15% tax savings (compared to their marginal tax rate) and the increased contributions tax in dollar terms is not overly significant.

Although I disagree strongly with the increased concessional tax, I do feel that very few will be impacted and those impacted will be in a position to build sufficient wealth for retirement.

The other change that has had far less fan fare, but in my opinion is of far more concern for those approaching retirement, this is the deferral on changes to the concessional contributions cap. As many will be aware the current concessional contributions cap is $25,000 for those under 50 and $50,000 for those over age 50. This arrangement ends at the end of the financial year, with a $25,000 cap for everyone. 

The original proposal was for those aged over 50 with a super balance less than $500,000 to have a cap of $50,000, this has been deferred for 2 years.

Most Australians accumulate the bulk of their retirement income in the last 10 years before retirement, in that period most have significantly reduced their debts and the expense of their children has greatly reduced, also in general most are earning more than they have for the majority of their working life, therefore have a much higher capacity to save for their retirement, compared to other times in their life.

The most tax effective way to do this has traditionally been through salary sacrifice. By doing so they were not only avoiding income tax and instead paying the more generous contributions tax of 15% as opposed to a marginal tax rate of up to 45%, the savings would also be in the concessional tax environment of superannuation. Many are able to contribute more than $25,000 and this cap will restrict those retirement savings, and at retirement these individuals will have less funds to provide income in retirement.

This cap reduction has further implications for those wishing to utilise a “transition to retirement strategy”. This strategy effectively transfers fully taxed income to tax free/concessional income, and does so by using superannuation salary sacrifice and pension income. Most use this strategy to increase net super contributions by reducing tax.

As this strategy involves salary sacrificing to the limit where possible, and replacing that income with an allocated pension, the reduced cap significantly reduces the amount that can be sacrificed and therefore significantly reduce the effectiveness of the strategy.

This reduction of cap will significantly impact on ability of everyday people trying to save for retirement and will alter how we plan to achieve retirement goals. It may be necessary to start planning for retirement earlier and grow saving in new ways.

For more information contact future financial services Phone: 02 47276588 or via our contact page.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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