How will the superannuation changes hit your nest egg?
It’s been buoyed by the mining boom and battered by the global financial crisis, but Australia’s patchwork economy will be back in the black if the government can claw back billions of dollars.
In the Federal Budget handed down in May, the government identified $33.6 billion of savings over the next 5 years, some of which will come from high-income earners such as doctors.
In two key superannuation changes, wealthier workers will have to pay more tax when they make super contributions, and the government has deferred a deal that would continue to allow older workers with less than $500 000 in super to contribute up to $50 000 per year.
Despite the extra changes, superannuation remains a tax-effective strategy for high-income earners.
There is also good news for medical practices, with an easing of rules for writing off business assets and a new upfront deduction for car purchases.
Here’s a look at the fine print of the budget, and suggestions for how to manage the changes.
Super contributions capped at $25 000 for over-50s
People aged under 50 can contribute up to $25 000 to their super fund each year at the concessional tax rate of 15%. Over recent years, people aged over 50 have been able to contribute up to $50 000 to encourage them to top up their balances before retirement. However, the May 2012 budget announced that the $25 000 cap would apply to all workers, regardless of age. The government decided the $50 000 cap would again be made available to workers over 50 with a super balance of less than $500 000 — but not until July 2014. With indexation, this is expected to rise to $55 000. Similarly, it is expected that from July 2014 the $25 000 cap will have increased to $30 000 through indexation.
What will it mean?
Maximising super contributions is a favourite tax-management strategy for doctors. However, because many are self-employed, they often come late to the superannuation party and often need to maximise contributions later in their career.
The change to the super contributions cap will mean that people aged over 50, on the highest marginal tax rate and contributing the maximum tax-deductible amount into super, will pay an estimated extra $15 750 in tax over 2 years.
Older doctors who earn super contributions from a couple of sources such as universities and hospitals may also feel the effects. If they inadvertently exceed the $25 000 cap, they may have a tax bill. Anything paid into super that exceeds the cap will attract a penalty tax of 31.5% in addition to the 15% contributions tax, giving a combined total that is equal to the maximum taxation rate.
Mr Chris Wren, a financial adviser with Highland Financial, says that even after-tax super contributions (which are capped at $150 000 per year or $450 000 over 3 years for those under 65) may still offer financial advantages due to the lower tax rates on profits made within a super fund.
Mr James Gerrard, a financial planner with PSK Financial services, says the change will also affect doctors implementing transition-to-retirement strategies.
He says this group has been able to swap significant levels of tax-free pension income for concessionally taxed super contributions, so they may have to tweak their arrangements.
For those over or approaching the age of 50 who have less than $500 000 in super, Mr Gerrard suggests super-splitting into a spouse’s account over the next 2 years.
Then in 2014, when the cap returns to $50 000, the doctor’s super balance will ideally be under $500 000 so they can get the maximum tax advantage.
Doctors can place up to 85% of their concessional contributions into their spouse’s account, according to Mr Gerrard.
Contributions tax rises to 30% for high-income earners
Before the budget, the contributions tax on tax-deductible superannuation contributions was 15% for all individuals. From July 1, this tax increased to 30% for those who earn more than $300 000.
Although all the details have yet to be released, this income is likely to include taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment loss, tax-free government pensions and benefits and certain foreign income.
However, if an individual’s income excluding their concessional super contributions is lower than $300 000, but the inclusion of their concessional contributions pushes their income over the $300 000 threshold, only that part of the contribution in excess of the threshold will be subject to the higher contributions tax.
This change will not affect the 15% tax on earnings within superannuation (and the tax exemption for assets supporting pension payments).
What will it mean?
This measure, of course, makes super a less tax-effective vehicle for those on very high incomes. Those earning $300 000 and over on the highest marginal tax rate of 46.5% were paying up to $3750 tax a year on their concessional contributions. This new measure will see that figure double.
However, even for people in this category, super still attracts a far better tax rate than income (30% compared with 46.5%), Mr Wren says.
“Super contributions within allowable limits still provide tax advantages, so it will still have a place in retirement planning”, he says.
Also, because income and capital gains from super remain at 15% or under (depending on how long an asset is held), super is still an attractive tax structure in which to hold investment assets, Mr Gerrard says. To capitalise on this tax-effective aspect, he suggests that people older than the preservation age of 55 seek advice about starting a transition-to-retirement pension — which brings the overall tax rate on investments held inside the super fund to 0% — and draw down the absolute minimum (which varies depending on your age).
“When you start a transition-to-retirement pension, you usually move the total super balance across to a transition-to-retirement pension and this becomes a second account inside your super account”, Mr Gerrard says.
Once in that pension, the money can earn interest, receive rent and produce capital gains, all tax free, he says. Meanwhile, you still receive money into your separate super account as usual through salary sacrifice and employer contribution, which continues to be taxed at up to 15% on earnings and gains.
The good news
Immediate deduction for business assets costing less than $6500
Small businesses (those with turnover of less than $2 million) have had to depreciate business assets costing over $1000 — think diagnostic equipment, computer software and office furniture — over a few years, depending on the life of assets. They could, however, write off assets that cost $999 or less. As of 1 July 2012, small businesses are able to write off any new business assets that cost less than $6500 in the same year they bought it.
What will it mean for you?
Mr John Fara, an accountant and tax consultant with Fiducia Advisors, says this measure means most practice items will be tax deductible in the year in which they are purchased, improving cash flow and making accounting easier at tax time.
Upfront $5000 deduction for new or used car purchases
A business owner who buys a new or used car can claim a tax deduction over several years based on the percentage of work-related use. Though this is still the case, as of 1 July, small businesses can also claim $5000 upfront on new or used cars.
What will it mean for you?
If you’re considering upgrading your vehicle, this measure provides an extra incentive. Mr Fara says the additional deduction will be worth $2325 for those on the highest tax rate.
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