Add CategorySuperannuation and investing in self-managed super funds (SMSFs) are undergoing reviews within the industry and within the political landscape.
The Coalition Government has passed new laws, and on July 1 new legislation will come into effect. These new rules, which are the biggest changes to superannuation over the last 10 years, will have a substantial impact on SMSFs. But how do these changes affect SMSF members?
We asked Jessie Shen of Esuperfund, a Melbourne-based self-managed superannuation service provider, to talk about SMSFs, outline its benefits, and explain the main changes.
What is an SMSF?
An SMSF is your very own personal superannuation fund that gives you total control over how your super benefit is invested, according to Shen.
“An SMSF is ideal for DIY investors who prefer to make their own investment choices for their retirement rather than leave their superannuation to be invested by others. There is no minimum amount required to set up an SMSF,” she said.
As for how common they are in Australia, recent figures from the Australian Taxation Office (ATO) reveal that in the five years to June 30, 2016, SMSF assets grew by 55% or $219.7bn.
Between June 30, 2012 and June 30, 2016, the number of SMSFs grew from 440,000 to over 577,000, with almost 1.1 million members. “This represents 9% of all members in Australian super funds,” Shen said.
What are the benefits?
Total control
An SMSF gives you total control of your super by allowing you to choose where you invest your super benefit.
Cost-effective
SMSFs can be the most common type of superannuation fund, according to Shen. “Their annual fees can be fixed irrespective of your super balance. So the higher your balance grows, the lower the percentage cost of running your SMSF. This is unique in comparison to other superannuation funds whose fees increase as your super balance grows,” she said.
Two accounts in one
With retail and industry funds, your benefit is typically invested separately in a pension or accumulation account. This can mean double the fees, as each account is managed separately with separate investments and a separate fee structure.
“Usually, the more funds you have the more fees you pay. However, an SMSF is a pension and accumulation fund in one. You can commence a pension and continue contributing to the same SMSF. There is no need to split your super benefit into multiple funds,” Shen said.
Consolidate investments
Members of an SMSF traditionally make contributions in cash. However, they can also contribute certain assets, called “in specie” contributions. These include assets such as shares, managed funds, and commercial property.
Consolidate member accounts
An SMSF can have up to four members, enabling you to consolidate your super with your family members or friends. “This means that members do not have to pay separate fees. More importantly, there is a much larger pool of money to invest with, giving you access to a wider range of assets,” Shen said.
What are the main changes?
- Pre-tax (concessional) contributions
Reduction of concessional contributions cap to $25,000 per annum
Currently, individuals can make concessional (pre-tax) contributions up to $30,000 per year for those aged under 49 at June 30 of the previous financial year, and $35,000 otherwise.
“From July 1, 2017, the government will lower the annual concessional contributions cap to $25,000 for all individuals aged under 75. The cap will be indexed in $2,500 increments (instead of the current $5,000 increase) in line with wages growth,” Shen said.
Allowing personal concessional contributions regardless of employment situations
Currently, individuals are only allowed to claim a tax deduction in the personal tax return for personal contributions if they meet the 10% rule (i.e. employment income divided by assessable income is less than 10%).
From July 1, all individuals aged under 75 are allowed to make concessional superannuation contributions up to the concessional cap (including those aged 65 to 74 who meet the work test) regardless of their employment situations.
“This change will benefit individuals who are partly self-employed and partly salary earners, as well as individuals whose employers do not offer salary sacrifice,” Shen said.
- After-tax (non-concessional) contributions
Increased constraint on non-concessional contributions
From July 1, the government will reduce the annual non-concessional (after tax) contribution cap from $180,000 to $100,000 per year.
“In addition, the government will introduce the $1.6m eligibility threshold, according to which individuals with a total superannuation balance of $1.6m or more at June 30 of the previous financial year will no longer be eligible to make non-concessional contributions. The above two changes in superannuation rules will affect the individual’s ability to bring forward non-concessional contributions,” Shen said.
- Pension phase
Transition to retirement pensions
People who have reached preservation age but are under 65 and not retired can still access a Transition to Retirement Pension (TRAP).
“However, from July 1, 2017, the government will remove the tax exempt status of income from assets supporting Transition to Retirement Pensions regardless of the date the TRAP commenced. The earnings on the amount supporting TRAPs will be taxed at up to 15% (i.e. the same tax rate applying to accumulation earnings),” Shen said.
The intent of this change is to ensure that TRAPs are not accessed primarily for tax minimisation purposes, but for the purpose of supporting individuals who remain in the workforce with reduced working hours.
Simple accounts-based pensions
From July 1, 2017, the government will introduce a $1.6m cap on the total amount that can be transferred into the tax-free retirement phase for simple account based pensions. “This is known as the general transfer balance cap. It will be indexed in $100,000 increments in line with CPI,” Shen said.
Superannuation benefits accumulated in excess of the cap can remain in the accumulation account, where the earnings will be taxed at up to 15%.
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