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With far-reaching changes to super just around the corner, business owners need to understand what they will mean to them – before July 1.
You may have heard a lot about the federal government’s superannuation reforms of late and how they will affect everyday Australians. But how will they affect you as the owner of a small to medium-sized business?
In many ways you will face exactly the same issues as anyone else who holds a super account in this country (see What’s changed: Summing up the super reforms). Like everyone, you will need to ensure you have a strategy to stay compliant – and to take advantage of the new rules, earlier rather than later.
However, as the owner of an SME, you should be aware of some additional issues that might impact you and your business, including your employees.
From July 1, 2017, the annual cap for concessional (pre-tax) super contributions will drop to $25,000 per annum (compared to the current $35,000 pa – if you are 49 years of age or older – and $30,000 pa for everyone else). Concessional contributions will also attract an additional 15 per cent tax1 if your income2 is greater than $250,000 pa (compared to the current income threshold of $300,000 pa).
From July 1, 2017, the cap for non-concessional (after tax) contributions will be $100,000 pa (compared to the current $180,000 pa). If you choose to bring forward two years’ worth of contributions this will be limited to $300,000 (versus $540,000). Conditions apply.
From July 1, 2018, if your total superannuation balance (accumulation and pension) is less than $500,000, unused amounts may be carried forward on a five-year rolling basis, with 2019–20 being the first financial year. This may benefit you if you have broken work patterns or competing financial commitments.
As of July 1, 2017, the tax paid on earnings from investments held in a transition to retirement (TTR) pension (a pension that has been started after you have reached preservation age3) will increase from 0 per cent to a maximum of 15 per cent. It’s worth reviewing your TTR strategy to see whether it’s still suitable or not.
From July 1, 2017, a ‘transfer balance’ cap of $1.6 million will be introduced that limits the amount you can hold in the retirement (pension) phase of super.4 Any amount in excess of $1.6 million can remain in the ‘accumulation’ phase where earnings are taxed at up to 15 per cent – or, in effect, a lot lower once deductible expenses, franking credits and other items are taken into account in the fund.
While it’s important to think about yourself, you should also give consideration to how you can help your employees navigate the super reforms – particularly those heading into retirement. Now is the time to provide them with general information and support, even if it’s only to check that they know about the reforms and have reviewed their own situation. If your employees salary sacrifice, they may wish to consider their pre-tax super contributions prior to July 1, 2017.
As a business owner, there’s a good chance you are funding some large premiums through superannuation contributions. If this is the case, you need to review your insurance premium contributions before July 1, 2017 to ensure they are under the new, reduced concessional cap of $25,000. It may be an opportunity to consider holding your personal insurance policies outside super. Seek financial advice before you proceed.
With June 30, 2017 looming, anyone who has plans to dispose of a business or business asset should also be thinking about the implications of the lower non-concessional contribution cap from July 1, 2017. You may need to decide whether it’s a good idea to try to bring forward any plans you may have to sell your business in order to increase the amount you put into your super before the end of this financial year. Seek financial advice before you proceed.
The $1.6 million limit
If you are likely to have more than $1.6 million in your super and/or pension as at June 30, 2017, you may be limited in making non-concessional contributions from July 1, 2017. Seek financial advice before you proceed.
It’s also a good idea to look at any employment and super contribution arrangements for your spouse if they are employed in your business. From July 1, 2017, the ‘10 per cent test’ for personal deductible contributions will be removed and you may be able to claim a tax deduction if they make personal contributions to super up to the concessional cap limit.
Moreover, as of July 1, 2017, the spouse contribution tax offset will be available when a spouse’s income is less than $40,000 per annum (compared to the current $13,800 pa), with a tax offset of up to $540 available to the contributing spouse.
1 Income Tax Assessment Act 1997, Division 293. 2 Taxable income, reportable fringe benefits, total net investment losses and low tax contributions. 3 Preservation age is currently 56 and will gradually increase to 60 depending on date of birth; further information is available at www.ato.gov.au. 4 The limit applies per person; this means it is possible for a couple to transfer up to $3.2 million to pensions.
Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice please consider whether it is appropriate for your circumstances. It is recommended that you consider the relevant Product Disclosure Statement (PDS), Terms & Conditions (T&C) and/or Financial Services Guide (FSG) available for products and services before making any decision.
This article was first published in Business View magazine (Issue 23).
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