First we had the calendar new year, followed by the Chinese new year. A third new year is fast approaching and it’s important to plan for it.
1 July 2014 marks the start of a new financial year. But it’s important not to leave wealth accumulation and wealth protection until the last minute. There are many things you can do in the lead up to the end of this financial year to prepare for the new one.
This year it’s particularly important to pay attention to superannuation contribution limits. If you are eligible to contribute to super, consider if you have maximised your level of contributions to the maximum you can afford to do, within the limits allowed, and taking into consideration your income and lifestyle needs.
An annual limit of $25,000 applies to concessional contributions (which generally covers superannuation guarantee contributions from an employer, salary sacrificed contributions or personal deductible contributions). You can contribute more than this amount, but if you do you can expect to pay additional tax above the standard 15% applicable within the superannuation environment.
If you were aged 59 or older on 30 June 2013, you have a higher concessional contribution limit of $35,000 for this financial year. If you are in this category, you may need to adjust any salary sacrifice arrangements to take advantage of this higher threshold. An extra $10,000 in salary contributions equates to $8,500 of investable money in the tax-effective super environment. If this money was taken as normal salary, instead of in super contributions, you could end up with as little as $5,350 after tax (assuming the top marginal tax rate).
If you have turned 49 or older this year, from 1 July 2014 you can also access this higher $35,000 limit. If you’re younger, there may be good news on the horizon. The existing $25,000 threshold is subject to indexation and current indications are that the standard concessional contributions cap will index to $30,000 from 1 July 2014. The ATO will confirm the actual cap closer to 1 July 2014, but it’s important to start thinking now about your options. For instance, could you afford to salary sacrifice more into super? Could you increase the level of insurance coverage you hold through your super?
Don’t forget to review your contributions this year to ensure you don’t accidentally exceed the cap. For example, have you taken into account that compulsory super contributions from your employer increased this financial year from 9% of your salary to 9.25%? If you plan your contributions close to the cap, constant monitoring is important.
After tax contributions
The expected increase to the standard concessional contributions cap has a flow on effect to the non-concessional cap, which relates to your after tax contributions to super. This cap is set at six times the concessional cap, making the current cap $150,000.
But if the concessional cap rises to $30,000, from 1 July the non-concessional cap should increase to $180,000. That’s an extra $30,000 of after tax contributions you could make to super if you can afford it.
There are a couple of other factors to think about. You can also use a ‘bring forward’ rule for non-concessional contributions. That means (if eligible) you can bring forward two years’ non-concessional contributions to the current financial year, effectively allowing you to exceed the current limit.
The rules mean you can contribute up to three times the value of the current year’s non-concessional contribution limit (currently $450,000) and is invoked as soon as you go over the current year limit. How much you can contribute is restricted in the following two years.
So the idea is to work out if you can afford to contribute more than $150,000 after tax this year. However, if the cap rises the amount you can bring forward next year should also rise to a limit of $540,000 (instead of $450,000). You may be better only contributing up to $150,000 this financial year, and contribute the balance next financial year.
The rules are complicated
Quite clearly, the rules around superannuation contributions are complicated. Constant monitoring of your contribution levels against the relevant caps is important to ensure you don’t exceed your caps.
Given the complex rules about who can contribute, how much, at what time and in what manner, it might be worth discussing your options with a financial adviser to help you make the most of end of financial year and beyond.