Ask Andrew Jewell

Q: I have been notified by my Payroll department that I need to review my salary sacrifice contributions. Why do I need to do this?

Your Payroll department is letting you know that you may need to change your salary sacrifice contributions so that you do not have to pay extra tax or incur penalty interest by the Australian Tax Office (ATO).

You may be asking ‘Why would I have to pay extra tax and pay penalty interest because of my salary sacrifice contributions?’

Let me clarify this for you.

In November 2016 the Federal Government introduced legislation that made a number of changes to superannuation. One of these was lowering the concessional contribution cap.

You may ask ‘What are concessional contributions and why does this lower cap apply to me’?

Concessional contributions are those made to your Frist Super account before any tax is applied. Examples include Super Guarantee (SG) contributions made by your employer, the minimum 9.5%, and salary sacrifice contributions. In this example the total SG and salary sacrifice contributions cannot exceed $25,000 per financial year regardless of age as from 01 July 2017.

Some of our member are making total concessional contributions of up to $30,000 or $35,000 this financial year. These are the current concessional contribution caps depending upon the member’s age.

Your payroll department is informing you that you may need to review your salary sacrifice contributions if your total concessional contributions are exceeding $25,000 this financial year in preparation for next financial year; i.e. as from the 01 July 2017.

Why do you need to initiate the change? You are solely responsible for managing salary sacrifice contributions and ensuring that the concessional contribution cap is not exceeded each financial year. Not your employer or First Super.

If you do exceed the concessional contribution cap then the ATO will notify you of the excess contribution and give the choice of two options; leave the excess contribution within the super fund as a non-concessional contribution or have the excess refunded back to you. Regardless of the option you elect, the excess contribution will be added back your taxable income on which you have to pay tax at your marginal tax rate. In addition to this the ATO will calculate and charge you ‘excess contribution earnings’ which in simple terms can be described as penalty interest.

So, if your current concessional contributions will exceed $25,000 this financial year, you need to start making arrangements to lower your salary sacrifice contributions so that the concessional contribution cap is not exceed next financial year.

To do this, you need to change your salary sacrifice contributions with your pay roll department so that the first salary sacrifice contribution received by First Super in July 2017 is at the ‘new’ correct amount. Start the process by reviewing your recent payslips and calculate your annual concessional contributions. Then speak with your payroll department to confirm and request your salary sacrifice to be reduced if applicable. If you need further assistance then contact the First Super Financial Advice team or your Member and Employer Services Coordinator who can provide you with General Advice on this matter.

 

Q: I have been told by friends at work that I need to change my TTR (Transition to Retirement) strategy. Why?

First it is important to remember the purpose of a TTR strategy, what are the current associated tax benefits of this strategy and then consider if these tax advantages remain given the forthcoming changes to super that the Federal Government has introduced.

A TTR strategy continues to provide the opportunity for those who has reached their preservation age, such as those who are currently 56 years old (i.e. born before 30 June 1961), to accelerate their super balance prior to their intended retirement age whilst maintaining the same disposable income or providing sufficient funds to meet their personal expenses.

The current associated tax benefits of a TTR strategy include:

• Earnings of funds invested in the Allocated Pension account is exempt from tax;
• Making extra super contributions via salary sacrifice and within the applicable concessional contribution cap depending the member age; and
• If you aged 60 or older then the income you draw from your Allocated Pension is exempt from your assessable income for tax purposes.

So how are the forthcoming changes to super affecting these associated tax advantages.

First, there has been no changes to the drawing from the Allocated Pension, that income remains exempt from your assessable income if you are aged 60 or older.

The changes concern earnings on the funds within an Allocated Pension when it forms part of a TTR strategy and making extra contributions.

Earnings of funds in an Allocated Pension where it forms part of a TTR strategy will no longer be exempt from tax but will be taxed up to 15% as from 01 July 2017. This is of particular relevance to those members with a TTR strategy and aged under 60, as the earnings exemption was one of the few tax benefits they received.

Extra contributions via salary sacrifice are subject to the concessional contribution cap. In this financial year, that cap was $30,000 for those aged under 49 or $35,000 for those aged 49 and over.  This concessional contribution cap is being lowered to $25,000 regardless of age as from 01 July 2017 – i.e. next financial year.

Any member with a TTR strategy will need to ensure that their salary sacrifice contributions are changed where they are currently making more than $25,000 in concessional contribution. Such members will now have up to an additional $5,000 or $10,000 of income subject to their marginal tax rate. Questions that these members need to address are:

• Do I still need the income from the Allocated Pension if I have extra disposable income?; and
• If I do retain the income from the Allocated Pension, what are my options to effectively invest the extra disposable income?

The First Super Financial Advice team is here to help you in my making those decisions by reviewing your TTR strategy and providing you with personal advice explaining:

• What do you need to do in respect to your salary sacrifice contributions;
• Are the Allocated Pension drawings still required; and
• If I keep drawing form my Allocated Pension, what are your options on how to invest that extra disposable income

This is a  guide and is intended to provide general information only, and not advice and has been prepared without taking into account your individual objectives, financial situation or needs.  For further information call us on 1300 360 988 or you can obtain a copy of our PDS from firstsuper.com.au This Financial Services Guide was prepared in February 2016 and issued by First Super Pty Ltd (ABN 42 053 498 472 AFS Licence No: 223988 RSE Licence No: L0003049).