8 February 2018
Understanding what ‘total super balance’ now means
The government introduced a number of changes to Australia’s superannuation regime in 2017 which it said at the time would “improve the sustainability, flexibility and integrity” of the system. The changes were also designed to rein in the amount of total wealth accumulated nationwide through super.
The new rules came into effect on July 1, 2017 and one of the most important changes concerns ‘total superannuation balance’.
‘Total super balance’ is the term used to describe the value someone’s super assets, and from that, calculate their eligibility for things such as:
The intention was to make the super taxation system fairer, but there is still plenty of confusion surrounding the difference between ‘total super balance’ and the ‘transfer balance cap’ – both of which have a $1.6 million limit – and how everyone from individuals to members of self-managed super funds are affected.
What is the $1.6 million super cap?
Total superannuation balance is comprised of all an individual’s super assets including pensions and retirement savings accounts. In other words, it’s the total amount an individual has in superannuation and related assets.
Transfer balance cap, on the other hand, is the limit on the amount someone can transfer from their accumulated super account into a ‘retirement phase’ pension account.
Calculating total super balance
The total super balance consists of accumulation and pension interests (including transition-to-retirement pensions) and once this cap is exceeded an individual can’t make any after-tax (non-concessional) contributions to their super fund.
Calculating the balance is for super funds and therefore, not a problem to consider for clients. The exception to this is self-managed super fund trustees, who must value assets. Doing this calculation can be problematic for them.
What happens when a client exceeds the cap?
If an individual exceeds the balance cap on June 30 of the previous financial year they will not be able to make non-concessional contributions to their super balance in the next financial year. While individuals can exceed the cap in their super account it means certain concessions are not available to them.
Financial advisers need to be vigilant that their clients manage their total super balance as they may be unable to make non-concessional contributions. A possible alternate strategy could be to contribute super in the name of the spouse.
The $1.4m rule and what it practically means
OnePath technical services manager Mark Gleeson says the changes to the total super balance rules will have a big impact on the non-concessional contributions cap.
Generally, individuals aged 64 or younger can contribute up to $300,000 into superannuation, while those aged 65 or more can contribute up to $100,000.
“That means if your total super balance is between $1.4 million and less than $1.6 million, the $300,000 cap is not available and a reduced cap applies. If the balance is $1.6 million or more, then no amount of non-concessional contributions can be made,” Gleeson says.
“If you exceed the non-concessional contributions cap, additional tax is payable.”
Who is most likely to be affected?
Roughly 110,000 individuals are likely to be affected by the total super balance changes, according to The Association of Superannuation Funds of Australia.
Those that have smaller amounts in their accumulated super accounts will also be affected by the reduction in the non-concessional contributions cap from $180,000 a year to only $100,000, which also came into effect last year. This will make it harder for those with lower balances to reach the total super balance amount of $1.6 million before retirement.
Concessional contributions have been reduced to $25,000 a year for everyone – a move which the association says will affect up to 400,000 people. (Previously, the cap was $35,000 for people 49 years and older at the end of the prior financial year and $30,000 for everyone else.)
How to ensure clients don’t exceed the cap
The biggest challenge for financial advisers is in understanding the implications when clients exceed the total super balance.
Gleeson says to avoid confusion now and in the future, financial advisers need to review their current and future strategies.
“This includes making sure clients understand there is a restriction that applies if their balance is over $1.4 million and they can make no further non-concessional contributions if their total super balance exceeds $1.6 million.
“Advisers should ensure they capture data about their clients’ total super balance so they can fully explain to them the restrictions regarding non-concessional contributions.”
Many advisers overlook this step that may cause the client to exceed the cap, he explains, adding that “the government co-contribution may also need a review to ensure the client is still eligible under the new balance and cap rules”.
Gleeson recommends reviewing clients’ spouse contribution strategies, as the recipient must also have a total super balance below $1.6 million.
“If the advice relates to the spouse contribution tax offset, co-contribution, or the segregation method for SMSFs, advisers need to ensure that they take the total super balance into account before implementing a strategy.”
Who should review their investment strategies?
The caps on concessional and non-concessional contributions and total balance mean that those nearing retirement might need to reconsider where they put their excess cash and assets since they can no longer be held in the superannuation investment class.
This will require finding other investments that are as tax-friendly as possible. In some instances, setting up investment bonds and family trusts will be beneficial although these can be highly complex.
One advantage of a family trust is that they can arbitrage tax between family members. This is especially advantageous when capital gains are distributed among members and those on low incomes pay the lowest tax rates.
Investment bonds also have tax advantages that may appeal to higher net-worth individuals as earnings are taxed at a maximum rate of only 30 per cent within the bond structure. Investment bond earnings are not included as part of taxable income and therefore do not attract, or increase, an individual’s marginal tax rate.
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