By Giles Krempels
Superannuation (Super) in Australia is a form of future savings arrangement which enables residents to accumulate funds that will provide a retirement income when they’re older. Recent changes have been made to Super and many people are unaware of how it may affect them, particularly for residents living or working outside the country.
Changes to Superannuation
Most of the recent changes in non-concessional contributions came into effect in July this year and are designed to improve the sustainability, flexibility and integrity of the Australian Super system. If relevant to you it would be wise to familiarise yourself with which alterations will affect you. Of particular note are the new transfer balance cap for retirement phase accounts and the changes to taxation of defined benefit income streams. For more detailed advice, take a look at the Government’s guidance notes.
The transfer balance cap is a new limit on the amount of your Super you can transfer and hold in tax-free retirement phase accounts – set at $1.6 million. The cap includes the value of any other pensions or annuities you receive. If your contributions exceed the cap, the amount above the cap is included in the assessable income, and is taxed at your marginal tax rate.
The changes to taxation of defined benefit income streams effects people who are:
• Retired and receive a defined benefit Super income stream over $100,000
• Receiving a defined benefit income stream and start/expect to receive a reversionary defined benefit income stream upon someone else’s death
• Receiving, or may start receiving, a defined benefit income stream and will turn 60 years old soon.
The defined benefit income cap now limits the amount of tax-free income a person can receive from a capped defined benefit income stream (pension or annuity). For 2017-2018, the defined benefit income cap is $100,000.
Impacts of Superannuation
How do the Super changes affect people approaching retirement, or those who would like to do advance retirement planning? The aim of the reforms is to give the consumer more power over their retirement funds. Superannuation is compulsory for most employees, so the system encompasses many people who don’t have the drive or the skill to make educated choices about their retirement saving funds. For example, where their savings will be invested, which level of life insurance they take, and above all, finding the most efficient provider.
The tax you pay on your Super contributions, as well as your Super benefit, depends on the type of contribution you make and how much you contribute yearly. Tax also depends on your age, the source of your benefit and how your benefit is paid: for example, whether the benefits are paid as a lump sum or income stream.
Proper financial planning – a case study
It’s important to up your knowledge about the Super, and to plan your finances appropriately for your retirement years. Enquiries have uncovered that last year, about 2.8 million Australians were underpaid on their Superannuation, and there have been calls for the Australian Taxation Office (ATO) to do more to detect these shortfalls by conducting random audits on employers. Currently, the ATO primarily relies on employees reporting their employers, which is unreliable as many fear the repercussions. Many employers exploit temporary or part-time employees – many of whom are women and students – as the Super is not payable if an employee earns less than $450 a month.
By knowing your rights and the regulations of Superannuation, you can protect yourself and your future savings.
It’s important to remember that each Australian expatriate will have different financial needs to others, and therefore this article provides a general overview of the Super changes, and how you can best prepare for them.