NEWS + VIEWS – 5/4/2024
Markets
Investor fears of ‘delayed’ interest rate cuts in both the US and Australia are impacting markets. Inflation domestically in particular is looking sticky in the face of falling unemployment and rising wages. The government is the key sector for employment growth, which does not bode well for productivity or future economic growth.
Markets have become a bit more volatile as we approach the weaker part of the year for investment returns. To date, the down days have been met with ‘buying the dip’. Nevertheless, we have had a significant run up since October last year, so we are cautious at this point.
Increases in contribution caps and tax changes
There are a number of tax changes that may impact super and personal tax strategies from 1 July this year. This area can become quite complicated, so we recommend reviewing strategies with your adviser.
Concessional Contribution cap
From 1 July the concessional contribution cap will increase from $27,500 to $30,000 p.a. Concessional contributions are made from before tax income with the contributions being taxed at 15% when received by the super fund, and include employer contributions, salary sacrifice and personal contributions.
Non-concessional Contribution cap and Total Super Balance (TSB)
The non-concessional contribution cap is four times the concessional contribution cap thus it increases to $120,000 p.a. from 1 July. These contributions are made in after tax dollars and are not subject to tax when received by the super fund.
Consequently, when using the bring forward provisions for non-concessional contributions, the cap becomes $360,000 (three years of $120,000).
When your TSB (pension plus accumulation amounts) is greater than $1.66 million and you have space in your Transfer Balance Cap, the bring forward caps are reduced to two years ($240,000), if above $1.78 million reduced to one year ($120,000) and non-concessional contributions are no longer allowed when your TSB is above $1.9 million.
Staying within the caps is important, so discuss the benefits of increasing your contributions to super with your adviser.
Transfer Balance Cap (TBC)
The TBC is a life-time limit that can be converted to pension phase. The cap remains at $1.9 million for 2024/25 for those considering converting super to pension phase. Bear in mind that your personal TBC is ‘frozen’ at the time you convert your super to pension phase. For example, if you converted $1.6 million to pension phase in 2017 (the TBC cap at that time), then you cannot convert any further funds to pension phase.
Stage 3 tax cuts
Calling these ‘tax cuts’ is a misnomer as they only partially reduce ‘tax rises’ due to bracket creep. Higher income earners will be taxed higher than the previous policy provided, and lower income earners’ tax will be taxed slightly less.
Source: Colonial First State
Effective Tax-free thresholds and Tax Offsets
The first $18,200 of income is tax free. Low Income Tax Offsets increase the taxfree threshold to $22,575 from 1 July 2024. For those receiving a government pension, the Seniors and Pensioners Tax Offset increase the tax-free threshold to $35,813 for a single and $31,888 for a couple from 1 July 2024.
Preservation Age hits 60 years
The age at which you can access super has been increasing. From 1 July 2024, it will be 60 years of age. This means transition to retirement pensions cannot be started until age 60 and the pension payments will be tax free. You can no longer ‘retire’ and access super until you reach age 60.
How the tax changes might impact strategies
Contribute to super
Your marginal tax rate outside super will determine whether it is advantageous to contribute to super. If your marginal tax rate is above 15% then it makes sense to consider concessional contributions (although you need to be in the 30% tax rate to make it worthwhile).
For non-concessional contributions, you should compare your marginal tax rate outside super to that within super. For example, if you are able to convert nonconcessional contributions to pension phase in super, your tax rate on earnings will be 0%. If your tax rate outside super is 30% it is likely to be beneficial to consider super contributions. If, however, you are earning little income outside super, then the decision to contribute may not be as clear. For example, to super may not save tax but managing your investments may become simpler.
Defer taxable capital gains
Consider deferring realising capital gains to the 2024/25 year to take advantage of lower personal tax rates. For example, if you are earning between $45,000 and $120,000 then you will pay 2.5% less tax on taxable capital gains. If your income is likely to be between $120,000 and $135,000 then the tax for this bracket will be 7% less.
Bear in mind that deferring asset sales can mean that prices may move, and you risk receiving less after-tax dollars.
Salary sacrifice and carry forward concessional contributions
Salary sacrificing amounts should be reviewed post 1 July In view of the increased caps. Concessional contributions
can be the best ‘guaranteed return’ in town. For example, someone on a 37% personal tax rate (plus 2% Medicare levy) can save 24% tax on concessional contributions.
If you have less than $500,000 in super and you have unused concessional contributions caps over the past five years, you are able to use these previously unused caps. This may become attractive if you are a higher income earner or you
are incurring a capital gain.
Non-concessional contributions under 75 years of age
Once over the age of 75, super contributions are restricted to employer contributions or downsizer contributions. Increased contribution limits in 2024/25 may assist in maximising super balances.
Use of ‘surplus’ cash flow
With the changes to personal tax rates and contribution caps, the benefits of paying off the mortgage versus contributing to super versus investing outside super may change. Maximising concessional contributions and paying off the mortgage tend to be the most advantageous.
Gerard O’Shaughnessy
P 0423 771 330
Important Disclaimer
The directors, employees and authorized representatives of PPN Wealth do not guarantee the information in this report to be complete, up to date, accurate nor applicable to your personal circumstances. This is general investment advice only. You should not act on recommendations in this report without discussing proposed actions with your PPN Wealth adviser to ensure recommendations are suitable to your circumstances.
The principals, associates and employees of PPN Wealth may have investments in the securities or companies, referred to in this report.
This report may not be distributed in any way without the prior permission PPN Wealth. The directors, employees and authorized representatives of PPN Wealth do not accept any liability for third parties’ actions relating to this report.
