Additional cash flow stemming from the proposed stage three tax cuts can boost superannuation balances by close to $50,000 in five years with a technical specialist calling for financial advisers to start talking with clients now about adjusting their contribution strategies.
Colonial First State head of technical services Craig Day said the tax cuts, which commence from 1 July and apply a 30 per cent rate to incomes between $45,000 and $200,000, were useful for clients who had not reached their superannuation contribution thresholds and wanted to focus on building their balances before retirement.
“A lot of people say they can’t afford more super contributions but [with the tax cuts] they’ve got extra cash flow and could direct this money into superannuation. As long as they identify the right levels of salary sacrifice and personal deductible contributions or non-concessional contributions, they will end up in the same cash flow position they are in today,” Day told attendees of a recent online briefing.
To illustrate his point he referenced a case study of a 58 year old pre-retiree with an assessable income of $200,000 who will have a concessional contributions cap of $30,000 after 1 July, and will receive a superannuation guarantee contribution of $23,000.
He added a personal deductible contribution of $7,000, made via salary sacrifice would reduce their assessable income down to $193,000, and the new tax rates would provide an additional $4315 in the hand in the next tax year compared to the current tax year.
“If we take that $4315 and direct it into superannuation as a non-concessional contribution, the client would be in the same cash flow position but with additional contributions of $11,000 going into superannuation,” Day explained.
“What does that mean for that balance in today’s dollars in five years? It’s an extra $53,000, and in 10 years it’s $106,000 and in 15 years it’s $163,000.
“If you have got a client that has fully utilised their concessional contribution cap we can take the extra $9075 they’re getting in cash flow [from the tax cut for someone earning $200,000], and dump that into superannuation as a non-concessional contribution.
“The difference is similar, over five years it reaches $46,000, over 10 years $93,000 and over 15 years $144,000, but is a bit less because we don’t have the tax benefits of making those concessional contributions.
“Now, I’ve been running tech services sessions for many years and sometimes you come up with a strategy that makes a difference for a client over 10 years of $10,000 or $15,000 and you think that’s fantastic. Here we’re talking about differences of $50,000, $100,000, $150,000 over those same time periods.
“This is a big opportunity all advisers need to start thinking about for their clients where they can potentially benefit from it which is why we’re talking about it now so you can start to have these conversations with your clients over the next six to seven months,” he suggested.