How to beat regulators on the $1.6 million cap limit on superannuation

AJ Financial Planningsuperannuation TaxHow to beat regulators on the $1.6 million cap limit on superannuation

If you have more than $1.6 million in super, presently you might find that you are unable to make any further after-tax contributions (non-concessional contributions) into your super.

This cap limit is based on a per person limit and was introduced as a result of the government’s idea of restricting how much one person can have in their super at retirement at a reduced tax rate of 0%.

In essence, if you have $1.6 million in super and are drawing an income stream, you might find that this is taxed at a 0% tax rate on any income, capital gains or earnings within the super fund. Any amounts that sit above this limit of $1.6 million could be taxed at 15%.

This legislation was introduced to target people who normally squirrel away larger amounts into super in the lead-up to retirement.

We often find a lot of people who are 50 years or older naturally start to think about super and retirement, and tend to stuff larger amounts into their super in the lead-up. This legislation acts as a natural headwind to this late ‘mercy dash’ towards retirement saving.

So, what can be done about this limit if you find you are hitting the $1.6 million brick wall?

Here are a couple of suggestions:

  1. The cap relates to $1.6 million per person, so if you have a partner who sits under this cap you could simply push some of your funds over to them. To do this, however, a range of complexities must be considered to see if you can step through this door.
  1. Starting early can help, too. If you think about how much you will put into super over your working life, for most of us there is a ‘bulge’ at the end, due to rapid savings that take place in the years approaching retirement. By smoothing the contribution amounts over a longer time, it allows you to maximise the power of compounding this capital. Simply by starting contributions earlier could allow you to smash through the $1.6 million cap limit without breaking a sweat. Of course, before you jump into this option you need to consider the trade-offs, such as less access to capital or paying off your mortgage sooner.

These are just a couple of options we look at when coming up against this problem. We often use a range of other solutions for clients who are contemplating this issue.

Like any tax problem, remember what Kerry Packer famously said:

“I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn’t minimize their tax they want their head read. As a government I can tell you you’re not spending it that well that we should be paying extra.”

Unlike the complex tax problems of a billionaire such as the late Kerry Packer, however, this strategy is fairly simple in comparison: to simply achieve the objective of eliminating the possibility of 15% tax being paid on your superannuation.

Like any great investment or retirement planning strategy, before you jump in and try to do this yourself, please seek professional guidance from a suitably qualified financial planner and, of course, I recommend AJ Financial Planning.