These proposed changes will present opportunities as well as disadvantages to dentists who are both old and young. It is essential that dentists seek advice regarding their circumstances from their accountant or financial adviser.
HOW THE PROPOSED SUPER TAX CHANGES AFFECTS DENTISTS
The Government put forward a superannuation reform package as part of the 2016/17 Federal Budget and following the election released exposure draft legislation to implement some of these changes. These changes will have an effect on dentists regardless of how close they are to retirement but at the time of writing they are still proposals that have not yet been introduced into law. The information contained in this article is general and may apply differently to different people in different circumstances. It is not financial product advice and dentists should consult their adviser to determine how the changes will affect their particular circumstances.
These are the superannuation contributions that you can claim a tax deduction for. In the current 2016/17 year you can get a tax deduction for super contributions up to $30,000 or $35,000 for dentists aged 49 years or over at 30th June, 2016. From 1st July, 2017 the annual concessional contribution limit will be reduced to $25,000 for all taxpayers. It goes without saying that if you are looking to maximise your tax deduction by making super contributions then you need to take advantage of the current rules and contribute before 30th June, 2017. A further measure relating to tax deductible contributions is that from 1st July, 2018, dentists with superannuation balances of less than $500,000 will be entitled to make additional “catch up” contributions to the extent they had not contributed their maximum in prior years. This will operate over a rolling five-year period that commences 1st July, 2018.
Dentists who earn in excess of $300,000 per year must pay an additional 15% tax on their concessional contributions under Division 293 of the ITAA (1997). Some of you may have already received these notices in the past few years and you do have a choice as to whether you pay the additional tax yourself or pass it on to your super fund to pay it from your accumulated superannuation balance. From 1st July, 2017 the income level at which this tax applies will be reduced from $300,000 to $250,000 and this reduction I believe will catch many more dentists who will be required to pay $3750 in additional tax if they have made their maximum superannuation contribution.
Most dentists are probably unaware of the 10% test. Currently for a person who is self-employed such as an ABN contracting dentist, they can only claim a tax deduction for super contributions where at least 90% of their income comes from contracting. If they earn 10% (or more) as an employee then any contributions made are not tax deductible. This is an unfair situation that may inadvertently affect dentist who do some work at a dental hospital or change part way through the year to a surgery where they are paid as an employee.
It is proposed that this rule will be removed so that all taxpayers regardless of how they engage their services have the same opportunity to maximise their deductible super contributions.
NON CONCESSIONAL CONTRIBUTIONS
These are superannuation contributions that are not tax deductible. Non-concessional contributions were capped at $180,000 per year and for those aged under 65 you were able to “bring forward “ two future years meaning that you could make a lump sum contribution of up to $540,000 (3X $180,000) in one year. From 1st July, 2017 this will reduce to $100,000 per year and therefore the maximum amount you can contribute in one lump sum under the bring forward rule will be $300,000. This is subject to transitional rules and it is unclear as to whether you could make a non-concessional contribution of $540,000 before 30th June, 2017 or whether the maximum amount will be $380,000 ($180,000 plus the next two years at $100,000 per year). For those dentists looking to increase their superannuation balances, the opportunity to make a non-concessional contributions at these levels will expire at the end of this financial year. The ability to make non-concessional contributions after 30th June, 2017 will also be restricted to those dentists with a superannuation balance of less than $1.6 million.
$1.6 MILLION PENSION BALANCE
When a dentist retires and they convert their superannuation balance to “pension mode” the income generated by the super fund is not taxed and neither is the pension which is received by the retiring dentist. From 1 July 2017 the maximum balance of superannuation assets that can be in pension mode will be capped at $1.6 million. This means that member superannuation balances in excess of $1.6 million cannot be converted to pension and will remain in (or revert back to) accumulation mode whereby any income generated from these excess assets will be subject to tax in the fund at 15%. Please note that the proposed $1.6 million pension balance cap does not apply to transition to retirement pensions (TRIP) and the income from assets supporting these pensions will now become taxable at 15%.
The above proposed changes will present opportunities as well as disadvantages to dentists who are both old and young. It is essential that dentists seek advice regarding their circumstances from their accountant or financial adviser. MW Partners specialises in providing taxation advice to dental practices throughout Australia.
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