The year is drawing to a close and hopefully we can look forward to 2021 with far more optimism. But before we celebrate the start of a new year, what could be expected in this year’s Christmas superannuation stocking to help build retirement savings. There’s plenty for the family to think about – super presents for the grandparents, mum and dad, as well as the kids no matter how old they are.
For the “grandparents”
Depending on the ages of the grandparents there may be some contribution options available. Here are some super treats to think about.
Raising of the work test to the age of 67
Since 1 July 2020, the age at which personal contributions can be made has been raised from 65 years of age to 67 before the work test of 40 hours in 30 consecutive days in the financial year, cuts in. Personal contributions include concessional and non-concessional contributions. The age increase provides a little bit more flexibility for anyone retiring prior to the age of 67 to make last minute tax deductible and non-deductible super contributions.
Recontributing to super
The strategy to recontribute to super has been used for many years and can have some estate planning benefits if death benefits are to be paid to adult children. With the increase in the requirement to meet the work test to the age of 67, the recontribution strategy may come in handy for individuals between 65 and 67 years old as they have access to their superannuation when they choose.
It is possible to recontribute any amounts withdrawn from super back to the fund as non-concessional contributions providing the person has a total super balance of less than $1.6 million. This can reduce the amount of tax an adult child is required to be pay on the death of a parent if they receive a super payment. To see whether there is any benefit in using the recontribution, strategy advice is always recommended.
If either grandparent is at least 65 years old and have just sold their home, then the downsizer contribution may be available. The downsizer contribution is available as a once-off opportunity for members of a couple who are at least 65 years of age to contribute up to $300,000 each to super from the sale of their residence. The contribution must be made within 90 days of the sale of the residence. There is no upper age limit to make the downsizer contribution.
Ceasing work contributions
Ceasing work contributions are permitted on a once-only basis after the member has reached 67 years old, previously age 65, in the financial year after they have ceased work. These rules allow a person to make concessional (tax deductible) and non-concessional (non-deductible) contributions providing they have a total super balance of less than $300,000 on 30 June in the previous financial year.
Concessional and non-concessional contributions
If either grandparent is working after reaching 67 years old and meet the work test, they may be eligible to make concessional contributions to super. There is a standard concessional contributions cap of $25,000 which includes personal and employer tax deductible contributions. However, if they have not used up all of their cap since 1 July 2018 and have a total super balance of less than $500,000 on 30 June in the previous financial year, they may be able to increase their concessional contributions cap by the unused concessional contributions.
Once grandpa or grandma have reached their preservation age (currently age 58) they can access a transition to retirement income stream, and if they have retired or have reached 65 years of age, they can commence an account-based income stream. The rules require that a minimum amount is obliged to be withdrawn each year and it is possible to withdraw lump sums depending on the rules that apply. A maximum amount applies to transition to retirement income streams.
For some people, it may provide flexibility for anyone with a transition to retirement income stream or an account-based income stream to pause it and have it recommenced at a later time as it is required.
For “mum and dad”
Just like grandpa and grandma, mum and dad can benefit from making personal concessional and non-concessional contributions to super if they qualify. This can include getting access to the bring forward rule for concessional contributions if their total super balance of no more than $500,000. But some of the concessions available to grandpa and grandma may not be available to mum and dad as they may not be old enough to qualify.
If mum and dad are working, it is likely their employer is making superannuation guarantee contributions for them and they may be salary sacrificing to super as part of their retirement savings.
Personal superannuation contributions can be made up to the age of 67 years without the need to meet a work test. After reaching 67 years of age, mum and dad will need to satisfy the work test if they wish to make concessional or non-concessional contributions to super. It’s important to make sure the contribution caps are not exceeded and that they take into consideration their total super balance to work out whether they can make non-concessional contributions to super.
It is possible for mum or dad, or even for the grandparents, to make spouse contributions, which are counted as non-concessional contributions of the spouse and can have the effect of evening up the couple’s super balances.
To be eligible, if the spouse is under 67 years of age, there is no need to meet a work test but if they are between 67 and 75 years old, the work test must be met prior to making the contributions. Spouse contributions are unable to be made after the spouse has reached 75 years of age.
If the spouse is a low-income earner and has an adjusted taxable income of less than $40,000, it is possible for the contributor to receive a tax offset of up to $540 for the first $3,000 of the spouse contribution.
Another benefit of making non-concessional contributions to super is that if mum and dad are low income earners, they may qualify for the co-contribution which is paid by the government to their super fund. If either has an adjusted taxable income of less than $54,837 for the 2020/21 financial year and make a non-concessional contribution of up to $1,000, the government’s co-contribution can be up to a maximum of $500.
Low income superannuation tax offset
The low-income superannuation tax offset is available for anyone with an adjusted taxable income of less than $37,000. It applies to concessional contributions because the tax payable on the contribution received by the fund is usually greater than the personal tax they would pay if the contribution was paid to them as salary and wages.
The offset is calculated by the ATO and paid directly by the government to the superannuation fund.
Contribution splitting can allow a person to split concessional contributions to their spouse. To qualify, the split to the person’s spouse can take place if they are under preservation age (currently 58 years of age) or between preservation age and 65 years old if they have not retired.
Concessional contributions include employer super guarantee contributions, salary sacrifice contributions and personal deductible contributions. It is possible to split up to 85% of the person’s concessional contributions or up to their concessional contributions cap. The general rule is that the contribution is permitted to be split to the member’s spouse in the financial year after it was made to the fund.
Concessional contributions made in this financial year ending 30 June 2021 will usually be split in the next financial year ending 30 June 2022. This requires an election to be made which tells the trustees of the amount that will be split. However, for anyone who is rolling over or transferring the whole of their super to another fund or withdrawing all of their super as a lump sum, or a combination, the election and split must be made prior to any of these events taking place. This can occur in the year in which the concessional contributions were made to the fund.
Once mum or dad have reached their preservation age (currently at the age of 58) they can access a transition to retirement income stream, and if they have retired or have reached 65 years old, they can commence an account-based income stream. The rules require that a minimum amount is required to be withdrawn each year and it is possible to withdraw lump sums depending on the rules that apply. A maximum amount applies to transition to retirement income streams.
For some people, it allows the flexibility for those with a transition to retirement income stream or an account-based income stream to stop it, and at a later time have it recommence as it is required.
For the “kids”
Children who are older than 18 years of age are entitled to the same superannuation concessions as their parents which depends on whether they qualify for a tax deduction, government payment or tax offset for the contributions they make to super.
However, for children under the age of 18, it is possible to have contributions made for the children. This could be made by their parents or guardians as non-concessional contributions. The amount of the non-concessional contribution is limited to the caps that applies to everyone.
Some children under 18 years of age can make personal contributions to super. However, if they wish to claim a tax deduction for the contributions they must be working.
Last but not least
There’s no doubt that 2020 has been a worrying year for SMSFs and investors in general but those funds that have weathered the storm should have come out of it with a reasonable result. The benefits of an investment strategy and understanding investment markets in volatile times can never be underestimated.
For SMSFs, members are waiting for the imminent increase of the maximum number of members from 4 to 6 members. This may provide some benefits for larger families, but careful consideration needs to be given to how a larger fund can be successfully managed before embarking on such a venture.
Subscribe to SMSF News using the form below to receive all of my articlesGraeme Colley, Executive Manager, SMSF Technical and Private Wealth - SuperConcepts
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