Self Managed Super Funds (SMSF)

A new financial year with some new super rules

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

The start of a new financial year always brings with it new rules for super funds. Sometimes there are lots of changes, which are wide-reaching, and in other years there’s just a few. For the 2020/21 financial year, the two main changes are: the abolition of the work test for anyone aged 66 and 67 years old who wish to make personal non-concessional contributions; and an extension of spouse contributions to those aged between 70 to 75 years. However, we are waiting for the change in legislation that will allow access to the ‘bring forward’ rules. The continuation of the 50% reduction in the minimum pension rate for account-based pensions, due to the COVID-19 pandemic, will apply for the of the 2020/21 financial year.

Abolition of the work test extended to 67 years of age

Until to 30 June 2020, there was no need for a member to satisfy a work test for personal concessional and non-concessional contributions before reaching the age of 65. However, once they reached 65 years of age in the financial year, a work test of 40 hours in 30 consecutive days was required to be met at any period during that year, and prior to the contribution being accepted. Providing the work test is met in a financial year, personal concessional or non-concessional contributions can be accepted up to 28 days after the month in which the person reaches the age of 75. However, there are exceptions to the work test where personal contributions are made in the year after ceasing work, or for purposes of downsizer contributions.

From 1 July 2020, for those under the age of 67 years, it is now possible to make personal contributions without needing to satisfy a work test. In the financial year a person reaches the age of 67, personal contributions can be made prior to reaching 67 years old. However, a work test must be met at any time during the financial year prior to the contribution being made.

Example: Phillip is aged 66 years on 1 July 2020 and will turn 67 years old on 23 October 2020. His total super balance on 30 June 2020 was $875,000 and he worked 40 hours in the first week of September. It would be possible for Phillip to make concessional and non-concessional contributions to his super fund without the need to meet the work test prior to his 67th birthday. However, after Phillip reaches the age of 67, he will only be able to make contributions if he has worked at least 40 hours in 30 consecutive days. As Phillip worked for 40 hours in the first week of September, he is able to make personal contributions.

Ceasing Work Contributions

Ceasing work contributions are permitted to be made on a once-only basis after the member has reached the age of 67 years, previously it was the age of 65. Personal contributions can be made on a once-only basis in the financial year after work has ceased, and the person has a total super balance of less than $300,000 on 30 June in the previous financial year. These contributions can be accepted in the year after the person retired from work and up to 28 days after the month in which the person reaches the age of 75.

Example: Cynthia retired from working when she turned 68 years old on 1 June 2020. On 30 June in the previous financial year, her total super balance was $250,000. Although she will not be working in the 2020/21 financial year, Cynthia will be able to make personal concessional and/or non-concessional contributions in the 2020/21 financial year, which is the year after she retired. This concession is available on a once-only basis.

Downsizer Contributions

Downsizer contributions can made after the sale of a person’s main residence, as described for CGT purposes, which they have owned for at least 10 years. To be eligible, the person must be 65 years or older, and a contribution of up to $300,000 must be made within 90 days of the sale. The person’s spouse may also be eligible to contribute up to $300,000 if they are 65 years of age or older. There is no upper age limit when applying to downsizer contributions or any work test that applies.

Example: Bev and Howard are a couple. Howard has owned the house they have lived in since 2005. They decide to sell the house and go for a tree change in the country. They are both over 65 years of age and decide to use some of the proceeds from the sale as a downsizer contribution to super. A downsizer contribution of $200,000 each is made to their SMSF and the rest is used to purchase a new home. The downsizer contribution needs to be made within 90 days of the sale of their main residence being finalised.

Employer Contributions

When it comes to employer contributions for anyone 65 years of age or older, there are no work tests or age limit for compulsory employer contributions, such as superannuation guarantee contributions or those made under an industrial award. But a work test must be met if the employee wishes to make a salary sacrifice contribution to their super, and contributions must be made before 28 days after the month in which the employee reached the age of 75.

Example: Marion is 74 years old and earns $100,000 p.a. Her employer makes a super guarantee contribution of $9,500 for her during the year. She decides to salary sacrifice $10,000 to her super. The amount Marion has salary sacrificed to her super will need to be contributed by her employer within 28 days in the month after Marion reaches the age of 75, otherwise it will be refunded from her superannuation fund. The amount made by Marion’s employer for super guarantee purposes will be accepted by her fund irrespective of her age.

Access to the ‘bring forward’ rules from 1 July 2020

It is possible for those under the age of 65 to trigger the ‘bring forward’ rule which allows a person to make up to two years’ worth of non-concessional contributions to be made over a fixed period. The period commences from the year in which the person makes a non-concessional contribution that is greater than the standard annual amount of $100,000.

Whether a person has access to triggering the bring forward rule depends on their total superannuation balance on 30 June in the previous financial year. For anyone with a total super balance of less than $1.4 million, they are able to bring forward up to two years’ standard non-concessional contribution. For those with a total super balance of between $1.4 and $1.5 million, they are able to bring forward up to one year’s standard non-concessional contribution. Once a person has a total super balance of between $1.5 and $1.6 million, only the standard non-concessional contribution is available and there is no bring forward amount. If a person has a total super balance of $1.6 million, it is not possible to make a non-concessional contribution without incurring a tax and interest rate penalty.

It was announced in the 2018 Federal Budget that the bring forward rules would be amended to apply to people under the age of 67 on 1 July in a financial year. The legislation to bring this change about was included in Treasury Laws Amendment (More Flexible Superannuation) Bill 2020, which is currently in the House of Representatives. As parliament resumes in early August, the bill has a way to go prior to becoming law. It is expected that the legislation will pass as the amendment is not considered to be politically sensitive. So where are we now with contributions for anyone who is 65 years of age or older with the start of the 2020/21 financial year?

Those fund members in the 65 to 66 years old age bracket, they may be in a bit of a quandary until the legislation is passed. From a practical point of view, it is only those members with a total superannuation balance of less than $1.5 million as at 30 June 2019, or 30 June 2020, who may be impacted if they wish to maximise non-concessional contributions by using the bring forward rule.

Example: Rose is currently 65 years of age would have access to the bring forward rule of at least one year’s standard non-concessional contribution if her total super balance is less than $1.5 million on 30 June 2019. If she contributes more than the standard non-concessional contribution of $100,000, the bring forward rule is triggered and may make the relevant contributions over a two- or three-year period, depending on their total super balance. If Rose makes contributions prior to reaching age of 67, the fund can continue to accept the contributions without requiring the member to meet the work test.

However, in contrast, if Rose was aged 66 or 67 years old, she will not be able to trigger the bring forward rule as she was older than the age of 65 on 1 July in the 2020/21 financial year. This will limit the maximum amount of non-concessional contribution to $100,000 without penalty. However, the consolation is that there is no requirement for Rose to meet the work test unless she wished to make personal contributions in the financial year after she reached 67 years of age.

Spouse contributions and the tax offset

It is possible to make contributions for an eligible spouse, which are treated as non-concessional contributions, and counted against the spouse’s non-concessional contribution cap. If the spouse has an adjusted income of less than $37,000, it is possible for the contributor spouse to receive a tax offset of up to 18% on the first $3,000 of the any non-concessional spouse contribution. The tax offset amount phases out between $37,000 and $40,000 on a dollar for dollar basis.

Until 30 June 2020, it was only possible to make spouse contributions up until the age of 70 years. Between the ages of 65 and 70 years, the spouse was required to meet the work test of 40 hours in 30 consecutive days for the year in which the contribution was made. However, from 1 July 2020 this has now been extended to apply to spouse contributions made between the age of 67 years, and 28 days in the month after the spouse reaches 75 years old, which puts it in line with other personal superannuation contributions. The work test must be met prior to the spouse contributions being made to the fund.

Example: Mick wishes to make a spouse contribution for his spouse Jo, who is 72 years old and works as a florist and has an adjusted taxable income of $30,000. Mick decides to make a $100,000 contribution for her. Since Jo’s adjusted taxable income is less than the tax offset threshold, Mick may be eligible to receive a tax offset of 18% of the first $3,000, which is $540 against his income tax assessment for the year.

Reduction in minimum pensions for account-based pensions

In late March 2020, the government amended the minimum percentage required to be paid for account-based pensions by 50%. This meant that account-based pensions, transition to retirement pensions, and market-linked income streams would have their minimum pension percentage reduced by 50% for the 2019/20 and 2020/21 financial years.

The table below shows the reduced percentage that apply:

Age

Minimum pension percentage for

account-based and transition to

retirement income streams for the

2019/20 and 2020/21 financial years

Under 65
2.0%
65-74 2.5%
75-79 3.0%
80-84 3.5%
85-89 4.5%
90-94 5.5%
95 or older 7.0%

The minimum amount for market-linked income streams is reduced to 45% of the amount calculated under the formula in Schedule 6 of the Superannuation Industry (Supervision) Regulations 1994.

What Next?

The extension of the work test exemptions to the age of 67 years old for personal superannuation contributions has been a bonus in these difficult times, as well as the extension of the age at which spouse contributions can be made. However, we remain waiting with anticipation for the extension of the bring forward rule to the age of 67 years to become law when parliament resumes in the next few months.

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