The end of the financial year is an important time for financial planners and superannuation. Most of the work revolves around making sure clients have maximised the amount they can contribute to their super, drawn at least the minimum pension amount, or started pensions in the right circumstances.
Every year brings with it new changes for super and this year is no different with no ‘work test’ required those below 67 years of age for personal contributions made to super. Another is the impact of the bring forward concessional contribution rule applying to clients who have a total super balance of no more than $500,000 as at 30 June 2020. So there’s lots to think about in the lead up to the financial year end.
Now with all that in mind, let’s look at what’s available for contributions and pensions before this financial year is out when we will head into a world of indexed contributions, Transfer Balance Cap and Total Super Balance changes from 1 July 2021.
As we all know there are two types of contributions that can be made to super: those that are tax deductible (concessional contributions) and those that are not (non-concessional contributions). Employer contributions are deductible, and personal contributions are deductible if an election is made for the amount claimed. The important part is to make sure the contribution has been made to the fund and the appropriate election has also been made to the fund when required.
The election for downsizer contributions and CGT small business retirement contributions are required at the time the contribution is made. The election for personal deductible contributions can be made up to the time the person lodges their income tax return, or at the end of the financial year in which the contribution was made, whichever occurs first. So, the timing is important to make sure the fund receives the right election at the right time.
Clients can make non-concessional contributions from after-tax income, which are contributions that haven’t been claimed as a tax deduction. These include personal non-concessional contributions, spouse contributions, and contributions for a child under 18 years of age. The co-contribution and low-income superannuation tax offset refund could also be considered in this category as well. And, don’t forget, downsizer contributions can be made to super by anyone 65 years and over who sells their main residence and qualifies.
There is no limit to the amount of contributions clients can make to super as a concessional or non-concessional contribution. Nonetheless, most clients like to stay within the caps as excess contributions can lead to tax issues and penalties. The standard concessional contribution of $25,000 for the 2020/21 financial year is taxed in the fund at 15%. However, any amounts in excess of the $25,000 cap are refunded to the client and are taxed at their personal tax rate, plus an interest rate penalty. One thing to remember is that for the 2021/22 financial year, the standard concessional contribution will increase to $27,500.
For non-deductible contributions the standard annual cap is $100,000. However, for clients who are under the age of 65 and have a total super balance of less than $1.5 million, access to the ‘bring forward rule’ may be available. A person with a total super balance of less than $1.4 million can access a cap of $300,000, which applies over a fixed three-year period. The ‘bring forward rule’ commences from the first year in which a non-concessional contribution of more than $100,000 is made to super. A total super balance between $1.4 and $1.5 million allows access to two year’s standard contribution of $200,000 over a fixed two-year period starting in the year in which the standard cap of $100,000 is exceeded. For those with a total super balance of between $1.5 and $1.6 million, they can access only the standard cap each year irrespective of age. Once a person’s total super balance totals to more than $1.6 million, non-concessional contributions cannot be made to super but if they are, they will be considered as excessive. Consequently, this may mitigate the benefit of making non-concessional contributions because of the penalties applied.
From a strategic point of view, advisers should take into consideration the indexation of the total superannuation balance cap to $1.7 million, which will take place from 1 July 2021. The standard non-concessional contributions cap will increase to $110,000 and the maximum bring forward amount will increase to $330,000.
For those who exceed their non-concessional contributions cap, there is a choice of withdrawing the excess and paying tax on a penalty interest amount, or leaving it in the fund and having any excess taxed at a penalty rate of 45%.
Salary sacrifice contributions are usually decided by clients at the commencement of a financial year or when commencing a new job. These contributions are difficult to adjust towards the end of the financial year if the employee needs to top up their deductible contributions. However, now that personal deductible contributions are available to employees, they may be able to top up their concessional contributions from their personal savings and claim a tax deduction.
When there is a change in the amount of concessional contributions, it may prove worthwhile to review a client’s salary sacrifice agreement so that is reflects the concessional contributions applying for the financial year. From 1 July 2021, the standard concessional contributions rate will be $27,500.
Don’t forget that Superannuation Guarantee (SG) contributions made by a client's employer count in the concessional contributions cap of $25,000. As these contributions are compulsory, they should be considered if any salary sacrifice contributions are made which are in addition to any SG contributions.
Spouse contributions can be an important addition to the superannuation savings of a client’s spouse. These contributions are not tax deductible and are counted against the spouse’s non-concessional contributions cap. However, if the spouse of a client is a low-income earning spouse, that is a spouse who has adjusted taxable income of less than $37,000, it is possible for the non-concessional contribution to be eligible for a tax offset for the contributing spouse of up to $540 for a contribution of at least $3,000.
After retirement contributions
There is a special concession that applies in the year after a person who is between 67 and 75 years of age in the year after they have ceased working. For those who have a total superannuation balance of no more than $300,000 on 30 June in the previous financial year, they would be entitled to make contributions to a superannuation fund. This allows the person to make concessional and non-concessional contributions on a once off basis without meeting a work test in the year after they have ceased working.
Advisers should also be aware that any super member that has made after-tax contributions of at least $1,000 to superannuation; has an adjusted income of less than $54,837 (2020/21 financial year); is younger than 71 years of age; and meets certain employment and self-employment tests may be eligible for the government co-contribution of up to $500. The payment of the co-contribution is automatic as the ATO pays the amount to the client’s superannuation fund once they know the amount of the after-tax contribution made by the client and they have lodged a tax return for the relevant year.
Whether the low-income spouse tax offset or the co-contribution provides the best outcome for a client may just depend on their individual situation. This should be considered in the context of the overall benefit to the client’s superannuation balance.
The Low Income Superannuation Tax Offset
The Low Income Superannuation Tax Offset (LISTO) of up to $500 is available for tax-deductible superannuation contributions for those who have an adjusted taxable income of no more than $37,000, where the amount of the tax-deductible contribution is at least $3,330. The amount of the LISTO depends on the amount of tax-deductible contribution made to the fund.
CGT small business retirement exemption
Clients who are in small business and have net assets of no more than $6 million, or a business with a turnover of no more than $2 million, may qualify for certain CGT small business retirement concessions on the disposal of the business or certain business assets. The calculation of what qualifies under these concessions is left up to the client or tax adviser as the current CGT threshold amount is $1,565,000 for the 2020/21 financial year.
There is generally no work test for amounts that qualify under the small business retirement exemption that are rolled over to super. However, once the client reaches the age of 67, work tests apply so the amount can be received by the client’s superannuation fund. The client’s accountant or tax agent can help determine if a client qualifies for the CGT small business concession and whether or not the amount paid to the superannuation fund would be counted against the other contribution caps.
Keeping an eye on contributions
During the financial year, it helps if advisers and clients keep a watch on the amount of concessional and non-contributions made to super to see whether any excess is likely to occur, and penalties applied. For concessional contributions, it’s important to keep an eye on what the client’s employer(s) may have contributed, including anything in a salary sacrifice agreement. For non-concessional contributions, advisers should check the client’s contributions in the 2020/21 financial year, as well as the last two years in case the ‘bring forward rule’ has been triggered. And don’t forget that spouse contributions count towards the spouse’s non-concessional contribution cap, which can be restricted by their total superannuation balance.
Clients can make super contributions in many ways by cash, cheque, electronic transfer or transfer of a limited range of investments. It is important to ensure the contribution reaches the fund by 30 June, otherwise any late contributions cannot not be counted until the next year. This could result in an excess contribution and subsequently an excess concessional or non-concessional contribution penalty may be applied.
Start an income stream from the fund before 30 June
- For persons who are 58 years of age (the current preservation age) or older are entitled to commence an income stream from 1 June in any year and access the following advantages:
Any income earned by the superannuation fund on the balance used to commence the pension is tax free.
- There is no requirement to actually receive an income stream payment in the first financial year. This allows clients to delay receipt of the income stream up until the end of June 2021.
- If the pension commences on 1 June 2021 and the member reaches 60 years of age in the next financial year, any pension received after reaching 60 years of age will be tax free.
Samantha is 59 years of age and retired. She commences an income stream in June 2020 with $800,000. It is not compulsory for her to receive any income stream before 1 July 2021 unless she chooses. Samantha’s birthday is on 10 May and if she delays receipt of her income stream until after 10 May 2021, when she reaches 60 years old, the amount she receives will be considered tax free. In addition, any income earned on her balance in the superannuation fund supporting her income stream will also be tax free from the time it commenced in June 2020.
Paying at least the minimum pension or income stream
One important issue with clients that have self-managed superannuation funds is that they are required to withdraw at least the minimum account-based pension or transition to retirement income stream from their fund. Don’t forget that for the 2020/21 financial year, the minimum pension percentage has been reduced by 50%.
Underpayment of pensions and income streams can lead to a number of compliance issues if the minimum pension has not been paid. This time of year is a good time to remind the client of the amount they need to withdraw by 30 June 2021 so that the income earned by the fund on any investments supporting the pension will not be taxed at 15%.
What the ongoing changes mean
The ongoing changes to superannuation provide some new rules that need to be applied to a client’s situation for the 2020/21 financial year. Whether it’s the concessional and non-concessional contribution caps, tax deductions or getting pension payments right - they may have an impact. As a result, advisers should make sure they know what’s required so they can apply the maximum benefit out of the superannuation rules for their clients.
Subscribe below to Market Watch to receive my latest articlesGraeme Colley, Executive Manager, SMSF Technical and Private Wealth SuperConcepts
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