New year financial plan
By Colin Lewis
The festive break is a good time to kick back with family and friends. It’s also a good time to take stock of where you’re at financially and to plan for the new year.
When it comes to the constantly changing superannuation environment, the last thing you want is to miss out on an opportunity you didn’t know existed.
New super rules that came into play from 1 July 2019 could now be financially rewarding, provided you qualify. Further changes from 1 July 2020 may also be of benefit to you.
You never know, the tax savings from utilising these measures could reimburse you for what you’ve outlaid over this expensive period.
Catch-up pre-tax concessional contributions
If you didn’t utilise the full $25,000 cap in 2018/19 then the unused amount may now be contributed this financial year – giving you a bigger deduction and tax saving. However, the catch is you must have had less than $500,000 in the super system – your ‘total superannuation balance’ (TSB) – at 30 June 2019.
Unfortunately, any unused amounts from prior financial years have been lost.
Say your concessional contributions in 2018/19 amounted to $20,000 then you’ve got an additional $5,000 to play with this financial year and you (or your employer) can contribute up to $30,000 provided your TSB at 30 June 2019 was less than $500,000.
If you don’t use an unused cap amount from 2018/19 before 30 June 2020, all is not lost as you can carry it forward on a rolling five-year basis. So, the $5,000 in the example can be carried forward up until 2023/24 provided in the year you wish to apply it, your TSB is less than $500,000 at the previous 30 June.
Carrying forward unused amounts into future years may increase the tax efficiency of those contributions if you move into a higher tax bracket but could reduce the tax effectiveness of those contributions with the reduction in personal tax rates.
If you’re not employed – so compulsory employer contributions are not being made – you can carry forward $25,000 a year and possibly contribute up to $150,000 in one year (before indexation of the cap), even more with a contribution reserving strategy. This could be useful if you’re wishing to make a large one-off contribution, say to minimise a capital gains tax liability.
Your TSB does not affect your ability to accrue unused cap amounts from year to year. It’s relevant at 30 June just prior to the financial year you intend to apply your unused amounts.
For example, if you want to contribute an unused cap amount in 2021/22, then your TSB at 30 June 2021 must be less than $500,000.
New work test exemption
If you’re aged 65 to 74, you may be able to contribute this financial year even if you’re not working. Normally, you must meet the ‘work test’ to contribute, i.e. be gainfully employed for 40 hours in 30 days.
The catch with this one is you must have met the work test in 2018/19 and had a TSB at 30 June 2019 of less than $300,000.
You cannot use this exemption if you fully retired before 2018/19 as the work test must be satisfied in the financial year preceding the year you wish to contribute.
The work test exemption may be used in conjunction with the above carry forward of unused concessional contributions cap amounts.
Take Ray who turns 65 on 1 February 2020. He retired from full-time work on 1 May 2019 and will not work in 2019/20.
On 30 June 2019, his TSB was $295,000 and he hasn’t made a personal after-tax contribution for many years.
From 1 July 2019 to 31 January 2020, Ray can make personal deductible contributions of $25,000 and after-tax non-concessional contributions of up to $300,000 as he’s under age 65 – anyone under that age can contribute.
What’s new is that if Ray doesn’t make these contributions before his 65th birthday when the work test normally starts applying, he can now make them from 1 February to 30 June 2020 under the work test exemption.
If Ray had retired a year earlier on 1 May 2018, he wouldn’t be able to do this, as he didn’t meet the work test in 2018/19, and he’d need to make the contributions before his 65th birthday.
What’s coming from 1 July?
Further changes announced in last year’s Budget are in the pipeline. If these proposals become law, then there may be further opportunities for you to get money into super later in 2020 or beyond.
From 1 July 2020, it’s proposed that people aged 65 and 66 will be able to make voluntary contributions without meeting the work test, helping those who are retired, or only work one day a week, or volunteer.
Aligning the superannuation work test with Age Pension age – scheduled to reach age 67 from 1 July 2023 – means voluntary contributions will be able to be made to that age, regardless of work status.
In concert with this change, the non-concessional contributions cap bring-forward rule will be extended to people aged 65 and 66. So, if you’re under age 67 any time in a financial year, you may be able to trigger the bring-forward rule and contribute up to $300,000 year even if you’re not working. Of course, the bring-forward rule remains subject to your TSB at the previous 30 June.
A retiree couple aged 65 or 66 selling their home may be able to contribute up to $1.25 million from the sale proceeds using a combination of pre and post-tax contributions and downsizer contributions. Without this change, they may only be able to contribute $600,000.
Also, from 1 July 2020, the age limit for spouse contributions will increase from 69 to 74 years of age – the receiving spouse must meet the work test from age 67.
Currently, people aged 70 or more cannot receive contributions made by a contributing spouse on their behalf.
The ability to make spouse contributions for a further five years will extend the period a spouse may claim a tax offset for spouse contributions of up to $540 a year.
All these changes are in addition to the usual opportunities super offers to grow your retirement savings while reaping tax benefits along the way. Now, during your downtime, is an ideal time to plan – which could be as easy as making the decision to seek professional advice to ensure you don’t miss out!