Planning for 2020-21 – never too early to start!
By Colin Lewis, Head of Technical Services, Fitzpatricks Private Wealth
With the end of the financial year upon us, now is a good time to get your ‘financial house’ sorted for 2020-21. Good financial planning is a year-round consideration, not just a June 30 event!
So, what’s in store? What are the super opportunities and considerations for the new tax year?
For the new financial year, the pre-tax concessional contributions (CCs) cap remains unchanged at $25,000. So, you and/or your employer may contribute up to this amount, regardless of how much you have in the super system, i.e. your total superannuation balance (TSB).
If you are earning more than $263,157 and receiving compulsory Superannuation Guarantee (SG) contributions from two or more employers, you can ask an employer to stop paying SG – to avoid beaching the CCs cap – provided at least one of them continues to do so. However, only do this if you can negotiate more salary because paying tax on something is better than getting nothing at all!
Any unused CCs cap amounts from 2018-19 and 2019-20 can be used in 2020-21 if your TSB is less than $500,000 at 30 June 2020.
From 1 July 2020, the good news is the age the work test comes into play has increased two years. So, if you wish to contribute, you must satisfy the work test – 40 hours of gainful employment in 30 consecutive days – if you’re aged 67 (up from 65) to 74.
If you won’t meet the work test in 2020-21, but met it in 2019-20 and have a TSB below $300,000 at 30 June 2020, you may make voluntary contributions under the ‘work test exemption’, provided you did not contribute using this exemption in 2019-20.
If you wish to top-up your super you can make salary sacrifice contributions, provided your employer offers this, and/or a personal deductible contribution.
Salary sacrifice allows you to ‘set-and-forget’ for the year as contributions will automatically be made for you on a regular basis. Making regular deposits into an investment at regular intervals is a powerful way to invest and is known as ‘dollar cost averaging’. It gives you the opportunity to build exposure to growth assets in a disciplined way, can reduce the risk of investing during times of market volatility and helps avoid the pitfalls of attempting to ‘time’ entry into markets. Entering into a salary sacrifice arrangement with your employer is a way of implementing dollar cost averaging.
Alternatively, making your own contribution(s) gives you greater control and certainty over both the amount and timing of those contribution(s), and dealing with the CCs cap particularly around year end – but you need to be disciplined. If you wish to adopt dollar cost averaging, you’ll need to administer this yourself.
Making your own contributions means you’re not reliant on someone else doing it and you have peace of mind knowing your money goes into your super fund. Many employers leave it for months between the money being deducted from wages and making the contribution. Unfortunately for some, the money never gets there! Also, it avoids a nightmare should your employer go into administration/receivership, as money deducted from salary but not contributed may take years to recover.
In working out your voluntary CCs, take into account, amongst other amounts, your employer’s SG contributions, your employer’s notional taxed contributions if you’re in a defined benefit fund and your fund’s administration expenses and/or insurance premiums where paid by your employer, as all count towards the CCs cap.
If making a personal deductible contribution, you must provide your fund with a notice of intent (NOI) to claim a tax deduction – usually around tax time. Do not to touch the contribution – roll it over to another fund, withdraw it, or start an income stream – before first lodging your NOI.
From 1 July 2020, you can split up to 85% of your CCs made in 2019-20 to your spouse’s super. You may wish to do this to even up entitlements to maximise the amount you can both get into the tax-free retirement phase given the transfer balance cap (TBC), or to move entitlements from a younger to older spouse for earlier access to tax-free benefits, or from a spouse at or over Age Pension age to a younger spouse to shelter from Social Security means testing.
If you used a ‘contribution reserving strategy’ leading up to June 30 to maximise your tax deduction in 2019-20, don’t forget to allocate that contribution by 28 July!
For 2020-21, the after-tax non-concessional contributions (NCCs) cap – four times the CCs cap – remains unchanged at $100,000, but you can only make an NCC if your TSB is less than $1.6 million at 30 June 2020.
If you’re under age 65 at 1 July 2020 (becoming 67 with legislation currently before Parliament), you may be able to contribute more by triggering the ‘bring-forward’ rule – determined by your TSB. If it’s less than $1.4 million at 30 June 2020, then you may contribute up to $300,000 over three years. If your TSB is between $1.4 million and $1.5 million, then its $200,000 over two years.
So, if you wish to make an NCC, it’s imperative to know your TSB at 30 June 2020 and contribution history from 1 July 2018.
From 1 July 2020, spouse contributions have been extended to age 75 (up from 70).
You may be eligible to make a downsizer contribution of up to $300,000 if you sell a home that you or your spouse owned for at least 10 years and you are aged 65 or more – boosting your super savings even if you’re otherwise ineligible to contribute due to age, work status or the amount you have in super.
If you’re an eligible small business owner selling your business or an active business asset in 2020-21, don’t overlook the opportunity to make a super contribution within the CGT cap of $1.565 million which is exempt from the NCCs cap.
If you commence a retirement phase pension in 2020-21, be mindful of the TBC which is unchanged at $1.6 million. It’s likely to increase to $1.7 million from 1 July 2021, so if you don’t need income, consider waiting until then.
The temporary reduction in minimum pension drawdown rates continues into the new tax year, i.e. the minimum annual payments remain halved for 2020-21. Ensure you take the new minimum and if you need more income, consider taking the excess as a lump sum ‘partial commutation’ as it will help with your TBC.
Finally, if you qualify for early release of your super under ‘compassionate grounds – coronavirus’, you only have until September 24 to apply to the ATO via myGov to access up to $10,000.
Now is the time to start planning to get ahead of the game!