Tax time this year is different with super

By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
May 2021

Superannuation and tax planning in the lead-up to 30 June is unique this year in that you could be better off delaying until the new financial year certain strategies you would normally implement now.

From 1 July, the general transfer balance cap (TBC), the contribution caps and the total superannuation balance (TSB) test limiting certain contributions, are all increasing, which may give you the opportunity to get more into super and keep more in it if you put off doing certain things until after 30 June.

Maximising tax-free pensions

The TBC limits the amount you can move into the tax-free retirement phase and/or receive as a death benefit income stream.

The general TBC is increasing from $1.6 million to $1.7 million—but everyone will have their own TBC between these amounts.

It could mean you’ll be able to get more into a tax-free income stream from 1 July—but it all depends on what you have done up to 30 June. The more you’ve used up of the current $1.6 million cap before 30 June, the less of this increase you’ll get.

You will only benefit from the full $100,000 increase where you have not transferred any super into retirement phase, nor received a death benefit income stream before 1 July. If you’ve used the entire $1.6 million TBC, then you get no increase, and you’ll receive some increase where you’ve had super in retirement phase but haven’t used the full $1.6 million cap.

Conventional wisdom has it that if you’re eligible to start a retirement phase pension then you should do so. Generally, you should aim to have your money invested in the tax-free income stream as soon as possible. However, with the TBC increasing, it may be worthwhile waiting until after 30 June to commence a pension—or move more money into retirement phase—so as to have more in the tax-free environment for the long term.

A common strategy for someone wanting the tax break but not the income is to commence a retirement phase pension on 1 June because a minimum pension payment is not required before 30 June and may be delayed even until the end of the following financial year. However, starting a pension on 1 June this year will use up some of the $1.6 million cap leading to less increase in your TBC. Depending on the value of the pension and other pension(s) you may have, it could eat up the entire amount resulting in no increase in your TBC. So again, it may be worthwhile waiting until after 30 June to commence a pension.

If you’ve never had a retirement phase pension but want to start one ‘now’, you need to determine whether the tax benefits of doing so now are greater than the downside of getting less increase in your TBC.

For example, take Homer (61) and Marge (63) who each have $1 million in their SMSF. Their fund owns a residential property which they wish to sell now in the current market but will realise a significant capital gain in the process.

Both Homer and Marge recently retired, so it makes sense for them to start pensions now so that the property can be sold with no tax on the capital gain.

If they start account-based pensions now, their personal TBCs will increase to $1.638 million on 1 July, but if they wait until then their TBCs will be $1.7 million. In all likelihood it won’t matter because even if they both make say downsizer contributions in the future, they will be well within their indexed caps to commence further pensions.

The only time Homer or Marge might regret not getting the full $100,000 increase in their TBCs is when one dies and the other inherits their super. Depending on their balances at that time, the surviving spouse might find a little more of the combined super could have remained in retirement phase had they waited until 1 July to start their first pension and received the full increase, but it’s highly unlikely it would be a significant enough benefit to warrant changing their plans.

Maximising after-tax contributions

From 1 July, the pre-tax concessional contributions (CCs) cap is increasing from $25,000 to $27,500.

The non-concessional contributions (NCCs) cap—currently $100,000—is four times the CCs cap, so it is increasing to $110,000.

Your TSB—the total amount you have in super—determines your eligibility to make NCCs and your entitlement to use the NCCs bring-forward rule.

Providing you are eligible to contribute to super and not in a bring-forward period, you can make an NCC if your TSB at the previous 30 June is less than the general TBC. So, for the current financial year, you can make an NCC if your TSB at 30 June 2020 is less than $1.6 million.

With the general TBC increasing, you will be able to make an NCC next financial year if your TSB at 30 June this year is less than $1.7 million.

Combining the higher TSB and NCCs cap from 1 July means that if you did not trigger a bring-forward arrangement in 2019/20 or 2020/21 and your TSB is less than $1.48 million at 30 June 2021 then you may be able to contribute up to $330,000 (up from $300,000). If you have $1.48 million to less than $1.59 million then you may be able to contribute up to $220,000 (up from $200,000), otherwise the maximum you can put in is $110,000.

Accordingly, if you’re looking to get as much money into super as possible, you should consider avoiding triggering the bring-forward rule this financial year by limiting your NCCs to $100,000, thus giving you the ability to trigger it next year to get more into super.

Increasing your tax deduction

An opportunity in the current financial year arising from the increase in the CCs cap next financial year involves the ‘contribution reserving strategy’—an arrangement whereby a contribution made to an SMSF in June is allocated in July.

Contributions must be allocated to members’ accounts within 28 days after the end of the month in which they are received, but they do not count towards a member’s contributions cap until allocated by the trustee.

Importantly, a tax deduction is permitted in the year the CC is made, despite it not being allocated until the following financial year.

So, with the higher CCs cap applying from 1 July, this strategy may allow you to claim a larger tax deduction this financial year.

A deduction of $52,500 (up from $50,000)—plus any unused cap amounts from 2018/19 and/or 2019/20—may be available because the second contribution will now be $27,500 as it’s being tested against the higher CCs cap in 2021/22.

Remember to allocate this contribution by 28 July.

To do this right, the SMSF trustee must resolve to defer the allocation of the contribution until the new financial year and lodge a Request to Adjust Concessional Contributions form with the ATO by the time the fund’s annual return and member’s tax return are lodged—otherwise it could be treated as an excess contribution.


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