20 July 2021
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
With the new financial year under way, now is a good time to ensure your ’financial house’ is sorted for 2021-22. Good financial planning is a year-round consideration, not just a 30 June event.
So, what are the super opportunities and considerations this year?
The pre-tax concessional contributions (CCs) cap is now $27,500. Regardless of how much you have in super, you and/or your employer may contribute up to this amount before additional tax applies.
The penalty for exceeding this cap has been reduced from 1 July with the removal of the interest charge on the personal tax liability arising on the excess amount. With this ‘sting in the tail’ for exceeding the cap being removed, it means you should no longer be overly concerned if you accidentally breach the cap.
If you are earning more than $275,000 and receiving compulsory Superannuation Guarantee (SG) contributions—now 10 per cent—from two or more employers, you can ask an employer to stop paying it (to avoid beaching the cap) provided at least one continues to do so. But only do this if you can negotiate more salary because paying tax on something is better than not getting anything at all.
Any unused CCs cap amounts in the last three financial years can be used now, provided the total amount you have in super—your total superannuation balance (TSB)—was less than $500,000 at June 30, 2021.
If you’re aged 67 to 74 and want to contribute, you must first meet the work test—40 hours of gainful employment in 30 days. If you will not meet this test, but met it in 2020-21 and had a TSB below $300,000 at 30 June then you may contribute under the ‘work test exemption’, provided you haven’t used this exemption before.
If you wish to top-up your super, you can make a personal deductible contribution and/or arrange to make salary sacrifice contributions via your employer—provided your company offers this.
Salary sacrifice allows you to ‘set-and-forget’ for the year as contributions will automatically be made on a regular basis. Making regular deposits into an investment at regular intervals is a powerful way to invest—known as ‘dollar cost averaging’. It provides the opportunity to build exposure to growth assets in a disciplined way, can reduce the risk of investing during volatile times and avoids the pitfalls of trying 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 gives you greater control and certainty over the amount and timing of the contribution and dealing with the CCs cap particularly around year end. If you wish to adopt dollar cost averaging, you need to be disciplined as you must administer this yourself.
Also, you are 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. It also 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 include, amongst other amounts, your employer’s SG contributions and/or notional taxed contributions for a defined benefit fund, and your fund’s administration expenses and/or insurance premiums if paid by your employer, as all count towards the CCs cap.
Where 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.
You can now split up to 85 per cent of your CCs made in 2020-21 to your spouse’s super—to even up entitlements to maximise the amount you can both get into the tax-free retirement phase, 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 30 June to maximise your tax deduction in 2020-21, don’t forget to allocate that contribution by 28 July—only days away.
The after-tax non-concessional contributions (NCCs) cap is now $110,000, but you can only make an NCC if your TSB was less than $1.7 million at 30 June 2021.
If you’re under age 67 anytime in this tax year, you may be able to contribute more. If your TSB was less than $1.48 million at 30 June then you may contribute up to $330,000, and if it was between $1.48 million and $1.59 million then it’s $220,000.
So, it’s imperative to know your TSB at 30 June 2021 and contribution history from 1 July 2019.
You can make a contribution for your spouse provided they are under age 75—and have met the work test from age 67.
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 are aged 65 or more—boosting your super 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 2021-22, don’t overlook the opportunity to make a CGT cap contribution of up to $1.615 million.
If you start a retirement phase pension (e.g. account-based pension) for the very first time, the limit on how much you can transfer into it—your transfer balance cap (TBC)—is now $1.7 million. But if you already have a pension, then be mindful of your personal TBC which will be less than this amount. You can obtain your TBC from ATO Online.
The minimum pension drawdown rates remain halved—like in the past two years. So, ensure you take the reduced minimum, but if you need more income consider taking the excess as a lump sum ‘partial commutation’ as it helps with your TBC.
Now is the time to start planning to get ahead of the game.