19 January 2021
By Colin Lewis, Head of Technical Services, Fitzpatricks Private Wealth
The festive break is an ideal 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 or may be coming up.
You never know, the tax savings from using the super could reimburse you for what you’ve outlaid over this expensive period.
If you are aged 65 or 66, you may now top-up your super without having to meet the work test—40 hours of gainful employment in 30 days—or work test exemption (discussed below).
You can now make voluntary pre-tax concessional contributions (CCs) and, provided your total superannuation balance (TSB) —the amount you’ve got in the super system—did not exceed $1.6 million at 30 June 2020, after-tax non-concessional contributions (NCCs).
Great news if you are retired, or only work one day a week, or volunteer.
From your 67th birthday up until 28 days after the end of the month in which you turn 75, you must still meet the work test or work test exemption to make voluntary contributions.
Non-concessional contributions bring-forward rule
If you haven’t triggered the NCCs bring-forward arrangements in the past two years and were under age 65 at 1 July 2020, you can make NCCs of up to $300,000 provided your TSB at 30 June 2020 was less than $1.4 million or up to $200,000 if it was $1.4 million to less than $1.5 million, otherwise the maximum is $100,000. You cannot contribute if your TSB was $1.6 million or more.
Hand in glove with the increase in contribution age will be an extension of the NCCs bring-forward rule to people aged 65 and 66. Unfortunately, the enabling legislation is currently stuck in Parliament and will not be law until February at the earliest—so keep an eye out if it may apply to you.
If it becomes law before June 30, it will mean that if you’re under age 67 anytime in 2020/21, you may be able to trigger the bring-forward rule—even if haven’t worked.
It could give retiree couples aged 65 or 66 who sell their home and are eligible to make downsizer contributions the ability to contribute up to $1.25 million from the sale proceeds. Without this change, they may only be able to contribute up to $850,000 (2 x $25,000 + 2 x $100,000 + 2 x $300,000). This excludes any catch-up CCs.
Note that the work test and age restriction don’t apply to downsizer contributions.
Trigger or not trigger, that is the question!
If you’re aged 65 or 66, you’re stuck with making NCCs of only $100,000 a year until the age to use the bring-forward rule increases.
A problem will arise if you do not meet the work test (or work test exemption) and turn 67 before it’s law.
Obviously, your financial adviser can only recommend strategies that are lawful at the time of providing advice, but you could decide to run the gauntlet and contribute more, e.g. up to $300,000, anticipating the change in age to bring-forward rule will become law. The problem is that if it doesn’t, you’ll be hit with an excess NCCs determination from the ATO for any amount you contribute above $100,000.
It’s a dilemma—do you take the risk?
Another dilemma for anyone eligible to use the bring-forward rule is whether you trigger it now in the face of the likely indexation of the CCs cap to $27,500 from July 1. With the NCCs cap being four times the CCs cap, it could mean getting up to $330,000 into super if you leave it until 2021/22.
The age limit for spouse contributions has increased from 69 to 74 years of age, but the receiving spouse must meet the work test (or work test exemption) from age 67.
The opportunity to make spouse contributions for a further five years extends the period you may be able to claim a tax offset of up to $540 a year for an NCC to your spouse’s super fund.
Work test exemption
If you’re aged 67 to 74, you may be able to contribute this financial year even if you’re not working.
The catch is you must have had a TSB at 30 June 2020 of less than $300,000 and met the work test in 2019/20—so if you were fully retired last financial year you won’t qualify.
Take Bob who turns 67 on 1 May 2021. He retired from all work on 1 May 2020. On 30 June 2020, his TSB was $295,000 and he’s never made an after-tax NCC.
Up until 30 April 2021, Bob can make CCs, of $25,000 and—assuming the increase in age to the bring-forward rule becomes law—NCCs of up to $300,000. If Bob doesn’t contribute before his 67th birthday—when the work test normally starts applying—he can do so from 1 May to 30 June 2021 under the work test exemption.
Catch-up concessional contributions
If you didn’t utilise the full $25,000 CCs cap in 2018/19 and/or 2019/20 then the unused amount(s) may now be contributed this financial year—giving you a bigger deduction and tax saving. However, the catch here is you must have had a TSB at 30 June 2020 of less than $500,000.
Say in 2018/19 and 2019/20, your CCs amounted to $20,000 and $22,000, respectively. You’ve got an additional $8,000 ($5,000 + $3,000) to play with this financial year and you (or your employer) can contribute up to $33,000 provided your TSB at 30 June 2020 was less than $500,000.
If you don’t use unused cap amounts before 30 June 2021, all is not lost as you can carry them forward on a rolling five-year basis. So, the above $5,000 and $3,000 can be carried forward up until 2023/24 and 2024/25 respectively, provided in the year you wish to apply them, your TSB at the previous 30 June is less than $500,000.
Carrying forward unused CCs cap amounts may be useful if you wish to make a large one-off contribution, say to minimise a capital gains tax liability.
Commencing a super pension
If you’re contemplating starting a retirement phase pension, e.g. account-based pension, be mindful that if the transfer balance cap is indexed from $1.6 million to $1.7 million from July 1, it could mean getting more into the tax-free retirement phase if you leave it until 2021/22.
Of course, there are 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 deciding to seek professional advice to ensure you don’t miss out!