24 February 2020
By Colin Lewis, Head of Technical Services, Fitzpatricks Private Wealth
People with a reasonable sum of money to invest in super who are turning age 65 from now to 30 June 2020 may find themselves in a predicament.
Take Dilhan who turns 65 on April 1 this year. He is retired and has not worked in the current financial year, i.e. 2019-20. After selling an investment property, Dilhan has $600,000 to invest and is looking to top-up his super. His super balance was less than $1.4 million at 30 June 2019.
Existing superannuation law
Currently, Dilhan could make a non-concessional (after-tax) contribution of $300,000 using the bring-forward rule, providing he hasn’t triggered it in the past two years by contributing more than $100,000 in either of those years.
In addition, Dilhan could make a concessional (pre-tax) contribution of $25,000. He could also use any unused concessional contributions cap amount from last financial year, i.e. 2018-19, provided the total amount he had in super – his total superannuation balance (TSB) – at 30 June 2019 was less than $500,000. Potentially, he could be looking to contribute up to $50,000.
But Dilhan would only make a concessional contribution if he has sufficient income to offset. Being retired, he may not have enough income to warrant making a personal deductible contribution, otherwise he’s paying 15 percent contribution tax for the privilege of putting money into super. However, as the money Dilhan wishes to invest came from the sale of an investment property there may be a capital gain he’s looking to reduce or eliminate and a personal deductible contribution, i.e. concessional contribution, could be worthwhile.
Regardless of whether Dilhan wishes to make a concessional or non-concessional contribution or both, he may need to act now and contribute before his 65th birthday – as he’s been fully retired throughout 2019-20.
Under age 65, anyone can contribute to super regardless of their work status, but once they turn 65 they must meet the ‘work test’, i.e. be gainfully employed for 40 hours in 30 days, or qualify for the new work test exemption, or be making a downsizer contribution following the sale of a property that was once their home.
To use the work test exemption from age 65 and thus be able to contribute after April 1, Dilhan’s TSB at 30 June 2019 needed to be less than $300,000 and he must have met the work test in 2018-19, as the work test must be satisfied in the financial year preceding the year the contribution is to be made. So, if Dilhan had too much in super or did not work in 2018/19, he cannot use the work test exemption.
Proposed new superannuation law
Important changes concerning superannuation contributions were announced in last year’s Federal Budget. If these proposals become law, then there may be the opportunity for people to contribute to super from age 65 even if they’re not working.
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 like Dilhan, 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 are under age 67 any time in a financial year, you may be able to trigger the bring-forward rule and contribute up to $330,000 in a year (assuming indexation of the cap by the time this applies) even if you’re not working. Of course, the bring-forward rule remains subject to your TSB at the previous 30 June.
So, for many people, what’s the dilemma?
The problem is that the proposals are still in the pipeline and are not yet law.
Most unhelpful in Dilhan’s case where he wants to maximise his contributions to bolster his super savings.
Should Dilhan maximise his contributions under the current rules, or does he aim to maximise his contributions under the proposed rules in the hope it pays off with those rules becoming law. As well-intentioned as the changes are, i.e. aligning the superannuation work test with Age Pension age, there’s always the risk that it may not happen.
It could mean the difference of hundreds of thousands of dollars.
If the proposed contribution rules are not law before Dilhan’s 65th birthday on April 1, then it’s crunch time for him.
If Dilhan contributes $300,000 before his 65th birthday under the current rules – because that’s the law – he foregoes the ability to contribute more even if the proposed rules become law because he’s triggered the bring-forward rule now and wiped out the next two years.
Alternatively, does he run the gauntlet and contribute only $100,000 before his 65th birthday in anticipation of the new rules coming into play?
If the proposed rules become law, he’ll then have the ability contribute – his TSB allowing – a further $110,000 next year (assuming indexation of the cap) and $330,000 the year after.
If he takes this approach and it works, Dilhan will have contributed a total of $540,000 – an extra $240,000 as opposed to erring on the side of caution. However, if he takes this path and the proposals don’t become law then he will have contributed $100,000 only. Second guessing won’t have paid off as he’ll have $200,000 less in super than if he’d been conservative and contributed under the existing rules.
And this is the dilemma. Go for it, or not go for it, that is the question.
Unless new legislation is forthcoming, prudence dictates that Dilhan should proceed based on current rules – but it all depends upon whether he’s a betting man!