Information for advisers only.
Since 1 July 2020, Australians under the age of 67 are eligible to make voluntary super contributions without needing to meet the work test1. This is an increase to the previous requirement of needing to be under age 65, and is designed to progressively align the work test with the eligibility age for the age pension (currently legislated to increase from age 66 to age 67 for both men and women by 1 July 20232).
In addition, there is a proposal to increase the bring-forward age to allow individuals under the age of 67 (as at 1 July in the relevant financial year) to make non-concessional contributions to super of up to $300,000 where all other eligibility criteria3 has been met. If this becomes law, it will also apply from 1 July 2020.
A unique double opportunity
The changes create a unique opportunity for individuals aged 65 and 66 who may now look to make additional contributions to super, where previously they may not have been eligible to contribute.
Since 1 July 2020, any individuals under the age of 67 are able to make voluntary contributions to super without needing to work. However to access their preserved benefits (for those under age 65), they need to have first met a condition of release4.
One of the most common conditions of release is reaching your preservation age5 and then retiring, or, attaining age 65 at which point you automatically meet a condition of release based on age, regardless of your current work status, patterns or intentions.
Individuals aged 65 and 666 have the choice to immediately withdraw this amount, or immediately start a retirement income stream as they have automatically met a full condition of release based on age.
This new opportunity may help individuals who have not yet saved the amount they were targeting in super, as they could now find themselves with an additional few years to make contributions. Plus, it could allow individuals who have come into additional money later in life to utilise superannuation more effectively, all while providing additional years to implement contribution, estate planning or spousal balance equalisation strategies.
Example #1 – A new opportunity to contribute
Hamish turned 65 in June 2020 and Leah turns 65 in August 2020. Both are retired after accumulating $1,000,000 each in superannuation over their working lives.
They have recently inherited $500,000 from Leah’s late aunt which they wish to contribute to super, given the reasonable levels of other assessable income they have in their own names from two commercial investment properties.
While they are both comfortably under the $1,600,000 total super balance threshold7 to enable them to make non-concessional contributions, prior to the work test increase they would have needed to meet the work test in the current i.e. 2020-21 financial year in order to be eligible to make voluntary contributions8 to super in the first instance (Leah could only contribute up until just before her 65th birthday). The work test increase has removed this requirement for those under age 67.
Also, under the existing rules, Leah would be eligible to make a $300,000 bring-forward non-concessional contribution, while Hamish would only be eligible to contribute $100,0009.
If implemented as announced, both Hamish and Leah will be eligible to make bring-forward non-concessional contributions.
This is certainly an increased opportunity. From not previously being eligible to contribute in the 2020-21 financial year (Leah could only contribute until just before her 65th birthday), to both being eligible to do so, up to $300,000 for Leah and $100,000 for Hamish.
If the proposed increase to the bring-forward age is legislated, they could both contribute up to $300,000 each (covering the inheritance) in the 2020-21 financial year.
The new opportunity would allow Hamish and Leah to contribute $400,000 of the $500,000 inheritance.
Senior Australians may be eligible for the seniors and pensioners tax offset (SAPTO)10. SAPTO can reduce the amount of tax an individual pays via a non-refundable tax offset. This may allow senior Australians to have a higher amount invested in their own names, before effectively paying tax on any investment income.
While the above strategy allows Hamish and Leah to contribute the $400,000 of the $500,000 inheritance into a nil tax environment (if moved to retirement phase) where an individual has maximised their transfer balance cap11, investing in their own name outside of super may, in certain circumstances, be more beneficial than the concessional tax rates of superannuation, particularly when SAPTO is taken into account.
If the proposal to increase the age which a person can trigger the bring-forward rule increases to age 67, and if they have additional amounts they wished to direct into super, they could both contribute up to $300,000 each.
The above opportunity remains a proposal at the time of writing.
Example #2 – Re-contribution strategy
Theo turned 68 in January 2020 and Kerri turns 66 in August 2020.
Theo has accumulated $750,000 in superannuation, with a 100% taxable component. Kerri has accumulated $350,000 in super, primarily made up of a $250,000 non-concessional contribution in the 2017-18 financial year. They both retired in June 2019.
From an estate planning perspective, their adult children would currently pay tax on the taxable component of their parent’s super benefits at a maximum rate of 15%12 (plus Medicare, if received direct from the super fund). Given the estimated current taxable component of $850,000 across both accounts, this could equate to $144,500 in death benefits tax.
While the probability of one of them surviving the other is the more likely outcome, they both wish to reduce the chance of any tax being paid on their respective super benefits if paid to their adult children, plus, they both wish to create an additional tax-free component now as a hedge against possible future changes to the tax treatment of superannuation.
From 1 July 2020, a variation of a re-contribution strategy could be used by Theo to withdraw up to $400,000 from his accumulated super benefits and then re-contribute this amount into Kerri’s super account as a $100,000 non-concessional contribution in the 2020-21 financial year. If the proposal to increase the bring-forward age to 67 is legislated, Kerri could then make an additional $300,000 bring-forward contribution in the 2021-22 financial year.
This strategy would reduce their combined taxable components from $850,000 to $450,000, and correspondingly reduce the potential tax payable by adult non-tax dependant beneficiaries from $144,500 to $76,500.
While Kerri was not eligible to make a voluntary contribution to super in the 2019-20 financial year (i.e. after her 65th birthday in August 2019 and not working), the work test increase allows her to implement the contribution strategy above, beginning from the 2020-21 financial year.
As an alternate approach, where one member of a couple survives the other, death benefit lump sums are tax-free when paid to a spouse13 and death benefit incomes streams are concessionally taxed, or also tax free, when one member of the couple is, or was, age 60 or over14 at the time of passing (or once the surviving spouse reaches age 60). There are a number of planning opportunities which can be implemented in such circumstances to continue to reduce the taxable component where adult non-tax dependants may end up being the ultimate beneficiaries.
It is important to note any re-contribution strategy will use an individual’s existing contribution cap space without directly increasing the amount they have in super. Where a client may have, or expect to have, additional amounts they wish to contribute in the immediate term, care should be taken to determine the merits of a re-contribution strategy.
The above opportunity to make the second bring-forward contribution (i.e. if aged 65 or 66 at the start of the relevant financial year) remains a proposal at the time of writing.
The above opportunity remains a proposal at the time of writing.
Increasing the age at which the work test applies from 65 to 67, from 1 July 2020, provides an additional opportunity for those who are approaching, or having recently retired, to implement voluntary super contribution strategies over a broader time horizon than was previously possible.
The proposed increase in the age limit under which an individual can trigger a bring-forward contribution only further opens up contribution opportunities during this time.
1- SIS Regulations 1994 – REG 7.04 (1) Item 2 (b) & (1) Item 3 (b) (here)
2- SSA 1991 – SECT 23 (5A)
3- ITAA 1997 – SECT 292.85
4- SIS Regulations 1994 – Schedule 1
5- SIS Regulations 1994 – REG 6.01
6- SIS Regulations 1994 – REG 7.04 (1) Item 2 (b) & (1) Item 3 (b)
7- ITAA 1997 – SECT 307.230
8- SIS Regulations 1994 – REG 7.04 Acceptance of contributions – regulated superannuation funds
9- ITAA 1997 – SECT 292.85
10- ATO – Eligibility for the seniors and pensioners tax offset
11- ITAA 1997 – SECT 294.35
12- ITAA 1997 – SECT 302.145
13- ITAA 1997 – SECT 302.60 and ITAA 1997 – SECT 302.195
14- ITAA 1997 – SECT 302.65
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