The 2019 Federal Budget contained a number of proposed changes to superannuation in order to provide individuals with more flexibility around planning for their retirement, particularly in the area of contributions.
As announced, and proposed to apply from 1 July 2020, Australians under the age of 67 will be eligible to make voluntary super contributions without needing to meet the work test1. This is an increase to the current requirement of needing to be under age 65, and from a policy perspective, 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, the proposed measures would increase the bring-forward age to allow individuals under the age of 67 to make non-concessional contributions to super of up to $300,000 where all other eligibility criteria3 has been met.
A unique double opportunity
Should the measures be legislated, the proposed 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.
Currently, while under the age of 65 an individual can make voluntary contributions to super without needing to work. However to access their preserved benefits, 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.
As proposed, from 1 July 2020 individuals aged 65 and 66 could make voluntary contribution to super without needing to meet the work test6. They would then 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 contribute. 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 April 2019 and Leah turned 65 in September 2019. 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, neither have met the work test in the current 2019-20 financial year in order to be eligible to make voluntary contributions8 to super in the first instance.
Additionally, if they had met the work test (or made a contribution before Leah’s 65th birthday), whilst Leah would be eligible to make a $300,000 bring-forward non-concessional contribution, Hamish would only be eligible to contribute $100,0009.
Even though they cannot currently make a voluntary contribution to super, from 1 July 2020 if implemented as announced, both Hamish and Leah will now be able to do so, without having to meet the work test, and both will also be eligible to make bring-forward non-concessional contributions.
This is certainly an increased opportunity. From not currently being eligible to contribute in the 2019-20 financial year, to both being eligible to do so, up to $300,000 each (covering the inheritance) in the 2020-21 financial year.
The new opportunity would allow Hamish and Leah to contribute the $500,000 inheritance, plus an additional $100,000 if they wished to take their total contributions to $300,000 each.
Should they have additional amounts they wished to contribute to super, they could fully utilise this opportunity, firstly by Hamish contributing $300,000 in the 2020-21 financial year, and secondly Leah contributing $100,000 in 2020-21 and then triggering the bring-forward rule in 2021-22 by contributing an additional $300,000 before her 67th birthday in September 2021. This would take their total contributions to $700,000 (far above the $0 they could currently contribute in 2019-20).
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 $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.
The above opportunity remains a proposal at the time of writing.
Example #2 – Re-contribution strategy
Theo turned 68 in January 2019 and Kerri turned 65 in August 2019.
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 parents 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 of these accounts, this could equate to $144,500 in 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 to Kerri as a $100,000 non-concessional contribution in the 2020-21 financial year, and then 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 may not be 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 proposed changes would allow 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 income 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. 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 remains a proposal at the time of writing.
Example #3 – Re-contribution and balance equalisation strategy
Mario turned 69 in June 2019 and Elena turned 66 in August 2019. Both retired in June 2018 following the sale of their small business.
Mario accumulated $1,900,000 in super, of which he has moved $1,600,000 to a retirement phase account based pension. The remaining $300,000 is currently in accumulation phase. Elena has accumulated $500,000 in super, all of which remains in accumulation phase.
Neither Mario nor Elena are able to make a voluntary after-tax contribution to super in the 2019-20 financial year for a number of reasons. Mario has a total super balance in excess of $1,600,000 and Elena, while having a lower total super balance, has not met the work test, nor is she eligible for the work test exemption15.
However, Elena has a small window in July 2020 where she will be age 66, before turning 67 in August 2020. Under the proposed work test increase from 1 July 2020, Elena could make up to $300,000 in bring forward contributions to super before starting a retirement phase account based pension.
Mario has met a full condition of release and could withdraw $300,000 from his accumulation phase super and then re-contribute this amount to Elena’s super during this opportunity window in July 2020.
The strategy would move the $300,000 from accumulation phase in Mario’s super, where earnings are taxed at the concessional super rate of 15%16, ultimately to retirement phase in Elena’s super where the equivalent earnings would be exempt from tax17.
Re-contribution and balance equalisation strategies between members of a couple work best where you can work toward maximising the use of each individuals retirement phase transfer balance cap.
Interestingly from a small business CGT contribution point of view, an individual can make a CGT exempt contribution to super regardless of their total super balance. However, they are still limited to transferring up to a maximum of $1,600,00018 to retirement phase under their transfer balance cap. In the example above, this may have been an earlier consideration for Mario and Elena when they sold their small business in June 2018.
The concessional tax rates offered by superannuation are generally beneficial, however as mentioned in the Advice Points - Example #1 above, the effective marginal rate of tax an individual pays in their own name in retirement shouldn’t be ignored, as often keeping some money outside of super may still provide a suitable tax outcome.
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 concurrent 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- The Hon. Josh Freedenberg MP, media release, 1 April 2019 Super boost: more flexibility for retirement
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
15- SIS Regulations 1994 – REG 7.04 (1) Item 2 (d) & (1) Item 3 (d)
16- ITRA 1986 – SECT 26
17- ITAA 1997 – SECT 295.385
18- ITAA 1997 – SECT 294.35
FOR ADVISER USE ONLY
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