It is fair to say that 2020 has been a challenging year for most people on some level.
From the fires, the floods, share markets dropping and then Covid! Amongst all this bad news there is a unique opportunity which has presented itself for a certain demographic this year.
1 July 2020 saw the age for members to make a voluntary super contribution without meeting the work test increased from 65 to 67. This means that those members last year who weren’t able to make a contribution because they were 65 and didn’t satisfy the worktest of 40 hours of paid work in a 30 day period meant they were ineligible to contribute.
Now members under the age of 67 can make voluntary contributions into their super fund without needing to be working.
This is great news for those members who may not be employed but have substantial investment related income. This now allows these people to make a Concessional Contribution into super and claim a tax deduction. The super fund will pay 15% tax on the contribution but the member has the ability to save up to 45% (excluding medicare levy) saving 30 cents for each dollar contributed overall. The good thing about concessional contributions is there is no cap on how much you can have in super to be allowed to make this contribution.
If a member doesn’t have sufficient taxable income to make a concessional contribution but has additional cash and they have a Total Super Balance (TSB) of less than $1.6 million they can now make a non-concessional contribution.
The date used to assess the Total Super Balance for a member is on the 30th of June each year. The decline in the share market prior to 30 June 2020 may mean that superannuation balances that were previously over the $1.6 million may now be below as at 30 June 2020. Therefore, members who in the previous year might have been over the TSB may now be able to top up their member balance if they find their total super balance below $1.6 million.
If members don’t have the additional cash available to contribute into the fund there are still strategic opportunities available.
Lump Sum Withdrawal
Members who have a balance that contains a high taxable component may now wish to withdraw $100,000 as a lump sum withdrawal and then recontribute this amount back in as a non-concessional contribution. This will convert the amount withdrawn from being predominantly taxable to completely tax free. Whilst this may have no tax advantage to the members themselves, it means if their death benefit goes to a non dependant ie an adult child, the adult child won’t need to pay tax on this amount.
Even out balances
Due to the maximum amount allowed in a tax-exempt environment is $1.6 million per member, it is important where possible to ensure that for mum and dad funds they both maximise their caps as much as possible. Therefore, the increase in the contribution age will allow members that have maximized their Transfer Balance Cap to shift up to $100,000 in a single year to their spouse who may have room left in their cap.
Bring Forward Rule
There is a greater opportunity here if the age is increased from 65 to 67 for the utilisation of the Bring Forward Contribution rule. This will allow an additional two years of contributions to be brought forward which means that instead of only withdrawing $100,000 each year whilst you are eligible you are able to withdraw $300,000 in one hit and recontribute this entire amount in the one year. The increase in the age from 65 to 67 is currently before parliament. The industry doesn’t expect they will receive notification on the decision before November this year at the earliest due to Covid-19.
Before taking advantage of the increase it is important to check the funds trust deed to ensure that the deed itself does not prevent a member from contributing. If it does restrict the member from an age perspective the deed will need to be updated before the contribution is made.
For further information about any of these strategies contact Karen Dezdjek of our office.
The information in this article contains general advice and is provided by ExpertSuper™ Pty Ltd as an authorised representative of Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (available here) for contact information and information about remuneration and associations with product issuers.This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article (6 Oct 2020) and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.