Written by Ivan Fletcher – Senior Financial Adviser
There are a few extra considerations in your tax planning this year that may be different to last year :
- The Age limit for contributions has been increased from age 65 to age 67. This can be particularly useful for large contributions and re-contribution strategies moving into retirement. The WORK TEST now applies to persons between age 67 and 74 in regards to voluntary contributions.
- The tax thresholds have moved in our favour this year with the 21% tax threshold (inclusive of Medicare Levy) increasing from $37,000 to $45,000 and the 34.5% threshold increasing from $90,000 to $120,000. This may change the marginal tax bracket you are sitting in and therefore impact the benefit you get from deductible super contributions.
- Untaxed income may be higher than usual if you have received job keeper payments for example. This income is still taxable and may require planning to make sure you have some money set aside for the bill which will come at the end of year. You could reduce the impact of this income with additional deductible super contributions.
Tabled below is a list of Super strategies for consideration before 30 June
|1. Government’s co-contribution scheme (Do you qualify)
|2. Reducing Taxable Income with Additional CONCESSIONAL super contributions (including Catchup Concessional contributions from prior years)
|3. Spouse contribution rebate
|4. Making Large NON-CONCESSIONAL Contributions
|5. Re-contribution strategy
|6. Rebalance super levels between spouses (re-contribution strategy)
|7. Super splitting (to a spouse only)
1. Do You Qualify For The Government’s Co-Contribution Scheme
By making a personal contribution up to $1,000 you may receive a government co-contribution up to $500. This equates to a 50% return on your money and is still one of the more effective super strategies available.
- The maximum benefit applies if your income is under $39,837.
- The benefit cuts out if your income is above $54,837
Refer to last month’s article here for the full details on the qualifying criteria for this strategy and how to classify your contribution.
2. Reducing Taxable Income With Personal Super Contributions
If your taxable income is in the higher tax brackets (at least above $45,000 taxable income) you may wish to consider some additional personal contributions (funded from personal accounts) which can may be classified as “Concessional” allowing for a tax deduction in your personal tax return.
- under age 67 or working (between 67 and 74 and satisfies the work test of gainful employment of 40 hours in 30 days), and;
- has room left in their concessional contributions cap ($25,000), and;
- has enough assessable income to be able to benefit from the tax deduction.
- Total Concessional CAP is $25,000 p.a.
- Deduct all other Concessional Contributions (Employer or salary sacrifice contributions (example $10,000)
- The reminder ($15,000 per above example) is the available amount for personal Contribution (that you can claim as a deduction).
2A. Catchup Contributions – Carry Forward Unused Concessional Cap
In the event that you do not fully utilise the $25,000 CAP, the unused component can be carried forward to the next financial year increasing your Concessional CAP for the following year. This can continue to accumulate for a maximum of 5 years. This can be advantageous if you anticipate landing in a higher tax bracket in a future year (eg in the event of a one-off event such as Bonus income or, Capital Gains Event). This is only applicable if your super balance is under $500,000 at the start of the financial year of your contribution. The 2019 financial year is the first available year to carry forward.
For example – if you have $15,000 of concessional contributions from your employer in both 2019 and 2020 tax years, this means that $10,000 per year remains unused. This means $20,000 of additional contributions could be made this financial year over and above the regular $25,000 CAP for this year.
The Process for Personal
- Make a personal contribution to a complying superannuation fund (must be received by the super fund by 30 June).
- Submit a valid Notice of intent to claim a deduction for personal super contributions, in the approved form, to the superannuation fund trustee within required timeframes.
A Notice of intent to claim a deduction for personal super contributions will not be valid unless it is submitted in writing to the fund trustee by the earlier of:
– the end of the day the taxpayer lodges their income tax return for the income year in which the contribution was made or
– the end of the next income year following the year of contribution.
- Receive Confirmation from the Super Fund trustee that the valid notice of intent has been received.
- Use the above confirmation back from your Super fund as evidence to claim a ‘personal’ tax deduction in your tax return.
WARNING – The maximum allowable in Concessional Contributions is $25,000 per person (inclusive of existing employer and salary sacrifice contributions).
Tip 1 – Make sure your accountant is aware of any personal concessional contributions you have made – pointless exercise if you don’t actually claim the deductions – your super fund should provide a summary statement. You will have to complete a form “Intention to Claim a Tax Deduction” to advise your super fund you intend to claim the tax deductions.
Trap 1. Make sure you account for your employers ‘Super Guarantee’ (SG) contributions in your calculations including salary sacrifice.
Trap 2 – Make sure you account for any life insurance premiums that may be structured under a super policy.
Trap 3 – CheckTiming – Your payslip does not necessarily match the timing of when the super fund receives employer or sacrificed contributions, so if you are running up to your Concessional CAP, be sure to check in with your super fund on the count so far (your payslip may mislead you (for eg. Last year’s June contribution may have arrived in July and therefore counted in this year’s Cap).
Check your contribution classifications are correct
Contributions received by your super fund will be classified as ‘concessional’ (tax-deductible to the payer) or ‘non-concessional (not tax-deductible).
If your contributions have been incorrectly classified as ‘non-concessional, it can prevent your accountant from claiming the deductions. This is an easy and common mistake.
3. Spouse Contributions Rebate
If your spouse’s income is under $37,000, you can make a contribution of up to $3,000 and claim up to a maximum 18% rebate ($540 maximum). This phases out to nil once the receiving spouse’s income is above $40,000. In assessing Spousal income, you must also include any reportable Fringe Benefits or additional contributions (or salary sacrifice) mandated above Super Guarantee (SG) levels.
4. Making Large Non-Concessional Contributions
If you have been considering making a large NON-CONCESSIONAL contribution to super with cash you are sitting on or about to receive from sale of investment assets or a windfall gain such as an inheritance, you can make a personal non-concessional contribution up to $100,000 per annum per person. You first must ensure you qualify to make a contribution (which requires a WORK TEST if between age 67 and 74).
3 Year Bring Forward Rule
For those with enough cash to consider the 3 year bring forward provision (applicable only to those under age 65 as at the start of this financial year), you can contribute up to $300,000.
WARNING – If you exceed the Maximum / CAP for non-concessional contributions, the penalty is heavy, with the excess being taxed at the highest marginal tax bracket (+ medicare levy).
5. Re-Contribution Strategy
This strategy allows you to reduce the amount of ‘Taxable Component’ applicable to your super balance by firstly withdrawing a Lump Sum from Super (with a high ’taxable’ component). This is dependant upon you being above preservation age and meeting a condition of release from your super. Secondly, the funds are contributed back to super as a non-concessional ‘tax-free’ contribution. This strategy can be used to maximum effect by utilising the 3 year bring forward provision (under age 65 only) allowing up to $300,000 to be withdrawn and re-contributed back to super. It is most commonly applicable to persons who have retired before 65.
This strategy could benefit your children in the form of reduced taxes upon the ultimate inheritance of any super balance or in the case of retirees under age 60, reduce the assessable amount of your pension income. There are strict criteria to qualify for this strategy in terms of both the withdrawal and the re-contribution.
Caution: The qualifications for this strategy are specific and complex and the tax consequences/penalties can be significant (especially under age 60). It is recommended this strategy be discussed and implemented through an adviser.
6. Rebalance Super Levels Between Spouses
This strategy (much like the re-contribution strategy above) will be dependant upon your capacity to qualify for ‘unpreserved’ Lump Sum withdrawals (free of tax) and your spouse’s qualification to contribute to super (including the “3 years bring forward provision” per above).
The benefits are three-fold :
(a) increasing the tax-free component of your collective super balances (benefiting potential future children beneficiaries with reduced tax).
(b) lowering your current Super balance further under the new $1.6 Million CAP allowing further contributions to Super in the coming years.
(c) sheltering assets to a younger spouse for Centrelink benefits.
Caution: The qualifications for this strategy are specific and complex and it is recommended that they be discussed and implemented through an adviser.
7. Super Splitting (To Spouse Only)
Super splitting is the process of rolling over your previous year’s “Concessional” contributions (less the 15% tax) to your spouse. Once 30 June 2021 arrives, the window for rolling over last years’ 2019/20 contributions to your spouse will close.
Reasons why you would consider this:
- A useful strategy in leveling out super balances between spouses as a natural hedge against legislative risk.
- Assist in keeping a super balance under various thresholds to support other contribution strategies in future years (eg keeping the balance under $500,000 to support the carry forward of unused Concessional CAPS (per Strategy 2A above).
- Spousal age gap:
- Shelter assets to younger spouse (for Centrelink benefits), or
- To increase the accessibility of super by splitting to the older spouse – closest to preservation age. Similarly, super splitting to an older spouse may allow you to get the assets into the tax-free arena of Allocated Pensions (no tax on earnings of the asset base).
If you wish to speak to an Adviser at Hudson Financial Planning, please call direct on 1800 804 296 or submit a contact form directly on our website.