Written by Kris Wrenn
In recent times there have been some really great amendments to Super rules and regulations, which has been a welcome change from the past. Prior to these we have been hit with reductions in contribution limits, a balance cap on Super and a transfer balance cap on Pension balances.
In this article I’ll summarise some of these changes and review three great strategies that may be applicable to you, if not now, then potentially in the near future depending on your age.
1/ The downsizers contribution. If you sell your home, or at least a property that was your home at some stage, and if you have owned it for more than 10 years, you are likely eligible to contribute $300,000 into super as a downsizers contribution. A couple can potentially contribute $600,000 ($300,000 each). It does not impact your concessional or non-concessional limits, nor is it impacted by the balance cap or the transfer balance cap.
2/ Catch up concessional contributions. This is whereby anyone with a Super/Pension balance under $500,000 as at July 1st, can add to their concessional contribution limit any unused concessional contributions starting from the 2018/19 financial year.
3/ As at July 1st this year, they have removed the Work test for those aged between 67 and 75. Furthermore, they will allow the bring forward rule for that age bracket. This means that before you turn 75, even if you are not working, you can contribute up to $330,000 as a post-tax lump sum to Super. Let’s say you’re aged 70, or even 72, you could even contribute $330,000 now and another $330,000 in a few years’ time, assuming they don’t renege on this fantastic change.
Strategy 1, and receiving the Bronze medal – making a downsizers contribution
Although I give it the bronze, it’s a great introduction to Super legislation. With house prices having increased as they have, the strategy has proven very popular with retirees realising they would rather have more income and enjoy retirement that little bit more, than they would keep the $1 million or $2 million property and worry about the budget.
Strategy 2, and receiving the Silver medal – recycling the taxable component.
This strategy has always been possible once you have access to your Super and using the non-concessional contribution limits. Unless you have gone to efforts to remove it, most people have a taxable component in their Super/Pension accounts, no matter their age. If you were to die and a non-dependent under the SIS Act (e.g. your adult children) inherit your Super, they will likely have to pay 17% tax on this component. For some people this might be $100,000 their kids have to pay in tax.
The main change that has increased my use of this strategy is the removal of the work test. Since July 1st, there are those aged 68, 70, even 74, that may not have worked for 10 years, that can suddenly withdraw and recontribute $330,000 into Super (and into Pension phase), recycling the taxable component and potentially saving their kids tens of thousands of dollars the ATO would otherwise have received.
Strategy 3, and well deserving of the Gold medal – delaying concessional contributions and using the catch up rules to make a large concessional contribution in a year with a high income.
I believe this legislation was mainly designed to help those where their income may rise and fall dramatically in a short space of time … think parents taking extended parental leave, or self-employed that may experience “good years and bad years”, perhaps dependent on the industry they operate in.
But for me, where the strategy has really “shined” is for those that are selling an asset and they are going to realise a large capital gain. E.g. For those that are intending to sell an investment property, and they know they are going to increase their taxable income by $100,000 or $200,000 or more, this strategy can potentially save you $10,000, $20,000 or more.
Think about this … if you haven’t made any concessional contributions since July 1st 2018 and if your Super/Pension balance was below $500,000 on July 1st this year, you potentially have a pre-tax contribution limit this year of $130,000. This is ground-breaking legislation! If your income was going to be $310,000 or more, a $130,000 concessional contribution to Super would save you over $44,000 in tax, all in one fell swoop! Of course that is the extreme example, but it’s still amazing and well deserving of the best change and the best strategy relating to Super at present.
Point to note – when considering your Super balance as at July 1st on any given year, you need to consider any Defined Benefit schemes, as they will likely increase your Super “balance”, even if you are receiving them as an income stream.