As we approach the end of the financial year, we thought it valuable to provide a checklist of strategies to consider before 30 June.
1. Maximise your super contributions
Super remains one of the best ways to save for your retirement due to the tax concessions it offers.
The first way to contribute more to super is through pre-tax contributions.
Most of you will be familiar with salary sacrifice arrangements – where you arrange for your employer to direct part of your pre-tax salary and put it directly into your super.
You also now have the flexibility to make pre-tax contributions (from 1 July 2017) from your personal funds. You then claim a tax deduction for the amount you have contributed, and it is treated as a pre-tax (concessional) super contribution (see point 2 below for more details on this).
The maximum amount that you contribute as pre-tax concessional contributions this financial year is $25,000. This includes your employer’s compulsory super contributions, any insurance premiums paid within super, salary sacrifice amounts, and any personal contributions for which you intend to claim a tax deduction.
If you exceed the cap, the excess will be taxed as income in your hands and you have a choice of either having those contributions returned or added to your non concessional cap.
Concessional contributions are taxed at 15 per cent in your super fund. For individuals earning income of $250,000 or more, there is an additional 15% tax (30% tax in total) on concessional contributions. This additional tax is known as the ‘Division 293 tax’, and is payable after the taxpayer lodges his or her tax return.
The second way to make additional super contributions is from your after-tax salary. These are known as non-concessional contributions.
There are limits on how much you can contribute – and as of 1 July 2017, these became a whole lot more complex.
If you have less than $1.6 million in super, then you may be able to contribute $100,000 in the financial year or up to $300,000 using the bring forward provision over three years if you are aged under age 65. However, if you have already triggered the bring forward provision in FY2016 or FY2017, you may not be eligible to make any non-concessional contributions this year.
You also can’t make non-concessional contributions if you have $1.6 million or more in total super assets (more on this in point 3 below). There are also age-based criteria and work hurdles that could limit your eligibility to make super contributions.
The key message here is: the limits and eligibility criteria for super contributions are exceptionally complex. If you want to check on your options, please contact us.
2. Consider personal deductible contributions
Before 1 July 2017, individuals could only claim a deduction for super contributions if their employment income was less than 10% of their total income from all sources (ie the 10% test). This meant that an employee’s only option to top up their pre-tax super was via salary sacrifice.
The good news is that from 1 July 2017, this 10% test has been abolished. To obtain a tax deduction for these personal contributions there are some important steps to take:
- Notice of intent: you must lodge a valid “Notice of intent to claim a deduction” form with your super fund and receive an acknowledgement from the fund by the earlier of: lodgement of tax return for the year in which contribution was made; or 30 June of the following financial year.
- Hold off rolling over your super fund: rollovers could partially or fully invalidate a subsequently lodged notice of intent. So ensure that you check with your super fund before closing your super fund or transferring monies to a new fund.
- Be careful commencing a pension (based in whole or part on the contribution): this also could invalidate a subsequently lodged notice of intent.
- Check that your taxable income exceeds the amount of super contributions that you are planning to claim: this is because the amount that can be claimed as a deduction is limited to an individual’s taxable income. It is not possible to create a tax loss by claiming a deduction for personal super contributions. The general rule of thumb is that an individual should be left with $20,542 taxable income after all deductions. This is the effective tax-free threshold of an individual in the current financial year after applying the Low Income Tax Offset.
3. Managing your total super balance (TSB) and non-concessional contributions
From 1 July 2017, an individual’s non-concessional contribution (NCC) cap is not only limited by the standard annual cap or the bring-forward NCC cap, but also by their total super balance (TSB) at 30 June of the previous financial year.
If your TSB was $1.6 million or more as at 30 June 2017, then your NCC cap is $0 for the current financial year. If you want to consider using the bring-forward cap, your TSB needs to be less than $1.5 million on 30 June 2017.
The TSB is measured again on 30 June of each financial year to determine your NCC cap in the following financial year.
There are some strategies that may assist to reduce a TSB before 30 June, which could increase your ability to make NCCs in the next financial year.
- For couples, an individual with a higher super balance may be able to split their concessional contributions (up to 85% is allowed – see point 5 below) to a partner who has a lower super balance.
- A ‘withdrawal and re-contribution strategy’ where an individual (where eligible) makes the withdrawal before 30 June. The reduced TSB could enable the withdrawal amount to be contributed back to their super – or if relevant, their spouse’s super – as a NCC after 1 July 2018.
- Reducing the TSB on 30 June by taking additional withdrawals from a Transition to Retirement or retirement income stream to enable a client to maximise the NCCs in the new financial year.
4. Turning 65 during the financial year
If you were 64 on 1 July 2017 and turned or are turning 65 during this financial year, this will be the last chance to trigger the bring-forward NCC cap (ie. up to $300,000).
You may be able to do this, provided:
- You didn’t trigger the bring-forward NCC cap in the past two financial years;
- Your TSB is below $1.4 million to achieve a $300k bring forward cap or below $1.5 million to have a $200k bring forward cap; and
- The work test is satisfied if the member has already turned 65 when making the contribution.
5. Contributions splitting for spouses
The contributions splitting measure makes it possible for a member to split their concessional contributions to their spouse’s super. The benefits of adopting the contributions splitting strategy are:
- The strategy can help to equalise super accounts between spouses. This may help to keep each member of a couple’s super benefits under the $1.6 million TSB in the long run. This then helps each member to maximise the NCCs, and maximise the amount that can ultimately be transferred to the tax-free retirement pension phase.
- The splitting amount can help to pay for life and TPD insurance premiums for a low income or non-working spouse through their super.
- Accessing superannuation benefits earlier by splitting contributions to the older spouse.
6. Spouse contribution tax offset
If a member of a couple’s income is below $40,000, a spouse contribution could help the contributing spouse to reduce their tax liability by receiving a tax offset.
In 2017/2018, a member could be entitled to the maximum tax offset of $540 by contributing $3,000 to their spouse’s super fund, if the receiving spouse’s assessable income, total reportable fringe benefits and reportable employer super contributions is $37,000 or less.
The tax offset gradually reduced for income above $37,000 and completely phases out when the income reaches $40,000.
7. Government super co-contribution
If an individual derives at least 10% of their assessable income from employment (including self-employment), they may be entitled to the government super co-contribution if their income is below $51,813.
The maximum co-contribution amount – which is $500 – can be credited to the individual’s super account by the ATO for personal after-tax contributions (NCCs) of $1,000 or more where their income is $36,813 or less.
The income for the 10% employment test is the total of: assessable income, reportable fringe benefits and reportable super contributions.
However, to calculate the co-contribution entitlement, the income is defined as the total of: assessable income, reportable fringe benefits and reportable employer super contributions less allowable business deductions.
To qualify, the member needs to be aged less than 71 at the end of the contributing financial year and if over 65, must meet the work test to be able to contribute.
8. Reviewing your Transition to Retirement (TTR) pension
If you have a Transition to Retirement (TTR) pension, then it is timely to review this.
While TTR pensions are still available, from 1 July 2017 they are taxed on investment earnings on the same basis as super – that is, 15% on income and 10% on capital gains.
If you have a TTR pension, and you will soon reach age 65, then you need to know that your pension will automatically convert to an Account Based Pension – regardless of whether you are working.
The same applies if you retire or change jobs (ie. cease any employment arrangement) after reaching age 60.
Once a TTR pension is converted to an account based pension:
- The investment earnings will be taxed at 0%, and
- The pension balance on the day it becomes an account based pension is counted towards the individual’s pension transfer balance cap.
It is essential, if you retire or change jobs after age 60, to notify your super provider as soon as possible to access the tax concessions on the investment earnings.
As with so many of the super legislation, the rules regarding retirement condition of release are complex.
9. Transfer balance cap and taking withdrawals from the income streams
From this financial year on, any lump sum withdrawals no longer count towards the minimum required pension payment. Although the minimum pension cannot be met by lump sum withdrawals, any amount that is withdrawn that exceeds the minimum level should be taken as lump sum withdrawals from a retirement phase pension.
This is because a lump sum commutation from a pension creates a ‘debit’ event in the member’s transfer balance account and therefore reduces the balance in the account. The reduction in a member’s transfer balance account could enable a member to transfer additional accumulation benefits to the tax-free retirement pension phase.
Where an individual has a super account as well as an account based pension, The other option for withdrawals may be to take any amount above the minimum pension from the super accumulation account. This can help to keep the maximum amount in the zero-tax pension phase.
10. SMSFs and the minimum pension payment
If a fund member is in pension phase, it is important to ensure that the minimum required pension is taken from the pension before the financial year ends.
If a fund fails to meet the minimum pension payment requirements in an income year, the super income stream will be taken to have ceased at the start of that income year for income tax purposes and the fund can lose the pension tax exemption for that financial year.
11. SMSFs and the transitional CGT relief
If an SMSF had a retirement pension exceeding $1.6 million or a TTR pension in the 2016/2017 financial year, the transitional CGT relief may be available to the fund to reset the cost base of the fund’s pension assets. If there is benefit in using the transitional CGT relief, the CGT schedule 2017 must be submitted before or at the time of lodging the fund’s annual return for 2016/2017 financial year. This is complex area and one where SMSF Trustees need to seek tax advice.
12. Super estate planning issues
Your super beneficiary nomination plays a significant part in your estate planning strategies. Here are a few key points to note to ensure that your nominations are up-to-date and in line with your preferences:
- Some binding nominations need to be refreshed every three years.
- Some super funds offer non-lapsing nominations which do not need to be regularly updated.
- A binding nomination can be made for a SIS ‘dependant’ – which includes a spouse/partner, adult children, a financial dependent or the individual’s estate.
- A reversionary death benefit pension is exempt from the recipient’s pension transfer balance cap for 12 months from the date of the member’s death.
This can be important to a couple whose combined pension balance exceeds $1.6 million. Upon a member’s death, the surviving member of the couple has 12 months to take action to reduce the combined pension balance to below their transfer balance cap. An effective way to do so is to roll back their own pension to accumulation phase in order to keep the maximum amount in the super system. A death benefit pension cannot be rolled back to the accumulation phase.
New super measures from 1 July 2018
With the changes to super, it is also helpful to understand some of the new measures which come into effect from 1 July 2018. Here is a summary of three important new super measures.
- Downsizer contributions – which allow an individual aged 65 or over to use the proceeds of sale of their main residence to make ‘downsizer contributions’ of up to $300,000 (or $600,000 if a couple) into super. To be eligible, the contract for sale (not the settlement date) must be entered into on or after 1 July 2018. Importantly, these ‘downsizer contributions’ are not subject to some of restrictions that apply to non-concessional contributions (NCCs) – including the annual caps, age limits, the work test, or the $1.6m total super balance (TSB) test for making NCCs to super.
- First Home Super Saver Scheme – eligible individuals can start to withdraw their voluntary super contributions they made since 1 July 2017 under this Scheme to assist them with purchasing their first home.
- Carry forward concessional contributions – an individual can start to carry forward their unused amount of their concessional (pre-tax) cap up to five years. The first year in which the individual can access the unused cap is the 2019/2020 financial year. The individual’s total super balance must be less than $500,000 at 30 June of the previous financial year.
With 30 June fast approaching, it’s timely to consider strategies that could help you make the most of your super.
If you’re feeling overwhelmed by the variety of strategies or the wide-ranging changes to super which were introduced on 1 July 2017, you’re not alone – it is an incredibly complex area with many dimensions and challenges.
So, if you do have questions or would like to know more, please contact us.
We do believe it’s worth navigating the complexity – our super and pension framework is a very attractive way to grow and sustain your wealth.