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Planning to top up your super before 30th June?

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When looking to make personal contributions to super, there are a number of considerations, including:

1. Type of contributions
Super contributions fall into several categories. The main types include:

Concessional contributions
Contributions made by an employer for the benefit of their employees are treated as concessional contributions. They include compulsory contributions often referred to as superannuation guarantee or “SG” contributions. For the 2022-23 financial year, employers are required to contribute 10½% of their employees’ wages or salary to super. This will increase to 11% next financial year.

In addition to SG contributions, an employee may enter a voluntary arrangement to forego part of their salary and request their employer to make additional contributions to super on their behalf. This is referred to as a salary sacrifice arrangement. Depending on personal circumstances, salary sacrificing to super can be very tax effective.

In many situations, individuals can claim a tax deduction for their personal super contributions. These are also treated as concessional contributions.

Concessional contributions are taxed at 15% when they are contributed to super.

For 2022-23, the maximum, that can be contributed as a concessional contribution is $27,500 per person.

However, people with a total superannuation balance of less than $500,000 may be able to carry forward any unused concessional contribution cap that has accrued since 1 July 2018.

Non-concessional contributions
Non-concessional contributions include contributions we make personally or contributions made for our spouse or partner. They are not tax-deductible.

The non-concessional contribution cap is $110,000 for 2022-23 however, people may be able to bring forward up to an additional two-year’s contribution cap and make a non-concessional contribution of up to $330,000 in a single year.

To be eligible to make non-concessional contributions, a person must have a total superannuation balance of less than $1,700,000 and to be able to fully access the three-year bring forward cap, the total superannuation balance must be less than $1,480,000.

Downsizer contributions
In some circumstances, a person, and their spouse, may contribute up to $300,000 (each) of the proceeds from the sale of their home to superannuation.

To be eligible, the home must have been their main residence for at least part of the time it was owned, it has been owned for at least ten years, and they are at least 55 years of age at the time the contribution was made. Contributions must be made within 90 days of receiving the sale proceeds.

Small business CGT contributions
In certain circumstances, a person may contribute the proceeds, or the capital gain arising from the sale of a small business to superannuation without being limited by the concessional and non-concessional contribution caps. Contributions made under the small business concessions are capped at either $500,000 or $1,650,000, depending on eligibility.

Contributing the proceeds from the sale of a business to superannuation can be complex and we recommend appropriate tax and financial advice be obtained.

Government co-contribution
Low-income earners who make a non-concessional contribution to super may receive additional contributions from the government.

The maximum co-contribution is $500. To receive this, a non-concessional contribution of $1,000 needs to be made.

To receive the maximum government co-contribution a person needs to have tax-assessable income, plus reportable fringe benefits and reportable employer super contributions of less than $42,016.

2. Age limitations
Superannuation contributions can generally be made by a person up until the 28th day of the month following that in which they turn 75.

However, mandated employer contributions (i.e. SG contributions) and downsizer contributions are not subject to an upper age limit.

For people aged between 67 and 75 who wish to claim a tax deduction for their personal contributions, a work test needs to be met. The work test requires a person to be gainfully employed for a period of at least 40 hours worked within 30 consecutive days, in the financial year in which they wish to contribute.

3. Claiming a personal tax deduction
When intending to claim a tax deduction for personal contributions, a notice must be given to the superannuation fund informing them of the intention to claim the tax deduction.

This notice must be provided within a prescribed time and before the contribution is applied to a pension account, rolled over to another superannuation fund, or withdrawn from super.

4. Timing of contributions
For contributions to be attributed to the 2022-23 financial year, they will need to be received by the superannuation fund by 30 June at the latest. Some superannuation funds may have earlier closing dates.

Importantly, if making superannuation contributions by electronic transfer such as BPAY or as a direct deposit, some days may elapse between processing the payment and it being received by the superannuation fund. Making contributions early is recommended.

Making additional contributions to super can be a valuable strategy for building wealth for retirement. If you are thinking of adding to your super, speak to your financial adviser.

 

Source: Centrepoint Alliance | Peter Kelly

Are Downsizer Contributions achieving their purpose?

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In 2017 the Government announced an initiative designed to reduce the pressure on housing affordability for Australian families.

The initiative, which came into effect on 1 July 2018, focussed on allowing older Australians – those aged 65 or over – to contribute up to $300,000 (and up to $600,000 for a couple) of the proceeds from the sale of an “eligible dwelling” to superannuation without being constrained by the usual age limit, work test, and contribution cap restrictions.

Downsizer contributions, as they are known, are subject to several conditions including a requirement the home must have been the owner’s main residence for at least part of the time, and the home must have been owned for at least 10 years.

Since downsizer contributions first became available in July 2018, approx. $9.4bn has been channelled into the superannuation system.

One of the eligibility criteria for making a downsizer contribution is the requirement a person must be aged 65 or older at the time they make their contribution. In the 2021 Federal Budget, the Government announced plans to reduce this to 60 from 1 July 2022. This change has been legislated.

While the ability for older Australians to contribute surplus proceeds from the sale of their former home to superannuation appears to have been a popular strategy, at least based on the number of technical enquiries we receive from financial advisers, I am not convinced the strategy has fulfilled its intended purpose of making housing more affordable.

When first introduced, the assumption was that older Australians were living in large homes close to the city. These were homes that these same older Australians had raised their own families in and were now occupied by one or two people. The ability to sell the family home and purchase something a little cheaper and contribute surplus proceeds to superannuation seemed like a good idea at the time.

However, since 2018 Australia has seen a massive increase in the value of the residential real estate, not only in capital cities but also in regional areas.

Australian housing prices have been driven by several factors with the largest no doubt being historic low-interest rates, readily available credit, and a raft of other state and federal government initiatives.

While the downsizer contribution initiative presents a wonderful opportunity for older Australians to get more money into super to help fund their retirement income needs, I doubt it has achieved its purpose of making housing more affordable.

Selling a family home is often more of an emotional decision rather than one purely driven by financial reasons. Family homes come with years of memories and are often located close to services, facilities, and established networks of friends and family.

If a decision is made to sell the family home, the ability to make a downsizer contribution may be a bonus. But it should not be the primary driver.

 

Source: Peter Kelly | Centrepoint Alliance

Compulsory super – a bit of a problem child?

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The current debate is whether compulsory employer superannuation contributions (generally referred to as “super guarantee” or “SG”) should be increased from 1 July 2021 or be deferred or possibly even suspended.

Back in the mid-1980s compulsory super was first introduced as trade-off for a national wage increase. It was referred to as award super, and required employers to contribute 3%, starting at 1%, of a person’s salary or wage to a superannuation fund.

By June 1988, just on half of all employees were receiving superannuation from their employer.

The Labor Government introduced SG legislation that commenced on 1 July 1992. The rate of SG contributions would progressively increase from 3% to 9% between 1992 and 2002.

By November 1993, 80% of employed people were making super contributions, or had them made (by an employer) for them. In many ways, SG had become “almost” universal for employees.

At one point, back in the 1990s the Keating Labor Government proposed supplementing SG contributions with a compulsory employee contribution starting at 1% and increasing to 3% by 1999-2000. This idea was abandoned when the Howard Liberal Government took office in 1996.

In 2010, in response to the Henry Review, the Coalition Government proposed increasing the rate of SG to 12% by 2019-20. This was legislated, however the dates have been tweaked along the way as successive governments of both persuasions have played with the system. The SG rate is not due to increase to 12% until 1 July 2025.

Where are we today?
The SG rate is due to increase from the current 9.5% to 10% from 1 July 2021.

However, as many businesses suffered following the lockdowns imposed by the outbreak of COVID-19 in early 2020, many are arguing that increasing the SG rate to 10% from 1 July 2021 is a step too far in the current economic environment. Any discussions by our political leaders on deferring the July increase has become highly politically charged. One of the major critics of any deferral is the superannuation sector which makes its money from the inflow of superannuation contributions.

What to expect?
As things presently stand, the government can go one of two ways.

They can either stick with the scheduled increase to 10% from 1 July 2021 – after all that is enshrined in legislation – or they can introduce an amendment to defer the next, and possibly future increases. However, if seeking to table amending legislation, the government may not have the numbers to support a deferment.

At this stage, I suspect we will hear more about this as we approach the Federal Budget which is expected to be delivered on 11 May 2021.

If you are looking to maximise your retirement savings, consider seeking the advice of a qualified financial planner.

 

Source: Peter Kelly | Centrepoint Alliance

Maximising retirement savings

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For most people, superannuation is the “go-to” preferred structure for retirement savings. It is convenient, tax-advantaged and most superannuation funds offer a wide range of investment options enabling their members to structure their savings in a manner they find most comfortable.

However, superannuation has its limitations.

Today, I will deal with one.

Before 1 July 2020, to be able to make a voluntary contribution to super beyond their 65th birthday, a person had to have met a “work test”.

This work test is met when a person is employed or genuinely self-employed for a period of at least 40 hours, worked within a period of 30 consecutive days, in the financial year in which they intend to contribute. Once a person turns 75, even though they may continue to be gainfully employed – as an increasing number are these days – they are unable to make voluntary contributions.

From 1 July 2020, the age limit at which personal contributions can be made without meeting the work test was increased from 65 to 67. This measure was designed, at least in part, to mirror the progressively increasing qualifying age for the age pension.

The age limit for making contributions to super also affects a person’s ability to access the “three-year bring forward rule”.

The three-year bring forward rule applies to personal (non-tax deductible) contributions a person makes to super. These are referred to as non-concessional contributions.

The current annual limit or “cap” on non-concessional contributions is $100,000 per year.

However, provided a person’s total superannuation balance (the total of all money a person has in super at the end of the previous financial year) is less than $1.4m, they can bring forward their non-concessional contributions for the current and next two financial years and make non-concessional contributions of up to $300,000 in a single year. (A person is unable to make any non-concessional contributions if their total superannuation balance exceeds $1.6m).

When a person makes a non-concessional contribution of more than $100,000 in one financial year, they are said to have “triggered” their three-year cap. This means that the maximum they can then contribute over the course of the next two financial years is $300,000, less the amount contributed in the first year.

For example, if a person makes a non-concessional contribution of $170,000 in 2020-21, they have triggered their three-year bring forward cap. The maximum that can then be contributed in 2021-22 and 2022-23 is $130,000 in total.

On the other hand, if they contributed $300,000 in 2020-21, they are unable to make any additional non-concessional contributions until 1 July 2023.

To be able to take advantage of the three-year bring forward rule, a person must be aged 64 or younger at the start of the financial year in which they intend to contribute.

At present, a person may make contributions to super up until they turn 67 without having to meet a work test. However, if a person wishes to maximise their non-concessional contributions by using the three-year bring forward rule, they must have been 64 or younger at the beginning of the financial year.

When seeking to maximise retirement savings through super, timing is critically important.

 

Source: Peter Kelly | Centrepoint Alliance

Important changes to Superannuation

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Australian employers are obliged to make minimum contributions to superannuation (super) for their employees. This is known as Super Guarantee (SG).

Currently an employer is required to contribute 9.5% of their employees’ salary (based on their Ordinary Time Earnings or “OTE”) to a super fund. Contributions must be made at least quarterly, by 28 January, April, July and October each year.

Employees can ensure their super guarantee contributions are being made in a correct and timely manner by checking their My.Gov account or with their super fund.

There are two important changes that will be affecting super guarantee contributions from
1 January 2020 and while these changes won’t affect everyone, it is good to be aware of what these are.

With the passing of the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019 (Cth) on 22 October 2019, employers will no longer be able to offset their Super Guarantee obligations against contributions made to super under a salary sacrifice arrangement.

Where a salary sacrifice arrangement is in place, future super guarantee contributions will need to be calculated on an employee’s salary before the salary sacrifice contributions are deducted.

Change 1: Offsetting Super Guarantee
A salary sacrifice arrangement is a voluntary agreement where an employee chooses to forego part of their salary and have their employer contribute the foregone portion to super instead. This is a popular tax planning strategy as the amount contributed to super is taxed at a maximum rate of 15%, rather than at the employee’s marginal tax rate, as would be the case if it was paid as salary.

The downside of this is that a contribution made under a salary sacrifice arrangement is regarded as an employer contribution and can be used by the employer to offset their obligation to make further super guarantee contributions.
For example, if we consider an employee who earns $100,000 per annum, their employer is required to contribute $9,500 to super.

However, if that same employee asks their employer to salary sacrifice $10,000 of their salary to super, they will receive a salary of $90,000 and the foregone $10,000 will be contributed to super on their behalf.

The employer still has an obligation to contribute 9.5% of the new salary of $90,000 to super ($8,550). But, as the employer has already contributed $10,000 to super under the salary sacrifice arrangement, there is no need for the employer to actually contribute the additional $8,550 to super for the employee. Under this arrangement, the employer wins and the employee loses.

From 1 January 2020, employers will no longer be able to use salary sacrificed contributions to meet their super guarantee obligations.

Change 2: Calculating Super Guarantee contributions
At the present time, an employer can calculate their super guarantee contributions on the reduced salary after deducting salary sacrifice contributions from 1 January 2020 this will no longer be the case.

Turning back to our example, currently an employer is only required to base their super guarantee contributions on the reduced salary of $90,000.

From 1 January 2020, super guarantee contributions must be calculated on an employee’s ordinary time earnings before the salary sacrifice contributions are deducted. Once again, turning back to our example, future super guarantee contributions will be based on $100,000, rather than $90,000.

While many employers have, in the past, calculated super guarantee on the pre-sacrifice salary, and have not offset their super guarantee contributions with salary sacrifice contributions, the new legislation provides clarity and certainty.

Readers are encouraged to take an active interest in their super and ensure their employers are paying the correct amounts on their behalf.

Even though your employer includes details of superannuation contributions on your pay slips, it is important to check and ensure the contributions are actually being made to your super fund.

If you are planning to review or establish a salary sacrifice arrangement, consider seeking advice from a financial planner. Contributing too much to super can result in having to pay more tax, and not contributing enough can impact your retirement income.

 

Peter Kelly | Centrepoint Alliance