Blog

Michelle Bromley CFP®, Director – Strategy and Advice

Key Points 

• Non-Concessional Contributions Cap $110,000 pa 
• Maximise Bring-Forward Concessional Contributions of up to $330,000 
• Work test removal for certain contribution types for those under age 75 
• Downsizer contributions to start at age 60 
• Consider a cash out and recontribution strategy 
• Speak to your adviser now, to make sure you maximise your opportunities 

Building on last months’ article which started us thinking about making the most of our superannuation Contributions Caps, in this article we discuss how the upcoming 1 July 2022 changes to contribution eligibility offer additional opportunities for retirees to structure their retirement income tax effectively. 

Contribution Eligibility 

Before this 30 June, to be eligible to contribute to superannuation you must be under age 67 or be age 67 – 75 (the contribution must be made within 28 days of the end of the month in which you turned 75) and have met the Work Test or the Work Test Exemption. 

• To meet the Work Test, you must have been gainfully employed for at least 40 hours during a 30 consecutive day period before you make the contribution. 
• The once-only Work Text Exemption allows a 12-month contribution period from the end of the financial year in which you last met the work test, provided your total super balance at the previous 30 June was less than $300,000. 

The fantastic news for those aged 67 – 75 is that from 1 July 2022 the above tests only apply where you are making personal contributions and claiming a tax deduction under the Concessional Contributions Cap.  If you’re aged under 75 on 1 July 2022 and making Non-Concessional Contributions your work status does not matter. 

However, if you’re age 75 on or after 1 July then your superannuation fund can only accept Mandated Employer Contributions and Downsizer Contributions.  

Non-Concessional Contributions 

Non-Concessional Contributions are made from after-tax income or assets you’ve accumulated in your personal name and include: 

• Amounts you contribute personally, including from your bank account or by transferring assets such as shares owned in your personal name, provided you don’t claim a tax deduction for the contribution 
• After-tax salary that you ask your employer to pay into superannuation on your behalf 
• Spouse contributions 
• Some other amounts, such as most foreign superannuation fund transfers and amounts contributed from the sale of a small business in excess of the lifetime capital gains cap 

Non-concessional contributions form part of the tax-free component of your member benefit and are always received tax-free by yourself or by your beneficiaries on your death.  

The Non-Concessional Contribution cap is currently $110,000 and you can potentially make a larger Bring-Forward Non-Concessional Contribution of three times the annual limit over a 3-year period.   

If you’ve got surplus cash or other investments such as shares or managed funds that you could contribute to superannuation, you may be able to take advantage of concessional tax rates in super with the maximum rate on fund earnings being 15% in accumulation phase and a 0% tax rate applying to pension phase benefits. 

Currently, the Bring-Forward rule only applies to those under age 67 but from 1 July 2022 anyone up to age 75 can utilise it, provided they have less than $1.48 million in superannuation on the 30th of June prior to the financial year in which the bring-forward rule is triggered. 

You must have total super savings of less than the standard $1.7million Transfer Balance Cap on 30^th June to be eligible to make any Non-Concessional Contributions the following year.  You can find out your prior 30 June Total Superannuation Balance by logging into your my.gov.au account and accessing your ‘Super’ information from your linked ATO record. 

Downsizer Contributions  

The Downsizer Contribution measure allows eligible home sellers to contribute up to $300,000 to superannuation without it counting toward your Non-Concessional Contribution Cap.  There is no Work Test requirement, and you can make the contribution even if you’ve already got $1.7million or more in superannuation.  

The eligibility criteria for making a Downsizer Contribution include that: 

• The contributor, their spouse (or former spouse) must have owned the property being sold for a minimum of 10 years. Each member of a couple is able to make the Downsizer Contribution regardless of who owned the property and whether title was held solely, as Joint Tenants or as Tenants in Common. 
• The property must be eligible for a full or partial main residence Capital Gains tax exemption. 
• The contribution must be made within 90 days of receipt of the sale proceeds (generally, the settlement date). You may be able to seek an extension to the standard timeframe if factors outside of your control prevent you from making the contribution in time. However, the extension must be requested within the 90 days and cannot be used to meet the age requirement.  
• The contributor must be age 65 at the time the contribution is made.  Pleasingly, the age requirement is being reduced to age 60 from 1 July 2022 and there is no maximum age limit. 
• The maximum contribution is the lesser of the sale proceeds or $300,000 (each). 
• You can only make Downsizer Contributions in respect of the sale of one home. If you sell a second home down the track, you can’t make further Downsizer Contributions even if you didn’t use the full $300,000 limit the first time. 
• Each contributor must complete a Downsizer Contribution Form and provide it to their superannuation fund when making the contribution. 

There is no requirement to actually downsize and buy another home with the sale proceeds, nor do you need to use only the remainder proceeds from a sale to make the contribution – you can use other assets including cash at bank or investments held in your own name for example. 

Centrelink allows a 12-month assets test exemption for the proceeds from sale of a principal residence where another principal residence is to be purchased. However, if you are Age Pension age, this exemption will not apply to the value of your Downsizer Contribution as superannuation assets are assessable.  

Cash out and recontribute 

One smart strategy is to combine a lump sum superannuation withdrawal (subject to preservation rules) with a Non-Concessional Contribution or a Downsizer Contribution, to ‘wash out’ some of the taxable component from your superannuation benefits.  The possible benefits of this strategy could include: 

• Reducing the taxable component of amounts cashed out and recontributed, potentially reducing tax deducted from death benefits paid to your beneficiaries 
• Recontribute into your spouse’s superannuation to equalise benefits and maximise the amount that can be used to start a superannuation pension 
• Recontribute into your non-Age Pension age spouse’s superannuation to reduce means tested assets and increase Social Security benefits 

While you aren’t restricted by the $1.7 million general Transfer Balance Cap when making a Downsizer Contribution, the total amount of money you can use to start a superannuation pension is still restricted by your personal Transfer Balance Cap which will be between $1.6 million – $1.7 million.  If you have reached your personal cap, any amount in excess of the cap will remain in the accumulation phase of superannuation and will be subject to up to 15% tax on any earnings. 

What to do? 

The removal of the work test requirements for those age 67 – 74 from 1 July 2022 creates several superannuation planning opportunities to be considered. 

Whether you’re contemplating a home sale, will be under age 75 on 1 July 2022 and can potentially take advantage of the removal of the work test, or perhaps utilise a cash out and recontribution strategy, you should speak to your adviser to make sure you take full advantage of the current caps and broader opportunities for next financial year. 

The information in this article contains general advice and is provided by 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 (www.primefinancial.com.au/fsg) 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, 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.