Superannuation update: year end planning (June 2021)
The end of the 2021 financial year is rapidly approaching and whilst some of us may have thought that COVID-19 would be well and truly behind us, the impact of the pandemic is still at the forefront of our minds and for some superannuation funds, this may have had a dramatic impact on members’ balances. Now is the time for everyone, retirees in particular, to switch their attention towards superannuation planning, including a review of strategies for contributions and pension planning. Understanding the current contribution and pension limits, as well as soon to be increased limits, will help in formulating appropriate strategies. Below we summarise just a few of these areas of consideration.
Contribution limit changes
| Concessional contributions | Non-concessional contributions | ||
|---|---|---|---|
| 30 June 2021 | 30 June 2022 | 30 June 2021 | 30 June 2022 |
| $25,000 per annum | $27,500 per annum | $100,000 per annum - for individuals with a total superannuation balance of less than $1.6m at the previous 30 June $nil - for anyone with a total superannuation balance of $1.6m or more at the previous 30 June |
$110,000 per annum - for individuals with a total superannuation balance of less than $1.7m at the previous 30 June $nil - for anyone with a total superannuation balance of $1.7m or more at the previous 30 June |
| The above limits are available to all members under the age of 67. If you are aged 67 or over, the work test rules still apply. | |||
| Unused carry-forward concessional contributions – available for individuals with a total superannuation balance of less than $500,000 at the previous 30 June | Unused carry-forward concessional contributions – available for individuals with a total superannuation balance of less than $500,000 at the previous 30 June | Bring forward non-concessional contributions - available for individuals aged under 65 up to a maximum of $300,000 depending on the individual’s total superannuation balance at the previous 30 June (Bring forward amount reduced if balance is between $1.4m and $1.6m) |
Bring forward non-concessional contributions - available for individuals aged under 65 up to a maximum of $330,000 depending on the individual’s total superannuation balance at the previous 30 June (Bring forward amount reduced if balance is between $1.48m and $1.7m) |
| Unused carry-forward concessions are available to all members under the age of 67. If you are aged 67 or over, the work test rules still apply | Bring forward concessions are currently only available to members under the age of 65. If you are aged 65 or over, the work test rules apply Legislation to increase this age to 67, is currently before Parliament |
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Changes announced in the Federal Budget May 2021
Announced in the 2021-22 Federal Budget is the further proposal to remove the work test requirement in respect to non-concessional and salary sacrifice contributions, which is expected to be effective from 1 July 2022. This proposal is intended to remove the complexities that have limited the ability of retirees to top up their superannuation and acted as a disincentive to pursue flexible work.
Contribution Strategies
When considering what contributions to make before the end of the financial year, it is important to think carefully about whether they are made in this year or the next. A number of strategies may be available to you to maximise the amount contributed into superannuation, and this is especially important for those individuals nearing the age limits or total superannuation balances cut off limits.
Double Deduction Strategy
Given the increase in the annual concessional contribution cap from 1 July 2021, individuals with high taxable income in the 2020-21 financial year may consider bringing forward their 2022 concessional contributions prior to 30 June 2021. This strategy is particularly valuable if you are not expecting higher income in the 2022 financial year.
Under this arrangement, personal contributions are made to an SMSF up to the concessional contribution cap any time during the year (say 2020-2021) with an additional contribution that can be made sometime in June 2021 but not allocated to the member until July 2021.
A personal tax deduction is claimed for two years’ worth of contributions in a single year as both contributions were made in the financial same year, but count towards the relevant cap in the different years.
If the strategy is adopted, this would allow for a contribution of up to $52,500 for the 2021 financial year, after taking into account the new higher cap from 1 July 2021.
Unused concessional contributions
As a reminder, members of superannuation funds can make additional catch-up contributions using unused concessional contributions carried forward from 1 July 2018. This provision provides a tax planning opportunity for family groups which can distribute income to individuals, such as children over 18, who have unused concessional contribution caps. For example, if a child has turned 18 before the end of the current financial year, there is the ability for them to make a personal concessional contribution of up to $75,000 against their taxable income (or $102,500 if they utilise the double deduction strategy noted above). This contribution can then be claimed against taxable income including trust distributions.
Please ensure that any superannuation guarantee on part time work has been taken into account since 1 July 2018 that may reduce the top up personal contributions. This will allow the respective individual to invest more superannuation benefits into the superannuation environment for long term wealth creation. It may also help the relevant individual save and withdraw up to $30,000 under the first home savers scheme, which is proposed to increase to $50,000 from 1 July 2022.
Maximising Non-Concessional Contributions
As mentioned in our table, members that have a total superannuation balance of more than $1.6 million are unable to make any further non-concessional contributions. This superannuation balance is tested at the beginning of the financial year. It is important to note that due to COVID-19, many fund balances significantly reduced between the period of March to June 2020. This may mean that for many members, the ability to make further non-concessional contributions may be possible if their benefits fell below $1.6 million. This strategy should be reviewed prior to year end 30 June 2021 as it may not be possible to make any further non-concessional contributions from 1 July 2021, particularly if the investment portfolios have recovered and the member is now in excess of the $1.6 million threshold.
Other Year End Matters
Minimum pension requirements
As noted in our 2020 superannuation year end planning publication, the second COVID-19 economic response stimulus package saw the Government announce a relief measure to support superannuation retirees. This included a reduction in the superannuation minimum income stream drawdown requirements for account-based income streams, market linked income streams and similar products by 50% for the years ended 30 June 2020 and 30 June 2021.
A further extension to this measure has just been announced by the Government, extending this reduction to minimum drawdowns for the year ended 30 June 2022. As this is only a temporary measure, the minimum withdrawal amounts will now revert back to their pre-COVID-19 rates from 1 July 2022.
Additionally, where you have a lump sum withdrawal arrangement currently in place, now is the time to review and implement any additional documentation instructing the trustee how you wish to receive your benefits prior to 30 June 2021 for the upcoming 2022 financial year.
Indexed Lifetime Transfer Balance Cap
The lifetime transfer balance cap is the maximum amount that can be transferred into pension phase upon satisfying a condition of release for retirement. Currently, this maximum cap is $1.6million ($1.6m) which will be increasing to $1.7million ($1.7m) from 1 July 2021.
From 1 July 2021, for those that have never commenced an income stream, their personal transfer balance cap will equal the increased general transfer balance cap of $1.7m. For those who were previously in receipt of an income stream, their personal transfer balance cap will be between $1.6m and $1.7m depending on how much of the cap has been utilised since 1 July 2017.
Members who commenced an income stream between 1 July 2017 and 30 June 2021 totalling $1.6m, have already maxed out the general transfer balance cap (regardless of any commutations which have occurred during this time) and will be ineligible to access the indexation of this cap. For those who commenced an income stream for less than $1.6m, a portion of this $100,000 indexation amount will be available, dependent upon any ‘unused’ cap amount.
For example:
Member A commenced an income stream on 1 July 2018 for $1.6m. As such, the member’s unused cap proportion is Zero at 30 June 2021 and Member A is unable to access any of the indexed cap.
Alternatively, Member A commenced an income stream on 1 July 2018 for $1.4m. The member’s unused cap proportion is 12.5% (i.e. 100% - $1.4m/$1.6m). Therefore Member A is able to avail themselves of an additional 12.5% of the indexed cap amount of $100,000, which equates to $12,500 from 1 July 2021.
Superannuation Guarantee Rate Increase
As a reminder, from 1 July 2021, the prescribed superannuation guarantee (SG) rate is scheduled to increase from the current 9.5% to 10%. This increase will require employers to contribute into superannuation, an additional 0.5% of an employee’s ordinary times earnings, in order to satisfy their SG obligations under the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA).
It is important for employers to start planning now as to how this change will impact their current processes and how this increase will be communicated to employees. Consideration should also be given to an employee's remuneration structure, as the impacts will differ depending on their arrangements.
We also note that it was announced in the 2021-22 Federal Budget the Government will remove the existing $450 per month minimum salary or wages threshold that resulted in low income employees not receiving any superannuation guarantee support. This change will simplify the rules for employers and add some further fairness into our superannuation system. This measure is expected to apply from 1 July 2022.
