Lower super balances present some super opportunities

Non-concessional contributions to super

The ability to make after tax (non-tax deductible) personal and spouse contributions into super.

Must be less than $1.6 million. Balances between $1.4 million and $1.6 million may impact the amount of non-concessional contributions that can be brought forward (see below).

Catch-up (or carry-forward) concessional contributions

From 1 July 2018, a person’s unused concessional contributions cap can be carried forward for up to five financial years allowing a concessional contribution greater than the general concessional contributions cap of $25,000 per year. Unused concessional contributions from the 2018/19 financial year can first be used in the 2019/20 financial year.

Must be less than $500,000

Post retirement year work test exemption

The ‘work test exemption for recent retirees’ allows a super fund to accept voluntary contributions if the person last met the work test in the immediately preceding financial year. From 1 July 2020, the person must not have used the work test exemption in a previous financial year.

Must be less than $300,000

Government co-contribution

A person who makes a personal non-concessional super contribution of at least $1,000 may be eligible for a co-contribution of up to $500. The co-contribution is paid by the Government to the person’s super fund. To be eligible, the person must:

• be under the age of 71 at the end of the relevant financial year
• satisfy a 10% income test
• have total income of less than $54,837. The co-contribution reduces where total income exceeds $39,837 (2020/21).

For additional information refer to the Australian Taxation Office (ATO) website.¹

Must be less than $1.6 million

Spouse contributions

Spouse contributions allow a taxpayer (the contributing spouse) to contribute directly into their spouse’s (the receiving spouse) super account. A spouse contribution of at least $3,000 may entitle the contributing spouse to a non-refundable tax offset of up to $540. The eligibility criteria includes:

• the receiving spouse must be less than age 70² and satisfy the work test or be eligible for the work test exemption where required
• the receiving spouse’s income must be less than $40,000. The tax offset reduces where income exceeds $37,000.

For additional information refer to the ATO website.³

Must be less than $1.6 million (applies to the receiving spouse).

SMSFs ability to use segregated assets for ECPI

SMSFs and small-APRA funds must use the proportional method to calculate exempt current pension income (ECPI) if at any time in the year, the fund is paying a retirement phase pension, and a fund member in the relevant financial year:

• has a total super balance exceeding $1.6 million at 30 June immediately preceding the relevant financial year
• has an income stream (other than a transition to retirement (TTR) or certain deferred annuities) just before the start of the relevant financial year (this can be from any provider).

Please note: An SMSF may still segregate for investment return purposes.

Must be less than $1.6 million (only applies to certain fund members).

Tips and traps

1. A significant reduction in the value of a person’s total super assets in the 2019/20 financial year will not change their eligibility for any of the above measures in 2019/20. The relevant total super balance for the 2019/20 financial year is the 30 June 2019 balance.
2. If a person’s total super balance is at least $1.6 million, their concessional contributions cap is not reduced to nil and they may be eligible to utilise the standard concessional contributions cap. It is the non-concessional contributions cap that is reduced to nil.
3. The total super balance is not the same as the transfer balance cap. The transfer balance cap is a limit on how much super can be used to commence retirement income streams. If a person has already used their $1.6 million transfer balance cap, a decline in the value of the assets supporting the retirement income streams will not allow them to transfer more of their accumulation super benefits to a retirement income stream.

Holly, age 53, takes advantage of catch-up concessional contributions

Holly previously inherited an investment property from her deceased parents with a large unrealised capital gain. Holly was a successful small business owner and following the advice of her financial adviser, she focused on building her super for retirement. At 30 June 2019, her total super balance had grown to $600,000. Unfortunately, Holly’s business and super balance have felt the full impact of the Covid-19 lockdown. Holly is hoping to sell the inherited property. The sale proceeds will be enough to re-establish her business, clear debt and leave some for investment. She is not comfortable with selling in the current conditions and is hopeful that she will be able to sell the property in the 2020/21 financial year.

Holly’s super interest is now approximately $400,000 and given her drastic reduction in income she will not make concessional contributions in the 2019/20 financial year, unlike last financial year when she utilised the full $25,000 cap. The unused concessional contributions cap of $25,000 from the 2019/20 financial year can be carried forward. If Holly’s total super balance remains less than $500,000 at 30 June 2020, Holly can use her unused concessional contributions in 2020/21 allowing concessional contributions of up to $50,000 to offset the anticipated capital gain and other income.

Without the reduction in Holly’s super balance she wouldn’t be eligible for catch-up concessional contributions, the unused cap for 2019/20 would be lost and she would pay more tax in the 2020/21 financial year.

Brayden and Eilish can take full advantage of their lower super balances

Brayden, age 61, and Eilish, age 62, are a wealthy couple nearing retirement. Eilish has her own medical practice which employs Brayden on a casual basis. For the last few years, Brayden’s super balance has exceeded $1.6 million. Due to the market downturn his super balance will now be below $1.4 million as at 30 June 2020. This will present him with new opportunities in the 2020/21 financial year.

The spouse contribution tax offset

If Brayden’s income for the 2020/21 financial year is below $37,000, Eilish can make a $3,000 spouse contribution for Brayden and receive a $540 tax offset. In the previous financial year, Brayden’s total super balance exceeded $1.6m making him ineligible to receive a spouse contribution without breaching his non-concessional contributions cap and Eilish ineligible to receive the spouse contribution tax offset.

The Government co-contribution

If Brayden’s income for the 2020/21 financial year is below $39,837, he may be entitled to a Government co-contribution of $500 when making a personal non-concessional contribution of at least $1,000. If his income is more than $39,837 but less than $54,837, he may be entitled to a part Government co-contribution. In the 2019/20 financial year, Brayden wasn’t eligible for the Government co-contribution because his total super balance exceeded $1.6m.

Non-concessional contributions

As Brayden is under the age of 65 as at 1 July 2020 and his total super balance is less than $1.4 million as at 30 June 2020, he can use the three-year bring-forward period allowing up to $300,000 of total non-concessional contributions. As spouse contributions are counted towards the non-concessional contributions cap, he could make a personal non-concessional contribution of $297,000 in addition to receiving the spouse contribution of $3,000. If Eilish is likely to remain eligible for the spouse contribution tax offset and Brayden for the Government co-contribution during the next two years, they should consider leaving room under the non-concessional contributions cap:

Commencement of an account-based pension

If Brayden can satisfy the retirement condition of release (permanent retirement or cessation of a gainful employment arrangement on or after age 60) he can commence an account-based pension (not a TTR pension) which provides:

• tax-free investment returns on assets supporting the pension
• the commencement of a pension at a time when his super balance does not exceed his $1.6 million transfer balance cap (a limit on how much super can be used to commence retirement phase income streams). As the commencement value of the pension is assessed against the transfer balance cap, any future investment returns relating to the pension will not affect the transfer balance cap.

The benefits could be substantial if investment markets recover. Alternatively, if Brayden doesn’t commence an account-based pension:

• investment returns will be taxed at up to 15%. Some funds may have both realised and unrealised capital losses, but these cannot offset income items such as interest, rent and dividends.
• if the super interest at the time of commencement exceeds the transfer balance cap, the excess will have to remain in accumulation phase or be cashed out of the super system.

The benefits for Brayden and Eilish can be summarised as follows: