9 minute read
Legislative impact on contributions
ANTHONY CULLEN is SMSF technical specialist at SuperConcepts.
Anthony Cullen details some of the recent legislative changes and the impact they have had on contribution opportunities for SMSF members.
A raft of legislative changes made in the past two years have had an impact on SMSF funds, how and when we can contribute to our funds and when we can access our funds in retirement.
SuperConcepts and selfmanagedsuper combined for the fourth annual SMSF Professionals Day on 27 October – the first digital edition of the forum – where these issues were discussed and we offered advice to professionals enabling them to assist their clients. The legislative changes discussed included:
• the ability for people aged 65 and over to make a downsizer contribution of up to $300,000 to their super fund from the proceeds of selling their home,
• the ability to make catch-up concessional super contributions if you have a total superannuation balance (TSB) of less than $500,000, •
work test exemptions for Australians aged between 65 and 74 with a superannuation balance below $300,000, and •
the increase in the work test age from 65 to 67.
Many of these amendments can be confusing, especially as they can collide with each other, making it challenging to know how, when and how much trustees can contribute to their SMSF fund in their senior years.
Here are the basics on what these changes mean and some advice on how you can help clients make the most out of their SMSF by leveraging the current legislative landscape.
Downsizer contributions for people over 65
It is quite common for people to sell the family home when they reach retirement age so they can purchase a smaller property because the kids are all grown up and have moved out of the house. This not only means singles and couples can have a more appropriately sized property in a location that suits them, it also means they can free up funds that can be used for their retirement savings.
The federal budget made allowances for this and from July 2018, anyone over the age of 65 could make a $300,000 downsizer contribution using the proceeds of selling the family home. But to be able to do this, the ATO has outlined strict eligibility requirements, including:
• the house must have been owned by the member or their spouse for 10 years or more before the sale (calculated from the settlement of purchase through to the settlement of sale),
• the home is located in Australia and is a fixed address, not a caravan, houseboat or other mobile homes,
• the proceeds must be, at least partially, exempt from capital gains tax (CGT) under the main residence exemption or entitled to this exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset,
• the downsizer contribution is made within 90 days of receiving the proceeds of sale, and
• the member has not previously made any other downsizer contributions.
Downsizer contributions are tax-free and exempt from concessional and non-concessional contributions caps and aren’t subject to the $1.6 million TSB restriction, making it a perfect way for people downsizing their home to boost their superannuation after the age of 65.
And one of the best parts of the downsizer contribution scheme is that proof of purchasing a new property is not needed, nor is the need to actually downsize. If members want to spend their retirement on the road in a mobile home, on the water in a houseboat or any other nomadic form of lifestyle, they can do so while still being able to contribute up to $300,000 to their super fund.
So, what happens if the client settles on the sale of your property when they are 64, but turn 65 during the 90-day period given to make the contribution? That is fine because the individual can wait until their 65th birthday and make the contribution (which still falls in the allowed 90-day period) without any fear of penalty.
Another thing to consider is the timing of the settlement and whether the property was sold towards the end of the financial year. If the 90-day period has the end of the financial year in the middle of it, the client may want to consider waiting until after July 1 before making the contribution. That way it won’t impact the person’s TSB and potential to make other contributions until the following financial year.
The changes to bring-forward and catch-up super rules
Changes were made to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 to allow people to carry forward their unused concessional contributions (CC) cap from the previous financial year into a later year and this was enacted from 1 July 2018.
This only applies if the member’s TSB was less than $500,000 in the previous financial year, but it allows members the chance to make up $150,000 of CC in just one financial year by carrying forward the unused cap from the previous five financial years.
It should be noted though, especially during COVID-19 times, if there are changes to the market and a person’s TSB falls below $500,000 in a future financial year, they become eligible to take advantage of their carry-forward balance, even from a period where this threshold may have been exceeded.
Bring-forward non-concessional contributions work in reverse, allowing a superannuant to make early contributions using the non-concessional contributions (NCC) cap from future years. Right now, this only applies up until the age of 65, but there is a bill before parliament that will extend this up to age 67. The Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 entered parliament in May, but has been stuck in the Senate since late August. With just 12 sitting days left in the Senate for 2020, it appears likely this may be further delayed until 2021.
If passed, it means retirees aged up to 67 will be able to use the bring-forward rule without being subject to a work test and without it being considered an excess NCC. Unfortunately, it means SMSF clients who are turning 65 this year are in a holding pattern and face a tough decision – exercise the bring-forward rule now or hope the legislation passes the Senate and wait until they are 67.
There are a number of amendments put forward by Pauline Hanson’s One Nation party that have delayed the bill from receiving royal ascent and we will all have to adopt a wait-and-see approach as to when this might happen and in what form. The proposed changes include:
• the potential to recontribute money released from super via the Temporary Early Access to Super COVID-19 measures, under specific circumstances, up to 30 June 2030,
• having an increased CC cap determined by age if a person is 67 or older at the beginning of the financial year, and
• the avoidance of excess CC should an employer contribute in accordance with certain workplace superannuation schemes that result in an individual exceeding the cap.
Whether Senator Hanson and One Nation are successful remains to be seen. There appears little doubt the bill will ultimately pass though as it has garnered wide support throughout the Senate. But the advent of COVID-19 and reduced parliamentary sitting days have caused delays in it passing through the upper house.
So what happens to people turning 67? There is no legislation right now. They have to decide as an individual whether they are willing to run the gauntlet and make a contribution triggering the bring-forward provision. We cannot advise you on this until there is an outcome in the Senate and for everyone’s sake let’s hope it comes soon.
Work test exemptions for Australians aged 65 to 74
New retirees aged between 65 and 74 can now make voluntary contributions to their super account without having to undergo a work test, under certain conditions.
For people over a certain age, the ATO will require work tests to be met in some cases before they can make any further contributions to their super account. To meet the criteria of this work test, members must have worked at least 40 hours in a 30 day period during the financial year in which they want to make a contribution.
But now the ATO has put exemptions in place to allow retirees the opportunity to top up their super without having worked the required hours in that financial year. To be eligible, these taxpayers must:
• have a TSB of less than $300,000,
• make the contribution within 12 months aft er the financial year in which they last met the work test, and
• adhere to the existing contribution caps.
This legislation became effective from July 2019 and was put in place for retirees and pre-retirees who have not had a lifetime of super contributions from their employer. The superannuation guarantee was only enacted in 1992 and was only 3 per cent to 5 per cent of wages at the time before slowly increasing to the current rate of 9.5 per cent. It is legislated to rise to 12 per cent from 1 July 2025.
It means many retirees missed out on a significant portion of super contributions the generations aft er them enjoyed, resulting in this measure being put in place to allow them to top up their retirement savings for a more comfortable retirement.
It is important to note, though, if a person retires early, they may not be eligible for these exemptions. If an individual stopped working when they were 60, for example, this doesn’t mean they can suddenly contribute now when they are 67. In scenarios such as this a work test would still have to be satisfied.
The increase in the work test age from 65 to 67
As well as the work test exemption, the age when these work test requirements kick in has been extended to 67, a change that came into effect on 1 July 2020.
It means workers approaching retirement age or new retirees also have an opportunity to make contributions under the CC cap of $25,000 and the NCC cap of $100,000 without having to meet the work test eligibility requirements.
It effectively affords retirees, or people approaching retirement, a larger window to make voluntary contributions and also gives them a window to access the bring-forward non-concessional super contributions – providing this bill passes the Senate shortly.
As a result, people in this 65 to 67 age bracket now have a unique opportunity to have their cake and eat it too. By reaching the age of 65, these individuals will have automatically triggered a condition of release, enabling them to access their preserved funds. Therefore, they can draw down on their super to start retirement, but also make further contributions to ensure it lasts you longer.
