Superannuation strategies for end of year planning
About the author:
- Author name:
- By Terri Bradford
- Job title:
- Head of Wealth Management
- Date posted:
- 16 June 2021, 12:00 PM
Market conditions have varied considerably over the past year so it is important you make time to review your current superannuation strategies before 30 June. Is your account in the best position to take advantage of positive market sentiment?
Salary sacrificing is a strategy used by employees to boost retirement savings and save tax. Salary sacrificing to superannuation is about foregoing taxable salary and contributing this amount into super instead as a concessional contribution.
The general limit for concessional contributions for this financial year is $25,000. The limit counts all taxable contributions, so this means employer super guarantee (SG) contribution as well as your salary sacrificed amount.
When planning your strategy, deduct what SG contribution amounts your employer will make on your behalf for the year from your concessional contribution limit. Base your salary sacrifice strategy on the balance remaining.
If you exceed the concessional contribution cap you will pay tax at your marginal rate (plus an ATO interest charge) on the excess amount.
Tip: The concessional cap increases to $27,500 next financial year so good time to review your arrangements for the 2021/22FY.
Changes to rules from 1 July 2017 means individuals, where possible, can claim a tax deduction on personal super contributions regardless of whether the individual is an employee or self-employed. Again, be mindful of the concessional contribution limit of $25,000.
Claiming a tax deduction may provide a better alternative strategy to salary sacrificing, particularly where their employer does not provide for salary sacrifice, or if income fluctuates throughout the year.
Tip: You can only claim an amount that reduces your tax liability to zero regardless of how much you contribute to super. Speak to your accountant to make sure you qualify in the first instance and then claim only what is allowable.
Catch-up concessional contributions
If you have not fully used your concessional cap since the 2018/19 year and your total super balance as at 30 June 2020 was under $500,000, you may be able to 'top up' your personal concessional contributions for this 2020/21 year with your unused contributions and claim a tax deduction if appropriate.
Tip: Unused concessional contributions can be carried forward for a period of 5 consecutive years.
Employees and self-employed individuals earning less than $39,837 this financial year may be eligible for the government co-contribution payment of $500 if a personal (after tax) contribution of at least $1,000 is made into superannuation. If you earn more than $39,837 but less than $54,837 this financial year you could still be eligible for a pro rata amount.
Spouse super contributions
Will your spouse earn less than $37,000 this financial year? If yes, you may be able to make a superannuation contribution on their behalf and claim a tax rebate of up to $540.
Tip: Contributions for which the spouse rebate is claimed will not be eligible for the Government co-contribution payment so work out which strategy works best for you. The cut-out income threshold for this offset is $40,000.
Personal contributions and total super balance
After tax personal contributions, where a tax deduction is not being claimed, are referred to as ‘non-concessional contributions’. The 15% contributions tax does not apply to non-concessional contributions.
The limit on how much you can contribute to super as a nonconcessional contribution (NCC) will depend on your ‘total super balance’ as at 30 June of the previous year.
If your total super balance is $1.6m or more, you are unable to make any further NCCs for the next financial year. If your total super balance is $1.5m or more, but less than $1.6m, you may only contribute up to $100,000 NCC for the next financial year.
To understand how ‘total super balance’ relates to personal contribution strategies please speak to your adviser.
Seniors downsizer contribution
Individuals over age 65 who are selling their principal home may be able to contribute up to $300,000 from the proceeds of sale into superannuation (non-tax deductible) regardless of whether the individual is working or retired. There are eligibility conditions in relation to home ownership that must be met so speak to your adviser for more information about the downsizer contribution.
Are you retiring this year and commencing a pension from your super? Pensions established after 1 June can have payments deferred until after 1 July. This is a useful strategy if you don't need income until after the new financial year.
If you are turning 60 during the year, and if cash flow permits, the pension can be structured so that actual payments won't commence until after age 60, when the payment will be tax free.
If you have an existing superannuation pension make sure you meet your minimum pension obligations before 30 June otherwise the tax office may declare your pension never existed for the financial year.
The consequences of this could be the loss of tax exempt status for the pension account, and any pension payments received during the income year will be treated as lump sum payments.
Tip: Minimum pension payment standards have been reduced by 50% for the financial years 2019/20 and 2020/21 due to market volatility caused by COVID-19. Check with your adviser or SMSF administrator in relation to your pension income situation.
If you are turning 65 this year and applying for social security benefits remember that account-based pensions are now subject to deeming rules when determining eligibility to benefits under the Income Test.
$1.6m Pension transfer balance cap
A new $1.6m pension transfer balance cap applies which limits the amount of capital a person can hold in a retirement pension where earnings are tax exempt.
If you are commencing a retirement income stream this financial year you must ensure the commencing value of the income stream does not exceed $1.6m. Note, transition to retirement income streams ‘not in the retirement phase’ do not count against the transfer balance cap.
Transition to retirement pensions
If you are over preservation age (which has been steadily increasing from age 55 for those born after 1960), and still working you can access your super as a non -commutable income stream - referred to as a "transition to retirement income stream" (TRIS).
If you are drawing TRIS pension payments it is important you do not exceed the 10% maximum limit for payments (10% of your account balance at commencement or each financial year). If you do exceed this limit penalties will apply.
Tip: Previously TRIS pensions were treated as tax exempt pensions (nil tax on earnings). From 1 July 2017 the tax structure changed, and earnings are now taxed as if the funds were in accumulation. You may wish to speak with your adviser to see if your TRISis still of value.
Small business capital gains tax (CGT) concessions and super
If you are a small business owner and you are thinking about selling the business and/or retiring, on sale of business assets you may be eligible to use one of the available small business capital gains tax concessions thereby reducing or even eliminating the capital gains tax that may have resulted from the sale of the assets. Some or all of the proceeds can be contributed into super as part of your retirement plans.
Speak to your accountant in the first instance about your eligibility for small business CGT concessions. Then speak to your adviser about the timing of any contributions to super under the CGT cap as it could make a big difference to how much you can get into super for retirement.
Tip: You can use one of two 'small business' tests to meet the definition – either aggregated turnover per annum of less than $2 million OR $6 million maximum net asset value of business and associated entities.
Wealth protection (Insurance)
Salary sacrifice/personal deductible contributions can be a tax effective way of covering premiums where insurance is held within super. It also means your super account balance is not being impacted by the ongoing costs of the premiums.
Generally, insurance premiums for policies held within superannuation are fully deductible to the super fund. However, premiums for total & permanent disability (TPD) insurance policies held within superannuation may only be 100% deductible to the extent the policy is based on 'any occupation' definition.
You may want to review your insurance policies held within super to see what 'type' of TPD policy your fund is holding and discuss with your adviser what the best course of action is.
If you have income protection insurance in your own name you can generally claim a tax deduction for 100% of the cost of the premiums.
Self-managed super funds (SMSFs)
From an administration point of view now is the time SMSF Trustees should start thinking about preparing for 30 June, particularly in terms of how portfolio valuations have been impacted by market uncertainty this year.
From a documentation perspective, ensure that minutes of meetings are up to date, contributions are accounted for and minimum pension payments will be paid prior to 30 June (see note about reduced minimum payments). Leaving these things to the last minute could lead to unintended consequences (think loss of tax benefits if a contribution is not counted in the right financial year).
Tip: If you have commercial property in your SMSF and due to COVID-19 issues have provided temporary rent relief to your business tenant, make sure all documentation in relation to this relief is in order, including reasons why the relief was provided.
What deductions can your SMSF generally claim?
- Many insurance premiums (depends on policy).
- Ongoing portfolio management fees (incl. professional fees for ongoing advice).
- Ongoing accounting/administration/audit fees.
- ATO/APRA lodgement fees.
- Costs to upgrade the trust deed necessitated by legislative/regulatory changes.
Does your SMSF have a limited recourse loan?
Trustees should check the terms of any related party loan they have with the SMSF to ensure the arrangement is being maintained on arms-length (commercial) terms. Are repayments being made monthly on a Principal-&-Interest basis? Interest-only repayments are no longer allowed.
SMSF investment strategy
End of year tax planning for SMSFs should also include a review of the fund’s investment strategy.
Is the strategy in writing and is it up to date so that members objectives are being met? Does the actual investment portfolio need to be reviewed to ensure it continues to meet income and growth objectives as set out in the SMSF investment strategy?
If your SMSF portfolio has liquidity issues caused by COVID-19 market uncertainty, it is important you consider this in your review of your strategy.
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