Every year brings a new range of super changes, including the work test for voluntary super contributions being abolished on 1st July. The change means that if you’re aged between 67 – 74, you can now make personal contributions into your super without having to meet a work-test. Also, you may be eligible to use the bring-forward rule, which can provide you with various strategies to contribute more to your super.
What is a personal contribution?
Personal contributions are Non-Concessional Contributions (NCC). In other words, you are contributing to your super that you are not claiming a tax deduction on. NCCs form part of your tax-free component when they are contributed. When funds are contributed into super, they are either classified as taxable or tax-free, depending on the type of contribution made. This is important when someone passes away and the super is paid to a beneficiary. The tax-free component remains tax-free to any recipient (i.e., you or a beneficiary) but the taxable component can be taxed depending on who is the beneficiary (more on this below). You can however take comfort in that fact that once you are retired, are over 60 years old and you start an income stream pension from your super fund (pension-phase), the earnings and capital gains in that pension are not taxable!
There is a cap on NCCs of $110,000 per year. This cap can be higher if you want to use the bring-forward rule.
What is the bring-forward rule?
If you are eligible, the bring-forward rule allows you to make NCCs above the annual cap by bringing forward the caps from future years. You could make an NCC of $330,000 in one single year. However, this means that you would be unable to make any further contributions in the financial year you make it in, plus the following two financial years.
You must be under 75 to take advantage of the bring forward rule. There is also a limit of how much your total super balance can be for you to be eligible. The total super balance on 30 June 2022 needs to be under $1.48m.
You could be 74 and still make a NCC of $330,000. Under normal contribution rules you would not be able to make an NCC contribute to super when you are over the age of 75. However, by bringing this forward 2 years, at age 74 you’re making contributions for the following two financial years, which you would normally be ineligible to do. The easing of rules is an excellent opportunity for retirees who were ineligible once over age 67 prior to this change.
How can this be helpful to me?
From the government’s perspective, the objective of super is to provide income in retirement to substitute, or supplement, the Age Pension. The more Australians who save to self-fund their own retirement will reduce the number of people that rely on Age Pension. Everything costs money, right? To achieve this, they provide a favorable tax environment for your retirement savings. Better tax outcomes result in more of your super money being available to grow. As mentioned earlier, once you are over 60 and in pension-phase, the earnings and capital gains inside that pension are not taxable. This means if you are over 60 and retired, your money may be best placed in super if you are able to get it in there.
Alternatively, if you hold money outside of super, any earnings and capital gains are subject to income tax at your marginal tax rate. Although, you should note that any individual can earn up to $18,200 before any tax is due.
The Re-contribution strategy
An alternative strategy that can benefit retirees is called a re-contribution strategy. I mentioned earlier that there is a taxable and a tax-free component in your super fund. Both components are generally tax-free to the retiree once you’re over age 60 and retired. So, what is the point of the taxable component you ask?
The taxable component comes into play when paying super death benefits. When your super is paid to a beneficiary, under taxation law they are either classed as a dependent or non-dependent (this is different to a dependent under superannuation law). The most common dependents are spouse, de facto or a child under 18; however, there are more circumstances that qualify. If you are not classed as dependent of the deceased, you will pay tax on the taxable components at the following rates:
One of the most common beneficiaries, that are often not classed as a dependent, are adult children who are not financially dependent on the deceased. This kind of beneficiary might be working full time and supporting their own families. Should a grown-up child be a beneficiary of your super upon death they may end up paying 17% tax on the taxable component of your super balance!
A re-contribution strategy can come in handy when remembering that your own super is tax-free to you. Once you withdraw your super and it lands in your bank, there is no longer any taxable or tax-free component on it. You didn’t pay tax on it when withdrawn either. It’s just money in your bank account now. You can then re-contribute those funds as a NCC and those funds re-enter into the super fund’s tax-free component.
It is important to note though that when you redeem funds, you cannot choose which tax component it comes from, it is withdrawn in line with how much of the overall funds are tax-free.
Example of withdrawing $330,000 and re-contributing (using the bring-forward rule) below:
The re-contribution strategy has reduced the taxable component by $207,900. This could allow a non-dependent beneficiary to avoid paying tax of $35,343 (17% of $207,900) on the taxable component upon your passing.
Furthermore, it should be noted that giving financial advice in 2022 implies that Best Interest Duty extends to the client’s broader, long-term interests and likely future circumstances. This signifies that we need to make sure using up the NCC cap(s) isn’t going to impact any future plans to contribute that could come up (e.g., an expected inheritance). It can also be inappropriate in some cases where assets need to be liquidated to fund any re-contributions. The re-contribution strategy should be looked at on a case-by-case basis and weighing up the advantages against the disadvantages and should never be considered without seeking professional advice.
Superannuation laws and regulations change frequently, it’s a full-time job keeping up with the changes. Particularly when a new government is elected and proceeds to unravel previous legislation.
If you would like to talk about contributing or recontributing funds into super, please don’t hesitate to contact an Oracle financial adviser.
Written by Chris Payne