Taking action with your super right now could put you in good stead for a comfortable retirement, while also potentially improving your tax position both inside and outside of superannuation
As the end of the financial year draws near, it is an opportune time to make sure that you have planned for your tax obligations. Superannuation is one of the most-effective means to use retirement benefits to make your life easier.
It’s not too late to take advantage of a number of superannuation strategies that can improve your tax position. If you want to gain control over your financial situation, now is the time to act. On that note, let’s take a look at some of the most-common strategies you can implement in your super fund before June 30, 2022.
Are you saving for retirement?
1. Make the most of your super contributions cap
First things first, making additional contributions into your super fund can reduce your taxable income. Whether you are an employee, run your own business, or only receive investment income, anyone can make a personal concessional contribution into their super. However, it is important you do not exceed the contributions cap specified by the ATO, otherwise you may need to pay more tax. For employees, this cap includes compulsory super guarantee (SG) payments and any salary sacrifice arrangements paid by your employer, so make sure you review these payments before making a contribution.
There are two options for making extra contributions into your super, including:
● concessional contributions (tax-deductible)
● non-concessional contributions (after-tax)
In FY 21/22, the concessional contributions cap has been increased. Individuals, regardless of age, may now contribute up to $27,500 per annum. Previously, the cap was $25,000 per annum. You may then be eligible to claim a deduction for this amount, although keep in mind it is not worth claiming a deduction for a personal concessional contribution if it reduces your taxable income below the effective tax-free threshold.
Fortunately, if you haven’t used the full quota of your concessional contributions cap across each of the last five years, you can roll forward the unused amount. That means you might be eligible to make a larger concessional contribution and significantly reduce your taxable income this financial year. Take note, this option is only available if your super balance was less than $500,000 at June 30, 2021.
Meanwhile, the non-concessional contributions cap has increased from $100,000 per annum to $110,000 per annum in FY 21/22. Unlike concessional contributions, there are no deductions for non-concessional contributions, but they may be used to help members accumulate retirement savings through a tax-effective structure. Super fund members aged under 67 on 1 July 2021 have the ability to make non-concessional contributions of up to three times the annual non-concessional contributions cap in a single year.
It is easy to make additional contributions into your super fund, however, for the contribution to be recognised this financial year, your superannuation fund must receive the funds prior to June 30, 2022. A super contribution may only be treated as a deduction in the financial year it is made, so ensure you make any contributions no later than a week before the EOFY. Later, you will need to notify your fund regarding your intention to claim a tax deduction for a concessional contribution.
When it comes to contributions and tax deductions, there are a large number of factors and eligibility tests to consider that may be relevant to your personal circumstances. The team here is happy to discuss these matters with you.
2. Have the government match your super contribution
While claiming a tax deduction on a concessional super contribution is one of the most-effective ways to improve your tax position, those with less money to contribute into their super, or who either work part-time or in a lower-income job, have another option.
If in FY 21/22 your total income is less than $56,112, you may be eligible for a co-contribution from the government of up to $500 on non-concessional contributions into your super. The government will contribute 50 cents for every $1 you contribute into your fund. The maximum co-contribution of $500 will apply where your income is $41,112 or less (i.e. a $1,000 contribution will yield the maximum government contribution).
In order to be eligible this financial year, there are a number of requirements you must meet. These include but are not limited to: being employed (at least 10% of your income is derived from employment activities), under the age of 71 at the end of the current financial year, not exceeding your non-concessional contributions cap this financial year, and also having a total superannuation balance of less than $1.6 million on June 30, 2021.
3. Save for your first home through your super
If you’re in the market for your first home, the First Home Super Saver Scheme can help you save a deposit, while also offering tax incentives this financial year. By making eligible voluntary contributions into your super fund of up to $15,000 per annum, and up to a maximum of $50,000, you can subsequently apply to withdraw these funds to put towards your first home.
In the meantime, you will accumulate earnings on these funds that you can also gain access to when you apply to withdraw your contributions. Bear in mind, concessional contributions may allow you to claim a tax deduction this financial year, but when you withdraw the funds they will be taxed at your marginal tax rate, less a tax offset of 30%. For non-concessional contributions, you may withdraw these funds tax free. You must meet a series of eligibility requirements to apply for the release of these contributions.
Additional options for spouses
1. Make a contribution into your spouse’s super fund
If your spouse is earning less than $40,000 per annum, or is under the age of 75 and not working, you may be eligible for an income tax offset that can reduce your tax liability. If you contribute $3,000 into your spouse’s super, you could be entitled to a maximum offset of up to $540. Your spouse’s assessable income, total reportable fringe benefits, and reportable employer super contributions must be $37,000 or less to receive the full offset, otherwise the offset will gradually reduce up until the $40,000 threshold. There may also be other tests to consider, which we can discuss with you based on your personal circumstances.
2. Contribution splitting with your spouse
Although splitting concessional contributions with your spouse may only be done after a financial year wraps up, now is the time to act if you wish to plan ahead. If your spouse is under their preservation age, or reached their preservation age but is under the age of 65 and still working, up to 85% of your concessional contributions from a prior financial year may be split with your spouse. This strategy is particularly beneficial when your spouse is nearing retirement.
If you choose to split concessional contributions with your spouse’s super account, this could have a number of potential benefits, including:
● Reducing your total superannuation balance and increasing the amount of non-concessional contributions you can make in the new financial year;
● Ensuring each of your super benefits remain under the transfer balance cap and that you maximise the amount you may transfer to the tax-free retirement pension phase
● More flexibility when paying insurance premiums for policies held through your super
● Where contributions are split to the older spouse, it may afford earlier access to super benefits
● Where contributions are split to the younger spouse, it may improve one’s Centrelink position
Are you retired or transitioning to retirement?
1. Draw your minimum pension to avoid losing tax benefits
Account-based pensions require that a minimum pension amount is paid annually according to your age, account balance and the starting date of the pension. Since FY 19/20, the requirements for minimum pension payments have been reduced by 50%. So if you are currently drawing a pension from your super, you must receive this before the end of the financial year, otherwise there may be consequences including but not limited to the loss of tax benefits.
Unless you started drawing your pension part-way through the financial year, the closing balance of your fund on July 1, 2021, is used to calculate your minimum pension for this financial year. As long as you are over the age of 65, and neither working nor drawing a “transition to retirement income stream”, you may draw as much as you like each year.
2. Make a ‘downsizing’ contribution
Have you sold your home recently? Are you currently 65 years old or older? If so, you may be eligible to contribute up to $300,000 (or $600,000 per couple) into your super as a one-off ‘downsizing’ contribution. This contribution is excluded from the restrictions governing non-concessional contribution, where normally your total super cannot exceed $1.6 million. There is also no ‘work test’ to meet. Take note that from July 1, 2022, the eligibility age for a ‘downsizing’ contribution will decrease to 60 years old or older.
3. Drawing a pension from your super could save you tax
Your preservation age is the age you can access your super if you are retired, or start a transition to retirement income stream (TTR). Currently, the preservation age is between 55 and 60, depending on your date of birth.
If you have reached the preservation age, you have the option to draw a pension from your super fund by starting a TTR. Under this system, you can withdraw up to 10% of your super balance every year, regardless of whether you stay in the workforce. The upside is that you can potentially reduce your tax liabilities, and also increase contributions into your super at the same time that your pension offsets the decrease in salary as you transition out of the workforce.
You will enter the “retirement phase pension” when any of the following conditions apply:
● You are aged 65 and over;
● You are under the age of 65 but retired after previously starting a TTR
● You are aged between 60 and 65, and changed jobs during this period
During the retirement phase pension, earnings on your super are tax free up to the pension transfer balance cap. Special attention should be given to the balance of a transition to retirement account when it is being converted to a retirement phase pension so that it is less than the cap. Under some circumstances, there may be an incentive to make additional withdrawals from one’s transition to retirement or retirement income streams to ensure their total superannuation balance sits below the key threshold. Recent changes have been made to the cap, and this will depend on your circumstances, so Kauri can walk you through this.
Review and update your beneficiaries
The end of the financial year also provides an opportunity to review your super beneficiary nominations. As your super is held in trust by the trustee of the super fund, it is important that you nominate beneficiaries to ensure that your super is transferred to those you would like it to in the event you pass away.
If you fail to nominate a beneficiary, the trustee of the super fund will follow the laws applicable in your state or territory to determine who will receive your super, or it could use its discretion to establish who your beneficiaries might be.
Binding nominations require updating every three years per legislative requirements. On the other hand, it is good practice to review non-lapsing nominations to ensure they remain up-to-date.
Regardless of what stage you are at in life, there are numerous options available to members of a super fund to improve their tax position and get their super working more efficiently. If you are interested in learning more about superannuation strategies that might help you ahead of this year’s tax season, or you would like help managing or planning your super in a tax-effective manner, please don’t hesitate to contact George Wong from the team on the details below.
Have a great week,
George Wong - Certified Financial Planner