Expert SMSF insights
Government clarity needed for contribution strategies
By Nicholas Ali
- New federal budget proposals
- Strategic benefits if passed
- Government creating a backlog of proposed changes
This year’s federal budget proposed that, from 1 July 2020, Australians aged 65 and 66 will be able to make voluntary super contributions, both concessional and non-concessional, without meeting the work test. Currently, this entitlement is only available to those under age 65.
The proposal also extends the availability of the bring-forward arrangement, which enables up to three years’ worth of non-concessional super contributions in a single year (depending upon a person’s total super balance at the prior 30 June). Currently, the arrangement is available to people up to the age of 65. The proposal extends the equivalent age to 67.
What’s the benefit of the legislative amendment?
In addition to being able to make personal contributions for an additional two years without having to meet the work test, the increase in the work test age from 65 to 67 provides an additional two years that an individual can utilise the standard $100,000 non-concessional cap, prior to triggering the bring-forward rule in the year they attain the work test age.
This strategy does require the individual to have less than $1.4m in total super at 30 June prior to the year the bring forward rule is triggered to maximise the non-concessional bring forward cap of $300,000. However, even with a prior 30 June total super balance of at least $1.4m, but less than $1.5m, it provides for a maximum of $200,000 of non-concessional contributions.
Let’s have a look at an example, to illustrate the benefits. Richard is turning 65 in December 2019, does not currently satisfy the work test and is unlikely to in the future. His 30 June 2019 Total Super Balance (TSB) is $720,000 and he has not triggered the bring-forward rule in the preceding three financial years.
Under the proposed change, rather than having to utilise the bring-forward rule prior to his 65th birthday, he can make non-concessional contributions as follows:
- $100,000 at any time in 2019/20;
- $100,000 in 2020/21 (assuming his TSB is less than $1.6m at 30 June 2020); and
- $300,000 prior to his 67th birthday in 2021/22 (assuming his total super balance at 30 June 2021 is less than $1.4m).
The net result would be non-concessional contributions totalling $500,000 for the period 1 July 2019 to 30 June 2022, compared to $300,000 if the rules remain unchanged and Richard makes the contribution before his 65th birthday. A larger non-concessional contribution provides Richard with a greater opportunity of his concessionally-taxed superannuation providing him with the retirement income he may need.
If the work test age remained at 65, to make further non-concessional contributions in later financial years, Richard would first need to satisfy the work test. He would not qualify for the ‘recently retired’ rule, which requires a person to have been gainfully employed in the preceding financial year and have a total super balance of less than $300,000 at the prior 30 June.
Where’s the legislation?
At the time of writing (October 2019), there has been no draft legislation put forward by the Government. Given a proposed commencement date of 1 July 2020, this lack of certainty means retirement planning for SMSF members is potentially compromised. For someone in Richard’s position, he is planning on the proposed legislation becoming law from 1 July 2020. The risk is that the proposed legislation doesn’t get passed, the commencement date is deferred, or the final version of the legislation differs from expectation.
Richard must decide prior to his 65th birthday in December 2019 whether to trigger the bring-forward provisions and either:
- make a total non-concessional contribution of $300,000, which effectively would be his last non-concessional contribution; or
- make a $100,000 non-concessional contribution in 2019/20 with the assumption that the proposed change will become law and he can make further non-concessional contributions of $100,000 in 2020/21 and $300,000 in 2021/22.
What’s the delay?
There was a raft of proposed superannuation changes shelved prior to the 2019 federal election. Given the importance of certainty and timeliness around retirement decisions, one would hope legislative amendments as important as contribution strategies are put forward in a timely manner. Our concern, however, is the Government now appears distracted with the recent announcement of the review of Australia’s retirement incomes system. The importance of such a review cannot be underestimated; but it should not impede the Government addressing the already large backlog of proposed changes - many of which are common-sense integrity and equity measures.
In fact, I would be happy to help draft the amendments if that expedites the work test changes. The change to the work test age from 65 to 67 simply requires a change to an existing regulation. As a regulation, this does not require a Bill to pass both houses of Parliament; but a simple amendment to the regulation that would require being gazetted, allowing a 14-day objection period. However, it would also require a change to the bring forward rule, which resides in the 1997 Tax Act and consequently this change would require an amending Bill to pass both houses.
It is imperative legislators give those planning for retirement now certainty and confidence in our retirement system.
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