By Graeme Colley
Executive Manager, SMSF Technical & Private Wealth
The beginning of a new year is often a good time for us to take a break, relax and maybe make resolutions for 2022. When it comes to superannuation, deciding on new year resolutions may be a little more complex than usual as we’ll need to look into the political crystal ball. There’s a federal election in the melting pot, some of this year’s super legislation is sitting in parliament, and we still need to keep planning for retirement. For 2022 let’s look at a contribution’s new year resolution as they are the lifeblood that helps build a person’s retirement savings.
There are many ways in which contributions can be made to superannuation. They can include employer contributions made for Superannuation Guarantee purposes, an industrial award or a salary sacrifice arrangement. Individuals can make super contributions for themselves, their spouses or even children. The contributions may be tax deductible or non-deductible and may depend on several factors such as a person’s work status, age and the amount they have in superannuation.
Personal super contributions
Personal superannuation contributions can be made up to 67 years old without meeting a work test. Under the current rules, a person aged between 67 and 75 must complete a work test of 40 hours in 30 consecutive days in a financial year. Meeting the work test can allow individuals to make concessional or non-concessional contributions to super. It’s essential to make sure the contribution caps are not exceeded and that if an individual is making non-concessional contributions, the person’s total super balance on 30 June in the previous financial year will determine how much can be contributed without a penalty applying.
The standard concessional (tax-deductible) contribution that can be made to super for the 2021/22 financial year is $27,500 and takes into account total employer contributions and any personal contributions the individual has claimed as a tax deduction. However, suppose a person has a total super balance on 30 June in the previous financial year of no more than $500,000. In that case, they can carry forward the unused amount of concessional contributions since 1 July 2018. The forward carry rule applies on a rolling year by year basis for up to 5 financial years.
Contributions made by an employer for an employee are concessional contributions and are counted against a person’s concessional contributions cap. These contributions include any contributions made for Superannuation Guarantee purposes, contributions made under an industrial award and any salary sacrifice contributions.
The standard non-concessional contribution (non-tax deductible) is capped at $110,000. It can be made by anyone who had a total superannuation balance of less than $1.7 million on 30 June in the previous financial year. If the person is age 67 and under 75, non-concessional contributions can only be made if the person meets the work test of 40 hours in 30 consecutive days in a financial year. Legislation currently in the parliament proposes abolishing the work test for non-concessional contributions from 1 July 2022.
For anyone who is under age 67 at the beginning of the financial year, they may be able to have access to the bring-forward rule, which allows a person to make up to $330,000 over a fixed period commencing in the first year in which they make non-concessional contributions in excess of the standard non-concessional contribution of $110,000. Suppose a person has a total superannuation balance on 30 June in the previous financial year of no more than $1.48 million. In that case, they can make non-concessional contributions of up to $330,000 at any time during a fixed three year period. If they have between $1.48 million and $1.59 million, they can make non-concessional contributions over a fixed two year period. If they have between $1.59 million and $1.7 million, they have access to the standard non-concessional contribution of $110,000 each financial year.
Downsizer contributions of up to $300,000 are available to anyone at least 65 years old and have sold their primary residence that a member of a couple has owned for at least ten years. The contribution is available on a once-only basis and must be made within 90 days of the sale of the residence. The good news is that there is no upper age limit to make the downsizer contribution.
Spouse contributions can be made for a person’s spouse and are counted against the spouse’s non-concessional contributions cap.
They can be used as a strategy to even up the couple’s super balances.
To be eligible, spouse contributions can be made for a spouse under 67 years old without meeting the work test. But if the spouse is between 67 and 75 years old, the work test must be met before making the contributions. Spouse contributions cannot be made after the spouse has reached 75 years of age.
If the spouse is a low-income earner with an adjusted taxable income of less than $40,000, the contributing spouse can receive a tax offset of up to $540 for the first $3,000 of the spouse contribution.
The tax offset is not available to the contributing spouse once they have a total superannuation balance of more than $1.7 million.
Ceasing work contributions
Ceasing work contributions are permitted on a once-only basis after the member has reached 67 years old in the financial year after they have ceased work. These rules allow a person to make concessional (tax-deductible) and non-concessional (non-deductible) contributions providing they have a total super balance of less than $300,000 on 30 June in the previous financial year.
Another benefit of making non-concessional contributions to super is that low-income earners may qualify for the co-contribution, which is paid to their super fund by the government. If either has an adjusted taxable income of less than $56,112 for the 2021/22 financial year and make a non-concessional contribution of up to $1,000 the government’s co-contribution can be up to a maximum of $500.
Low Income Superannuation Tax Offset
The low-income superannuation tax offset is available for anyone with an adjusted taxable income of less than $37,000. It applies to all concessional contributions because the tax payable on the contribution received by the fund is usually greater than the personal tax a low-income earner would pay if the contribution was paid to them as salary and wages.
The offset is calculated by the ATO and paid directly to the person’s superannuation fund.
Contribution splitting can allow a person to split concessional contributions to their spouse. To qualify, the split to the person’s spouse can take place if they are under preservation age (currently 58 years of age) or between preservation age and 65 years old if they have not retired.
Concessional contributions include the employer’s super guarantee contributions, salary sacrifice contributions and personal deductible contributions. It is possible to split up to 85% of the person’s concessional contributions or up to their concessional contributions cap, which has been explained previously.
The general rule is that splitting the concessional contribution to the person’s spouse occurs in the financial year after it was made to the fund.
Concessional contributions made in the 2020/21 financial year will usually be split in the 2021/22 financial year. This member must make an election that informs the trustees of the amount to be split. However, for anyone:
• who is rolling over or transferring the whole of their super to another fund, or
• withdrawing all of their super as a lump sum, or
• a combination of the above two actions
The election and split must be made prior to any of these events, which may occur in the year the concessional contributions were made to the fund.
Re-contributing to super
The re-contribution strategy can be used once a fund member meets a condition of release of retirement or when they reach age 65, whichever occurs first. It involves withdrawing a lump sum and re-contributing the amount withdrawn back to the fund as a non-concessional contribution. The strategy has been used for many years and can have some estate planning benefits if a taxable pension is paid to a member or death benefits will be paid ultimately to adult children.
It is possible to re-contribute amounts withdrawn from super back to the fund as non-concessional contributions providing the person has a total super balance of less than $1.7 million. The effect of the re-contribution strategy can reduce the amount of tax an adult child is required to pay on the death of a parent if they receive a super payment. To see whether there is any benefit in using the re-contribution strategy, advice is always recommended.
Make extra contributions
As a New Year resolution, why not consider making additional contributions to a superannuation fund and benefit from the potential benefits from compounding returns.
A relatively small increase in contributions, especially when a person is young, can make a real difference to the amount accumulated when retirement arrives.
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