How to get super ready for EOFY

Superannuation has dominated recent headlines, with proposed changes announced by Treasurer Jim Chalmers. While the details of these changes still need to be released, it’s worthwhile turning our focus to superannuation balances as we approach the end of financial year.

There are lots of different ways to top up your super, but if you want to take advantage of the opportunity to maximise your contributions, it is important not to wait until the last minute.

One of the simplest ways to boost your retirement savings is to contribute a bit extra into your super account from your before-tax income. When you make a voluntary personal contribution, you may even be able to claim it as a tax deduction.

If you have any unused concessional contribution amounts from previous financial years and your super balance is less than $500,000, you can also make a carry-forward contribution. This can be a great way to offset your income if you have higher-than-usual earnings this year.

Another easy way to boost your super is by making tax-effective super contributions through a salary sacrifice arrangement. Now is a good time to discuss this with your boss, because the Australian Taxation Office requires these arrangements to be documented prior to commencement.

 

Non-concessional super strategies

If you have some spare cash and have reached your concessional contributions limit, received an inheritance, or have additional personal savings you would like to put into super, voluntary non-concessional contributions can be a good solution.

Non-concessional super contributions are payments you put into your super from your savings or from income you have already paid tax on. They are not taxed when they are received by your super fund.

Although you can’t claim a tax deduction for non-concessional contributions because they aren’t taxed when entering your super account, they can be a great way to get money into the lower taxed super system.

Downsizer contributions are another option if you’re aged 55 and over and plan to sell your home. The rules allow you to contribute up to $300,000 ($600,000 for a couple) from your sale proceeds.

And don’t forget you can make a contribution into your low-income spouse’s super account - it could score you a tax offset of up to $540.

Eligible low-income earners also benefit from the government’s super co-contribution rules. The government will pay 50 cents for every dollar you pay into your super up to a maximum of $500.

 

Your tax bill can benefit

Making extra contributions before the end of the financial year can give your retirement savings a healthy boost, but it can also potentially reduce your tax bill.

Concessional contributions are taxed at only 15 per cent, which for most people is lower than their marginal tax rate. You benefit by paying less tax compared to receiving the money as normal income.

If you earn over $250,000, however, you may be required to pay additional tax under the Division 293 tax rules.

Some voluntary personal contributions may also provide a handy tax deduction, while the investment returns you earn on your super are only taxed at 15 per cent.

 

Watch your annual contribution limit

Before rushing off to make a contribution, it’s important to check where you stand with your annual caps. These are the limits on how much you can add to your super account each year. If you exceed them, you will pay extra tax.

For concessional contributions, the current annual cap is $27,500 and this applies to everyone.

When it comes to non-concessional contributions, for most people under age 75 the annual limit is $110,000. Your personal cap may be different, particularly if you already have a large amount in super, so it’s a good idea to talk to us before contributing.

There may even be an opportunity to bring-forward up to three years of your non-concessional caps so you can contribute up to $330,000 before 30 June.

 

If you would like to discuss EOFY super strategies or your eligibility to make contributions, don’t hesitate to give us a call.

A super window of opportunity

New rules coming into force on July 1 will create opportunities for older Australians to boost their retirement savings and younger Australians to build a home deposit, all within the tax-efficient superannuation system.

Using the existing First Home Super Saver Scheme, people can now release up to $50,000 from their super account for a first home deposit, up from $30,000 previously.

Another change that will help low-income earners and people who work in the gig economy is the scrapping of the Super Guarantee (SG) threshold. Previously, employees only began receiving compulsory SG payments from their employer once they earned $450 a month.

But the biggest potential benefits from the recent changes will flow to Australians aged 55 and older. Here’s a rundown of the key changes and potential strategies.

 

Work test changes

From July 1, anyone under the age of 75 can make and receive personal or salary sacrifice super contributions without having to satisfy a work test. Annual contribution limits still apply and personal contributions for which you claim a tax deduction are still not allowed.

Previously, people aged 67 to 74 were required to work for at least 40 hours in a consecutive 30-day period in a financial year or be eligible for the work test exemption.

This means you can potentially top up your super account until you turn 75 (or no later than 28 days after the end of the month you turn 75). It also opens potential new strategies for a making big last-minute contribution using the bring-forward rule.

 

Extension of the bring-forward rule

The bring-forward rule allows eligible people to ‘’bring forward” up to two years’ worth of non-concessional (after tax) super contributions. The current annual non-concessional contributions cap is $110,000, which means you can potentially contribute up to $330,000.

When combined with the removal of the work test for people aged 67-75, this opens a 10-year window of opportunity for older Australians to boost their super even as they draw down retirement income.

Some potential strategies you might consider are:

Downsizer contributions age lowered to 60

From July 1, you can make a downsizer contribution into super from age 60, down from 65 previously. (In the May 2022 election campaign, the previous Morrison government proposed lowering the eligibility age further to 55, a promise matched by Labor. This is yet to be legislated.)

The downsizer rules allow eligible individuals to contribute up to $300,000 from the sale of their home into super. Couples can contribute up to this amount each, up to a combined $600,000. You must have owned the home for at least 10 years.

Downsizer contributions don’t count towards your concessional or non-concessional caps. And as there is no work test or age limit, downsizer contributions provide a lot of flexibility for older Australians to manage their financial resources in retirement.

For instance, you could sell your home and make a downsizer contribution of up to $300,000 combined with bringing forward non-concessional contributions of up to $330,000. This would allow an individual to potentially boost their super by up to $630,000, while couples could contribute up to a combined $1,260,000.

Rules relaxed, not removed

The latest rule changes will make it easier for many Australians to build and manage their retirement savings within the concessional tax environment of super. But those generous tax concessions still have their limits.

Currently, there’s a $1.7 million limit on the amount you can transfer into the pension phase of super, called your transfer balance cap. Just to confuse matters, there’s also a cap on the total amount you can have in super (your total super balance) to be eligible for a range of non-concessional contributions.

As you can see, it’s complicated. So if you would like to discuss how the new super rules might benefit you, please get in touch.

 

Combining downsizer and bring-forward contributions

Australians aged between 60 and 74 now have greater flexibility to downsize from a large family home and put more of the sale proceeds into super, using a combination of the new downsizer and bring-forward contribution rules.

Take the example of Tony (62) and Lena (60). Tony has a super balance of $450,000 while Lena has a balance of $200,000. They plan to retire within the next 12 months, sell their large family home and buy a townhouse closer to their grandchildren. After doing this, they estimate they will have net sale proceeds of $1 million.

Under the new rules from 1 July 2022:

    • They can contribute $600,000 of the sale proceeds into their super accounts as downsizer contributions ($300,000 each)
    • The remaining $400,000 can also be contributed into super using the bring-forward rule, with each of them contributing $200,000.

By using a combination of the downsizer and bring-forward rules, Tony and Lena can contribute the full $1 million into super. Not only will this give their retirement savings a real boost, but they will be able to withdraw the income from their super pension accounts tax-free once they retire.

Source: ATO

Benefits of a super long engagement

Superannuation is a long-term financial relationship. It begins with our first job, grows during our working life and hopefully supports us through our old age.

Throughout your super journey you will experience the ups and downs of bull and bear markets so it’s important to keep your eye on the long term.

The earlier you get to know your super and nurture it with additional contributions along the way, the more secure your later years will be.

Like all relationships, the more effort you put into understanding what makes super tick, the more you will get out of it.

Your employer is required to make Superannuation Guarantee (SG) contributions into your account of at least 9.5 per cent of your before-tax income. If you are self-employed you are responsible for making your own voluntary contributions, but these are tax-deductible.

 

Check your account

The first step is to check how much money you have in super and whether you have accounts you’ve forgotten about.

You can search for lost super and consolidate all your money into one fund if you have multiple accounts by registering with the ATO’s online services.i Having a single fund will avoid paying multiple sets of fees and insurance premiums.

The next step is to check what return you are earning on your money, how it is invested and how much you are paying in fees.

If you don’t nominate a super fund or investment option, your SG money is invested in the ‘Balanced’ or default option nominated by your employer. Balanced options typically have 60-75 per cent of their money invested in growth assets such as shares, with the remainder in bonds and cash.

Over the past 10 years, $100,000 invested in the median balanced option would have nearly doubled to $193,887, but there was a wide range of performance (see the graph below). The best performing balanced option returned $214,464 over the same period while the worst returned $156,590.ii

The difference between the best and worst performing funds could fund several overseas trips when you retire, so it’s worth checking how your fund’s returns and fees compare with others. You can switch funds if you are not happy, but it’s never wise to do so based on one year’s disappointing return. Super is a long-term investment so get in the habit of looking at your fund’s performance over five years or more and comparing its returns with similar products.

 

A decade of super returns

Source: Super Ratings

State your preferences

Default options are designed for the average member, but you are not necessarily average. Younger people can generally afford to take a little more risk than people who are close to retirement because they have time to recover from market downturns. So think about your tolerance for risk, taking into account your age, and see what investment options your super fund offers.

As you grow in confidence and have more money to invest you may want the control and flexibility that come with running your own self-managed super fund.

Also check whether you have insurance in your super. A recent report by the Australian Securities and Investments Commission (ASIC) found that almost one quarter of fund members don’t know they have insurance cover, potentially missing out on payouts they are entitled to.iii

Insurances may include Total and Permanent Disability (TPD) and Income Protection which you can access if you are unable to work due to illness or injury, and Death cover which goes to your beneficiaries if you die.

 

Building your nest egg

Once you understand how super works you can take your relationship to the next level by adding more of your own money. Small amounts added now can make a big difference when you retire.

You can build your super in several ways:

 

    • Pre-tax contributions of up to $25,000 a year (including SG amounts), either from a salary sacrifice arrangement with your employer or as a personal tax deductible contribution. This is likely to be of benefit if your marginal tax rate is higher than the super tax rate of 15 per cent.
    • After-tax contributions from your take home pay. If you are a low-income earner the government may match 50c in every dollar you add to super up to a maximum of $500 a year.
    • If you are 65 and considering downsizing your home, you may be able to contribute up to $300,000 of the proceeds into your super.

You could also share the love by adding to your partner’s super. This is a good way to reduce the long-term financial impact of one partner taking time out of the workforce to care for children. You can split up to 85 per cent of your pre-tax contributions with your partner. Or you can make an after-tax contribution and, if your partner earns less than $40,000, you may be eligible for a tax offset on the first $3,000 you put in their super.

Before you make additional contributions, adjust your insurance, or alter your investment strategy, it’s important to assess your overall financial situation, objectives and needs. Better still, make an appointment to discuss how you can build a positive long-term relationship with your super.

 

https://www.ato.gov.au/individuals/super/keeping-track-of-your-super/

ii https://www.superratings.com.au/2018/09/20/dont-panic-what-superannuation-is-teaching-the-post-gfc-world/

iii https://download.asic.gov.au/media/4861682/rep591-published-7-september-2018.pdf