Changes within superannuation due to Coronavirus
With 30 June 2020 fast approaching and a variety of changes happening across the globe due to COVID-19, we wanted to provide a couple of super tax planning strategies as well as some other handy tips.
COVID-19 measures and handy tips
Minimum Pensions halved
One of the measures announced, was the Government is temporarily reducing superannuation minimum pension requirements for account-based pensions and similar products by 50% for the 2020 and 2021 financial years.This will ensure, for those with lower balances, that they will be not forced to sell share investments at a low point to fund their pension payment.
A few points to note:
- If you have already pulled the minimum pension out for the year (full percentage) consider whether the excess amount can be a lump sum payment out of accumulation account. Unfortunately, you cannot simply put back in the excess pension you have paid (if you have already paid). For example: John has a $1.6M pension and $1M in accumulation – his minimum, under the new pension reduction is $40,000. John has already withdrawn $80,000 (in two lots of $40,000). One $40,000 payment can be the pension payment and the other $40,000 is elected to be a lump sum out of accumulation. This will help to reduce the tax of the fund in future years.
- For those with lump assets such as property within super, if there is not enough cash to fund pensions, you could stop the pension and put it back to accumulation. This may cost a bit of tax but it avoids having to sell the lump asset or property at a time where it is not in the best interests of members to do so.
- Those with market linked pensions that pay above $100,000 in pensions will save considerable tax. Normally the 50% above, (the $100,000 they receive) gets taxed as income but now they might not have any income to include from this pension. For example: Mary has a market linked pension where her minimum for 30 June 2020 year was $170,000. Her marginal tax rate in her own name is 47%. Normally she would have to include $35,000 (50% above the excess over $100,000) in her return resulting in tax of approximately $16,450. Under the new pension reduction, the pension received would be $85,000 meaning no requirement to pay tax in her own name as its under $100,000.
Early release of super
Another measure announced was to assist those suffering financially due to COVID-19. This measure will allow those to access their superannuation ($10,000 before 30 June 2020 and a further $10,000 from 1 July 2020). This commenced on 20 April 2020 which at the time of writing over 800,000 people had registered interest in doing this through their myGov account. Find out more information through the Treasury website.
While this will prove a big help to those employees and members who desperately need the money in these difficult times, there has been some news around this measure being used in a different way.
One suggestion, is that people could use this measure to withdraw the money and to then re-contribute the $10,000 back into their superannuation fund, potentially creating a tax refund for 30 June 2020 and 30 June 2021 in their individual returns. Although this sounds great, this is not something that should be pursued from our perspective. It is simply against the spirit of why the measure was brought into place (which is to help those financially distressed to pay their bills and keep themselves afloat). The ATO has also hinted that this is restricted and could apply penalties for those not doing the right thing.
Super Tax planning
Catch-up contributions measure available for 30 June 2020 – those members with a balance of less than $500,000 at 30 June for the prior year, will be eligible to make ‘catch up’ concessional contributions over a rolling 5 year period. The normal concessional cap is $25,000.
Example 1: Mary has made concessional contributions of $10,000 for the 30 June 2019 financial year through her employer, meaning she has not used $15,000 of her cap. Her super balance at 30 June 2019 is $300,000. For the 30 June 2020 financial year, she is able to put in $40,000 of concessional contributions being $25,000 for 30 June 2020 plus the $15,000 unused for the 2019 year.
This may prove handy for members that may have higher taxable income in a particular year or a one off capital gain to reduce their tax.
Example 2: Mary has made the following concessional contributions through her employer:
|Employer contribution||Remaining cap C/F|
|30 June 2019||$10,000||$15,000|
|30 June 2020||$10,000||$15,000|
|30 June 2021||$10,000||$15,000|
In the 30 June 2021 year – Mary has a salary income of $100,000 plus a net capital gain from a sale of investment property of $70,000. Her total super balance at 30 June 2020 is $400,00.
Under the catch up contributions she is able to put $45,000 into her superannuation (from the proceeds she has from sale) and claim a deduction on it. This being the $15,000 carried forward from each of the 30 June 2019 and 2020 years, plus the remaining $15,000 left in her cap for the 30 June 2021 year.
Overall, this could save her approximately $10,800 in tax, being tax saving of $17,550 at the individual marginal rate (39%), less 15% contributions tax and the $6,750 that the fund needs to pay.
Proposed Law for 65 and 66 year old individuals – ability to bring forward contributions and not have to meet the work test requirements
- Members aged 65 or 66 as at 1 July of the applicable year will be able to use the ‘bring forward rule‘ to put up the $300,000 (3 x $100,000) of non-concessional contributions (if eligible). This is proposed to come into effect from 1 July 2020 (previously you had to be 64 on 1 July).
- Members aged 65 or 66 as at 1 July of the applicable year, won’t need to meet the ‘work test’ to contribute.
The below example illustrates where this new law can be advantageous.
For example: John was 64 on 1 July 2019 and turns 65 on 30 April 2020 and is not working. His total super balance is $900,000.
Under current law – John would look to put $300,000 in before 30 April 2020 as he needs to put a contribution in before turning 65 as he doesn’t meet the work test. He would then not be able to put any further contributions in for 30 June 2021 and 30 June 2022. Unless he starts working again after 30 June 2022, he will not be able to put in non-concessional contributions again.
Under Proposed new law – John could put in the following:
- 30 June 2020 – $100,000 (no need to meet the work test so could contribute in May or June with no issue).
- 30 June 2021 – $100,000 (no need to meet the work test).
- 30 June 2022 – $300,000 (was 66 at 1 July 2021. As long as he puts in by 30 April 2022 when he turns 67, there is no issue).
So under the new law, John has the ability to put in $500,000 in total over the three years – i.e an extra $200,000 into superannuation as opposed to the current law.