Several new superannuation changes came into effect on July 1, 2022 and with change comes new possibilities – one of which we will discuss in this article; for a detailed summary of all the changes, click here.
Non-concessional Contribution Changes
One of the new changes that have come into effect is the ability for 67 – 74-year-olds to make non-concessional contributions. Here we consider how this can be paired with the down-sizer contribution scheme and explore what that means in the example below:
Mary is 68 years old and the sole member of her Self-Managed Super Fund, which has a $1.3 million balance as of June 30, 2022. Approximately half of the fund’s assets are liquid type (cash/fixed interest). Her entire amount has been paid via taxable contributions and earnings during her lifetime, and she has made no non-concessional contributions along the way.
This implies that if Mary passes away with her super intact and the superannuation benefits are paid out to adult children or the estate (for the benefit of the adult children), the beneficiaries will be subject to a 17 per cent death benefits tax (or 15 per cent if paid to the estate). This could amount to a $221,000 ‘hidden’ tax on the recipients.
Two events happened in July 2022 for Mary:
1. New rules on non-concessional contributions came in for 67–74-year-olds, where she can access the ‘bring forward’ rule and no longer requires the ‘works test’ for non-concessional contributions.
2. Mary sold/settled on her main residence (which she had lived in for decades). The sale proceeds exceeded $300,000. Mary has since moved into another property that she bought.
In the aftermath, Mary did not have any money available from outside super to contribute to her super because:
· Money was needed for certain living expenses and
· No sale proceeds were left over from the sale of her main residence because the house she purchased to move into was roughly the same price as the sale proceeds.
What Can Mary Do from a Planning/Superannuation Strategy Perspective?
Note that as Mary is over 67, she meets the condition of release and can withdraw from super unrestricted. But Mary will have to perform the following:
1. Mary withdraws $330,000 from her fund and, a week later, contributes this $330,000 back in as non-concessional contributions (the changes enable her to put in 3 years’ worth all at once at $110,000 per year)
2. As Mary meets the downsizer contribution scheme rules as a separate transaction, she withdraws $300,000 out of the fund and then a short time later contributes the $300,000 back in as a downsizer contribution (and does all the appropriate paperwork to go along with it). The downsizer contribution needs to be made within 90 days of the settlement of her main residence sale.
What has Mary Achieved, Exactly?
Mary’s Super balance has been converted from a ‘taxable component’ to a ‘tax-exempt component,’ which means that $630,000 is no longer liable to the 17 per cent death benefits tax when paid out upon her death.