Staying up to date with Superannuation
Superannuation has experienced a number of changes of late. Some changes have been implemented by the Government as relief efforts after the impacts of COVID-19 and some are legislation changes that have impacted SMSF’s and contribution rules. Below we go into further detail on the latest within the Superannuation space.
Increase in number of members for Self-Managed Super Funds
The government has indicated it still has plans to introduce legislation to increase the limit of number of members from four to six. This was originally intended to have commenced from 1 July 2019 but that commencement date did not proceed.
Self-Managed Super funds wanting to add a fifth or sixth member will need to wait until the legislation has passed as the new rule will apply from the date it is passed (at time of writing this has not been finalised).
New Contribution rules from 1 July 2020
There are new contribution rules in place from 1 July 2020 that will make it easier for 65 and 66 year old members to make more contributions and open up more opportunities.
- The first leg of the legislation being “Members aged 65 or 66 as at 1 July of the applicable year, won’t need to meet the ‘work test’ to contribute’ has now passed and is law. Please note: that this includes both non-concessional contributions (after-tax contributions) and concessional contributions (where the contributor is claiming a tax deduction). Note that for non-concessional contributions you need to be eligible to make them based on your total super balance. Generally speaking, the ‘work test’ means doing at least 40 hours of paid work over a period of 30 consecutive days. So you only need to pass the work test to contribute when you are 67-74 years old.
- The second leg of the legislation “Members aged 65 or 66 as at 1 July of the applicable year will be able to use the ‘bring forward rule‘ to put in $300,000 (3 x $100,000) of non-concessional contributions (if eligible)” has not officially passed at time of writing. But the government has all but guaranteed that this will go ahead and should hopefully pass in the next couple of months with effective start date of 1 July 2020.
- A member who is 65 or 66 who may have high taxable income in that year (example due to a capital gain on a sale of an asset) can make a $25,000 super contribution and claim a deduction for it. If they don’t have the money to make the contribution, an option is to draw a pension amount out of the fund (turning 65 means you are able to draw a retirement pension out of Super) and then re contribute it back in as a deductible contribution.
- A member can withdraw superannuation at 65 or 66 and recontribute it as a non-concessional contribution (if eligible under the total super balance limits) to change the tax configuration of their super. A parent’s superannuation going back into their fund like this can save on death benefits tax. It can be passed on to their adult children at a zero tax rate when the parent dies. By contrast, super that hasn’t been through this re -contribution process above can be taxed at up to 15 per cent plus Medicare when it is inherited by the adult children.
Early Release of Super Scheme $10,000
At the time of writing around 2.5 million individuals had been approved for early release of super across both the 2019–20 and 2020–21 financial years, with the total amount applied for around $28.1 billion. This has already started to exceed the initial government estimations that $27billion would be withdrawn and there is still a couple of months to go (scheme ends 24 September 2020). Unfortunately for about 500,000 individuals, they have exhausted all of their superannuation balance and it is down to 0.
Furthermore, according to ATO data, there has been approximately 28,000 applications from SMSF’s for this scheme over the two financial years totalling around $280 million This has come from a total of 17,000 SMSF’s (some SMSF’s have applied for both financial years). So SMSF members only make up a small percentage of those applying for this scheme.
Please ensure you are getting appropriate advice if required as to whether this scheme is appropriate for you and your superannuation (and not from sources that aren’t eligible to do so).
Word of caution – just because you may have withdrawn $10,000 and been eligible in the first tranche before 30 June 2020, doesn’t automatically make you eligible for the second tranche post 1 July 2020. For example, if your working hours have now increased and you are back to a similar level to the pre-COVID-19 period, you may not be eligible because your working hours have not reduced by more than 20% as compared to pre-COVID-19. Please check you eligibility before going ahead with this as there has been various warnings from the ATO about those not eligible receiving penalties and being taxed at their marginal tax rate on the $10,000. The ATO is likely to look at various cases at some point.
Rental Relief & COVID-19
For Self-Managed Superfunds who hold property and have provided rental relief of some sort to the tenant due to COVID-19 (particularly for a related tenant in commercial property) you need to ensure that the reasons for the decision are appropriately documented and any lease agreements updated where necessary. The ATO is releasing a legislative instrument on this issue shortly which will provide more specific guidance.
Super Guarantee Increase
As of 1 July 2021, the Super guarantee rate is scheduled to increase from 9.5% of salary to 10%. There is currently a review of the retirement system which is due to report on this issue so there is some uncertainty whether the increase will go ahead. There has been vigorous debate about the issue from various stakeholders, particularly given the current COVID-19 environment. There is a big concern around whether the increase in super contributions will just result in a reduction in wages to households already struggling.