Deep Dive Into Retirement Planning + Super
Written by: Canny Advisory
Deep Dive on two of the proposed positive changes to superannuation rules in this year’s budget!
In previous years, nearly all changes to superannuation and the rules surrounding it have been negative, whilst there have recently been two proposed changes, that have not had Royal Assent, that is scheduled to come into play as of the first of July 2022.
It’s important to note that anything below is purely for information purposes, does not take into consideration any of your personal financial goals, and does not constitute financial advice. To see how any of these strategies could benefit you, you can come and have a chat to a financial planner from the financial advisory team at Canny Group.
Retirement Planning:
Repealing the Work Test for Superannuation Contributions
Currently, as it stands, people who are aged 67 years old and over can only make contributions to superannuation if they meet the work’s test, which is working 40 hours in a consecutive 30-day period, which sometimes isn’t feasible. The proposed change removes this stipulation meaning that anyone aged 67 years and over can include contributions to superannuation, as long as they do not wish to claim a tax deduction on these contributions. To claim the contribution, they will still need to meet the aforementioned works test.
What is the benefit of this you ask? Currently, when superannuation passes upon a member’s death, if the monies are paid to a dependant, there is 0% tax applied to the benefit. if the monies are paid out to a non-dependent child (think of an adult child), the recipient of these funds have the taxable component taxed at 17%.
So let’s put this into practice, for example: if someone was to pass away with $200,000 in superannuation, and the fund is made up of 50% taxable contributions and 50% tax free contributions, the recipient of the funds will have 17% tax withheld, meaning of the 4200,000 balance, they would receive $183,000. The tax rate is 15% plus the Medicare levy!
To override this tax, you can increase the tax free component of your fund by doing what’s called a cash out and re-contribution strategy, whereby you withdraw funds that are taxable (they will be in proportion with any tax free parts), and re-contribute them back in to superannuation, whilst abiding by the allowance limits ($110,000 per year, or potentially more depending on your situation) to increase the tax free component in the fund. In the example above, for example, if Member A were to withdraw $110,000 from their fund, and re-contribute it, it would take the components to:
Taxable = $45,000
Tax Free = $155,000
Net Benefit to Estate = $192,350 an increase of $9,650!
There are other scenarios like this that can achieve a better result and structure for your own personal financial situation, so book a time to speak to someone from our financial advisory team if this option feels like it could be an option for you.
Financial Planning + Extension to Access Downsizer Contributions
Currently, as it stands, Australians from the age of 65 and onwards are able to make tax free contributions (outside of the normal caps) to superannuation if they were to sell a house they’ve had for over ten years. The maximum is set at $300,000 each.
So, a quick re-cap on the existing rules:
- Those aged at least 65 years old can access the downsize contribution opportunity
- The maximum that can be contributed is $300,000 per person
- The contribution does not count towards the non-concessional contribution cap and a portion of it cannot be claimed as a personal superannuation tax deduction
- It can be made if a person’s Total Super Balance is more than $1.6M
- It will form part of a person’s Transfer Balance Cap if it is used to commence a superannuation income stream
- It would count as an asset for the aged veteran’s pension
- The contribution cannot be made unless the principal place of residence has been sold (after June 2018 and the sale has been finalised or settled) and the family home has been owned for at least ten years by the person or their spouse – that is, the house is partially or fully exempt from Capital Gains Tax (CGT)
- The house is in Australia and is not a caravan, houseboat or mobile phone
- The contributions must be made within 90 days of receiving the proceeds
- Downsizer contributions can only be made one
What the proposed changes seek to do is bring this age, down to 60 years old!
What does this mean? It means that people that are planning to downsize can make the change sooner if their perfect downsize home is available to them. The might look to contribute proceeds in to superannuation, and take on some debt whilst interest rates are at an all-time low, and seek to repay this money once they retire, at whatever age that may be. If this strategy is coupled with the strategy below, people are going to be really able to maximise the tax free component of their superannuation funds prior to being eligible for the age pension, and beyond.
So let’s put this into practice, for example: Bob and Jenny who are both aged 63 years old and are both still working and they have found the perfect house. They have lived in their home for 25 years and it is worth $1.1M. They have found a nice house for $650,000 including costs. They do the deal, and they each put in to their superannuation funds $225,000. They then look to start salary sacrificing and making use of previous year’s contributions caps to maximise their contributions for the next 3-4 years they want to work.
This strategy also opens up other avenues of creating wealth for superannuation, which include but are not limited to transition to retirement strategy, whereby people are allowed to access their super via way of an income stream, and then use the money to salary sacrifice some of their wages in to superannuation, creating tax advantages as well as increased their balances at retirement.
Just a few other points of chance – the new concessional contribution caps for the 2021-22 financial year have been indexed to $27,500, an increase from $25,000 and the non-concessional contribution caps have been indexed to $110,000, an increase from $100,000.
Your Financial Goals + Canny Advisory
To find out more about how to get the most out of AND in to your superannuation, we have also put together another article that goes in to great depth that could also be beneficial, check it out here!
To see how all of this plays in to your retirement planning, estate planning, tax planning and overall financial planning needs – why wait? Get in touch with our financial advisory team at Canny Group and we will take you through the changes in more detail, and discuss with you – your financial goals, to see how we can help you achieve them.
