Financial Insights with Australian Unity – Nov 2020
Extra time to make contributions into super.Posted: November 3, 2020
Extra time to make contributions into super
Author: Yvonne Chu, Head of Technical and Professional Development, Licensee Services, Australian Unity.
From 1 July 2020, you can make voluntary contributions into your super without having to meet a work test, up to the age of 67 – compared to the previous age limit of 65. This means if you are under the age of 67 you now have up to two extra years from the start of this financial year to make additional contributions even if you have retired from the workforce.
This provides a range of planning opportunities such as withdrawing and re-contributing back into your super fund, adding any surplus pension back into your super, making extra personal contributions including utilising the carry forward concessional caps, as well as more time for a small business owner to sell active assets.
What is the work test?
The work test is an age-related condition under which a super fund can accept contributions.
The work test from 1 July 2020
If you are at least age 67 but under age 75, to satisfy the work test, you must have worked at least 40 hours during a consecutive 30-day period in the financial year for your super fund to accept certain contributions (unless a work test exemption applies). This change effectively aligns the age at which the work test applies with the eligibility age for the age pension (currently age 66 and will increase to 67 from 1 July 2023).
The work test exemption
To meet the exemption criteria, you must have:
- Satisfied the work test in the financial year preceding the year in which you made the contribution,
- Have a total superannuation balance of less than $300,000 at the end of the previous financial year, and
- Not relied on the work test exemption previously.
Non-concessional contributions are made into your super fund from after-tax income. These contributions are not taxed in your super fund and are added to your tax-free component. If you are age 65 or 66 at the time of making a non-concessional contribution, you can contribute up to $100,000 per financial year where you:
- have a total superannuation balance under $1.6 million on 30 June of the previous financial year, and
- have not previously used up your non-concessional contribution cap
If you have retired and commenced an account-based pension (ABP), you could also utilise the new rules to contribute any surplus pension income back into superannuation as a non-concessional contribution until you reach age 67, without needing to satisfy the work test. It is important to note that it is not possible to contribute additional amounts to an existing income stream. If you wish to access amounts that have been contributed to your super, you must firstly satisfy a condition of release1. This means the amount to be contributed will need to go into the accumulation phase and you’ll need to commute and re-commence a new ABP if you want the contribution to be added to your ABP balance.
If you make a voluntary contribution while aged 65 or 66, you can immediately commence an ABP with the amount contributed unless you have already used up your $1.6 million transfer balance cap. This is because you will have met the “reaching age 65” condition of release which means all benefits become fully accessible, regardless of whether you are still working or not.
Extra time to implement cash out and re-contribution strategy
If you have met a condition of release1 and are aged 65 or 66, you can withdraw your super and re-contribute the amount as a non-concessional contribution back into your super before age 67. This is commonly known as a cash-out and re-contribution strategy. As non-concessional contributions form part of the tax-free component of your super fund, this may enable you to convert some or all of your existing taxable component into the tax-free component. By improving the tax-free component of your super (which is not subject to tax) it may increase the net amount payable to your family or estate when the death benefit is paid upon your death to certain beneficiaries. Read case study >>
Personal deductible contributions
A personal deductible contribution is a contribution that you have claimed as a tax deduction on your individual tax return subject to meeting eligibility criteria. Making personal deductible contributions can assist you to manage your personal tax. A personal deductible contribution forms part of your taxable component and counts towards your concessional contributions cap (currently $25,000) for the current financial year.
Since 1 July 2018, your unused concessional contributions automatically accrue and are carried forward to enable you to make concessional contributions more than the annual cap in subsequent financial years. Importantly you are only able to access unused amounts accrued since 1 July 2018. In the current financial year, you may access these amounts if your superannuation balance was below $500,000 on 30 June of the previous financial year. Read case study >>
Small business CGT contributions
Small business owners who sell an active business asset and qualify for the CGT small business concessions can contribute up to $1,565,0002 to super under the small business CGT cap. Prior to 1 July 2020, if you were aged 65 or over you had to meet the work test (or work test exemption) to be able to contribute. Following this change, small business owners aged 65 and 66 can make contributions under the CGT small business cap without having to meet a work test. Under this new rule, you may now have more time to sell the active asset of a small business and contribute some or all of the proceeds into super.
Personal injury contributions
Payments arising from structured settlements or proceeds from personal injury order/settlement can be contributed into super without any contribution limit (subject to meeting eligibility criteria). As normal contribution eligibility rules apply, prior to 1 July 2020, members aged 65 or 66 couldn’t make this contribution as they would not be able to satisfy the work test being total and permanently disabled. Under the new rules, people aged 65 and 66 will be able to contribute personal injury contributions.
1 SIS Regulations 1994 – REG 6.01.
2 Based on 2020-21 tax rates.
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