Super changes aplenty as EOFY approaches

Australians should be familiarising themselves with pending superannuation changes before the end of the financial year if they’re to maximise their nest egg and ensure a comfortable retirement.

Super should be viewed as a major asset of a person’s financial circumstances and treated like other aspects of a financial and budgeting framework, but all too often, maximising the very structure of the super system comes too late.

The uncertainty of the past year has emphasised the need for a sound, robust financial strategy, and taking advantage of super legislation introduced can make a material difference on balances in later years.

Contribution caps

One legislative change of note is the increase in super contribution caps and thresholds effective from 1 July 2021. These have been fixed for the better part of the last four years, with the increase signalling something of a milestone.

Concessional super contributions are typically employer contributions, such as super guarantee and salary sacrifice contributions. Concessional contributions also include personal contributions made by individuals for which they claim an income tax deduction. Conversely, non-concessional contributions are those where a tax deduction has not been claimed, with these contributions not taxable to the super fund and can be withdrawn from super, tax-free.

The new annual concessional and non-concessional super contribution caps are outlined below:

Concessional contribution cap

Non-concessional contribution cap

*Bring forward cap over three years.

Further to this, the $1.6m non-concessional cap threshold is also increasing due to the indexation of the general transfer balance cap on 1 July 2021, and will be raised to $1.7m.

As an example, from 1 July 2021, a person’s non-concessional cap will be nil if their total super balance on 30 June 2021 is $1.7m or more.

Transfer balance cap

When a retirement phase superannuation income stream is started, the “personal transfer balance cap” is set at the general transfer balance cap for that financial year. Essentially, the transfer balance cap is a lifetime limit on the total amount of super that people can transfer into retirement phase income streams, including most pensions and annuities. Therefore, a larger cap amount means they can have a bit more money in their pocket throughout their retirement.

This cap amount takes into account all retirement phase income streams and retirement phase death benefit income streams, but the age pension and other types of government payments and pensions from foreign super funds don’t count towards it.

The ATO has confirmed that when the general transfer balance cap is indexed to $1.7 million from 1 July 2021, there won’t be a single cap that applies to everyone. Rather, every individual will have their own personal transfer balance cap of between $1.6 million and $1.7 million, depending on their circumstances. Therefore, if an individual has already utilised their $1.6m transfer balance cap, they are unable to top up their pension benefits by another $100,000 of superannuation benefits.

Work test exemption

Also effective from 1 July 2020, the work test exemption will be extended from age 65 to age 67. That is, people can now contribute to superannuation (subject to contribution caps) up to age 67 without needing to meet a work test. It is also being proposed to extend the three-year bring forward non-concessional contribution cap from age 65 to 67, with the bill currently before Parliament.

SMSF members

While it’s yet to be enacted, the Federal Government has also recently revisited the possibility of allowing six members in a self-managed superannuation fund (SMSF), primarily for parents to include their dependents in the fund as members.

From the parents’ point of view, it may seem like a good thing to do for their children, so that they can benefit from mum and dad’s investment strategies. However, the possible downsides need to be carefully considered, as they may cause serious problems for all members in the long term.

Parents and their children are fundamentally at different stages of life from a wealth accumulation perspective, and therefore have different investment horizons and different requirements from superannuation. This would require them to have separate investment strategies in a fund and ultimately complicate the administration and investment strategy of the fund.

The six-member fund may also be utilised by business partners to combine family super benefits in order to buy the business premises, or just to combine retirement savings if their investment strategies are aligned in the same way as their other business interests.

It’s a potential policy change to watch, and something for families and business partners to be aware of should the proposal become legislation.

While the approach to managing and structuring super hasn’t changed, the introduction of any new legislation warrants close attention.

The focus historically has to be put as much into super as you can and then be in a position to draw-down on the nest egg in retirement. This is still the case - contribute as much as you can afford to using salary sacrifice and personal concessional contributions.

However, people need to be fully aware of how much they can contribute, the amount one can have in pension phase, and any super balance caps which may impact their retirement savings.

Depending on the stage of life, the level of importance may be different, but nevertheless, attention to super needs to be had even in the early accumulator stage. Capturing the benefits of any known legislative changes will ensure they’re not unknowingly missing out on potentially thousands of dollars come retirement.

Andrew Yee is the director of superannuation at HLB Mann Judd Sydney.