Super opportunities for senior Australians from

Will Moloney is a Technical Services Manager for Macquarie Technical Advice Services.

While there has been a general move to restrict the amount of superannuation contributions someone can make each year, 1 July 2022 marked another step in the trend of broadening the eligibility to contribute, with measures that remove the work test in relation to the acceptance of contributions, while increasing the ability to use the bring-forward rule for non-concessional contributions (NCCs).

This article for financial services professionals provides an outline of the new laws, some opportunities that will now be available to older individuals, and some considerations when developing strategies for clients.

Bring-forward rule for NCCs and the acceptance of contributions

There have been a number of changes to the bring-forward rule for NCCs over the past few years. For the 2020-21 and 2021-22 years, the last year the bring-forward rule could be triggered was the year the individual turned 67. Prior to this, it was the year the individual turned 65.

The law now is the bring-forward rule can be triggered up to the year the individual turns 75. This change applies from 1 July 2022.

However, the maximum age limit for the acceptance of contributions is unchanged. Generally, the last date a fund can accept a contribution is the 28th day of the month following the month the individual turned 75. Therefore, in order to make the most of the client’s NCC cap, it will be essential to ensure contributions are made when a superannuation fund is able to accept them.

Example 1:

Marcia turns 75 on 1 August 2022. Assuming Marcia has no Total Superannuation Balance (TSB) limitations, her NCC cap for 2022-23 will be $330,000. However, a super fund can accept her contributions generally only up until 28 September 2022 (the 28th day after the month she turns 75).

While Marcia’s NCC cap applies for the whole of 2022-23, it is only of use to the extent that she is able to make contributions, which is until 28 September 2022.

A slightly different scenario arises for those who are born in June. Assume an individual turns 75 on 1 June 2023. The bring-forward rule can be used in the year they turn 75, so 2022-23 in this instance. However, it they choose to make contributions in the month following the month they turn 75 (i.e. by 28 July 2023), their NCC cap will be $110,000 (assuming no indexation for 2023-24), as the last financial year they can use the bring-forward rule is 2022-23.

Removal of the work test for the acceptance of contributions

Prior to 1 July 2022, individuals needed to meet a work test (or work test exemption) from age 67, in order to make most contributions.

This work test (and work test exemption) was removed from 1 July 2022. As a result, the ability to make contributions is available to people aged 67-75 (up to 28 days after the month they turn 75), regardless of whether they are gainfully employed and meet the 40-hour requirement.

The following contribution options will be available from age 67, irrespective of the individual’s work situation:

* NCCs (both personal and spouse);

* Salary sacrifice;

* Small business CGT contributions;

* Personal injury contributions; and

* COVID-19 re-contributions.

Note that other requirements may apply including, for example, an individual’s TSB prior to 30 June will affect their NCC cap, and some contributions (small business CGT, personal injury and COVID-19 re-contributions) require an approved form to be provided to the fund no later than the time of the contribution.

Also, these contributions need to be made by the 28th day of the month following the month of the individual’s 75th birthday.

New work test for claiming a tax deduction for personal contributions

With the removal of one work test, comes the introduction of a new work test from 1 July 2022. The new work test (or work test exemption) must be met for individuals to claim a tax deduction for their personal contributions made from age 67 to age 75 (up to 28 days after the month they turn 75).

The requirements for this work test are essentially the same as the old work test for the acceptance of contributions, that is, the individual must be gainfully employed for at least 40 hours in 30 consecutive days in the income year the contribution is made. The change also includes a work test exemption that contains the same criteria as the old work test exemption for the acceptance of contributions (i.e. TSB below $300,000 prior to 30 June, met the work test in the prior financial year, and have not used the exemption before).

There’s no requirement for the work test to be met before the contribution is made. As such, the work test can be met in the same income year, but after the contribution is made.

The work test requirement will effectively be managed by the Australian Taxation Office (ATO), likely to be at the point the individual completes their tax return.

Strategies and considerations

The removal of the work test, plus the change to the NCC bring-forward rule, presents opportunities for clients whose age is 67-75, including:

1. Additional contributions from assets outside of the superannuation environment;
2. Recontribution strategies, such as:

a. Withdrawal from an individual’s account and contributing that money back into the same person’s super account, increasing the tax-free component in the account, which may be beneficial if a lump sum death benefit is paid to a non-tax dependant (e.g. an independent adult child).

b. Withdrawal from an individual’s account and contributing that money into a spouse’s super account. In addition to the potential estate planning benefits, this strategy could better use both spouses’ transfer balance caps (TBC), including where one spouse has already used their full TBC and has funds in the taxable accumulation phase, while the other spouse can move the contribution to the tax-free pension phase.

Recontribution strategies will often result in the option of either commencing a pension with the contributed amount (i.e. running two or more pensions) or combining the contributed amount with the commuted value of an existing pension to commence one pension.

Having two or more pensions can provide a better death benefit tax outcome where more than the minimum pension is drawn while the individual is alive. This occurs where the additional amount is drawn from the pension with the higher taxable component, thus reducing the taxable component at a greater rate.

There are, however, many other considerations involved in withdrawals and/or contributions strategies. The following case studies highlight some of these considerations

Case study 1: The work test and deductible contributions

Peter (age 73) has been retired for a number of years and is now interested in contributing to super again with the removal of the work test for the acceptance of contributions. Peter takes the following action in September 2022:

* Makes a $27,500 personal contribution and submits a notice of intent to claim a tax deduction;

* Makes a $330,000 personal contribution and intends to use the NCC cap (Peter had a 30 June 2022 total superannuation balance of $450,000); and

* Commences an account-based pension (ABP) from the contributions.

When Peter completes his 2022-23 income tax return in October 2023, he realises that he is unable to claim a tax deduction for his contribution, as he didn’t meet the work test or work test exemption. This results in the following outcomes:

* Peter’s taxable income is $27,500 higher than he expected;

* Peter will be unable to vary the deduction notice. This is because or all part of the contribution has been used to commence an income stream. The fund will have deducted $4,125 for tax based on the contribution and will not be able to refund the tax, as the deduction notice cannot be varied; and

* The contribution intended to be a CC is likely to count towards his NCC cap. As Peter had also made contributions of $330,000, he will have excess NCCs of $27,500.

The implications would be greater had Peter taken action to use a carried-forward CC cap from prior years. For example, if Peter had used $102,500 of the prior year’s CC caps (i.e. the full CC caps dating back to 2018-19).

Case study 2: Accurately determining someone’s NCC cap

Sasha is 73 and hasn’t been able to contribute to super for many years. She has an ABP with a current value of $1.63 million and a 30 June 2022 balance of $1.6 million. In September 2022, Sasha decides to implement a re-contribution strategy for $330,000.

However, Sasha’s NCC cap for 2022-23 is based on her TSB at 30 June 2022. As her TSB (i.e. $1.6 million) at 30 June 2022 is above $1.59 million and less than $1.7 million, her NCC cap for the year is $110,000.

Of the amount withdrawn, Sasha may contribute $110,000 in 2022-23, with the remainder in 2023-24. Alternatively, she may contribute the whole amount in 2023-24. In either case, her NCC cap for 2023-24 will be determined by her TSB at 30 June 2023. Sasha is at risk of not being able to contribute the whole amount withdrawn back into superannuation.

Case study 3: Classification of withdrawals and Centrelink benefits

Seb turned 65 in November 2012 and, at that time, commenced an ABP. He also started to receive the Age Pension. Seb still holds the same ABP, which is now worth $500,000 and consists solely of taxable component (element taxed). His Age Pension is determined by the income test, rather than the assets test. He turns 75 in November 2022 and is planning to implement a recontribution strategy in order to provide a potential estate planning tax benefit.

Seb’s ABP is subject to grandfathered income test treatment. Grandfathering applies where both of the following conditions are met:

1. The ABP commenced prior to 1 January 2015; and
2. The individual has been in continuous receipt of an eligible income support payment (e.g. Age Pension) since immediately before 1 January 2015.

Due to the grandfathering, rather than the ABP balance being deemed for income test purposes, the assessed income is determined by reducing the income received (and expected to be received) for the year by an annual deduction amount.

When the $330,000 is withdrawn, classifying the payment as either a lump sum commutation or pension payment will have very different outcomes as follows:

* Lump sum commutation – the lump sum will reduce the annual deduction amount. This annual deduction amount is calculated as follows:

Purchase price – commutations

Relevant number (ie life expectancy at commencement)

The lump sum commutation reduces the annual deduction amount, which has the potential to increase the amount assessed. However, the minimum pension will reduce going forward, which will partially or fully negate the reduction to the annual deduction amount.

* Pension – a pension payment will be added to the amount being assessed for income test purposes. Based on an income payment of $330,000, it is very likely Seb will stop receiving an Age Pension. This higher pension will continue to be assessed for income test purposes until the earlier of the following:

1. The ABP ceases and Centrelink is notified; or

2. Centrelink is advised of the new pension payment details for 2023-24.

Depending on Seb’s position, taking the payment as a combination of a lump sum commutation and pension payment might be suitable. The lump sum commutation may not have an impact on his foreseeable Age Pension entitlement and the pension payment could be used to meet the minimum pension requirement for the year, if he doesn’t need additional cash flow.

If Seb were to stop receiving the Age Pension, a further impact is that in future years his ABP will be subject to deeming, as grandfathering ‘condition two’ will not be met.

Further, as part of the overall strategy considerations, it’s important to consider the deeming of the amount contributed to super and the potential impact this might have.

Case study 4: Commonwealth Seniors Health Card (CSHC)

Assume the same facts as case study 3, except that Seb has held a CSHC from November 2012 and does not receive the Age Pension.

Seb’s ABP is subject to grandfathering under the CSHC income test. Grandfathering occurs where both of the following conditions are met:

1. The ABP commenced prior to 1 January 2015; and
2. The individual has been in continuous receipt of the CSHC since immediately before 1 January 2015.

As a result of the grandfathering, the ABP is not assessed under the CSHC’s income test.

If Seb were to commence an ABP with the amount contributed to super, the new ABP will be subject to deeming – it will be important to consider this when determining whether to implement the strategy. Further, if Seb where to commute the existing pension and combine this amount with the contribution to commence a new pension, the new pension will be deemed for CSHC income test purposes, which may affect Seb’s eligibility for the CSHC.

Case study 5: Capital gains tax (CGT)

Jenny and Anders are the only members of an SMSF with the following benefits:

Jenny is considering a lump sum withdrawal of $330,000 from her accumulation account by way of in specie transfers, with the proceeds to be contributed into an account for Anders to commence an ABP. The strategy is intended to make better use of both TBCs, and move funds out of the taxable accumulation phase and into the tax-free pension phase.

Jenny and Anders should be mindful of the CGT consequences associated with the transfer of the assets.

In this instance, the SMSF must use the proportionate approach when determining the fund’s exempt and assessed income. This means that specific assets can’t support pension or accumulation accounts and instead, exempt income is calculated on the proportion of benefits supporting retirement phase income streams (i.e. tax-free income streams) versus the total value of benefits over the course of the year.

On this basis, a portion of the net realised capital gains will be subject to tax. Broadly, the amount of earnings that is subject to tax is the fund’s assessable income less the portion that relates to the average value of accounts in the tax-free retirement phase during the income year.

In addition, Jenny and Anders should consider whether there are any deferred capital gains arising from the 2017 super reforms. These deferred capital gains are taxable in the year a CGT event happens in relation to the asset.

The CGT considerations here would be equally relevant if they were to instead sell assets and transfer cash in and out of the SMSF.

Case study 6: Minimum pension payments

Malcolm is 74 and has an ABP valued at $1 million at 1 July 2022. He plans to implement a $330,000 recontribution strategy in 2022-23 and commence a second pension with the recontributed amount. In addition, he plans to draw the minimum pension to meet his income needs.

It’s important that Malcolm understands the minimum pension requirements associated with implementing this strategy.

If the new pension commences on 1 October 2022, Malcolm would have the following minimum pension requirements for the year:

Note that a partial lump sum commutation from a pension doesn’t reduce the minimum pension payment for the year.

As Malcolm only needs $25,000, he has drawn $6,170 more than required from the superannuation environment. If this was a year where the minimum pension payments weren’t halved, the impact would be double.

Consideration should be given to implementing the strategy later in the year when the minimum prorated pension in relation to the contributed amount would be smaller. If possible, commencing the new pension in June would allow Malcolm to elect not to receive a minimum pension for the year.

Case study 7: Classification of withdrawals and the TBC

Lilly and Romesh, age 70, have each commenced an ABP from their SMSF for $1.4 million and $1.2 million respectively. They are renovating their home and need to draw $300,000 more than their minimum pensions for the year. It is expected they will receive an inheritance in the not-too-distant future.

Lilly and Romesh should consider how they instruct their SMSF to classify the additional payments as additional pension payments and/or lump sum commutations.

Both pension payments and lump sum commutations are tax-free payments to Lilly and Romesh, but the TBC implications differ. A pension payment will not affect their TBC account, whereas a lump sum commutation will result in a debit in the TBC account.

A debit to the TBC account reduces the TBC account balance, allowing for additional funds to be potentially moved into the retirement phase in the future. Although neither Lilly or Romesh are currently close to their TBCs, having lower TBC account balances may be useful in the future if:

* They contribute the future inheritance to super and commence an income stream with those contributions; and/or

* One should pass away and there is desire to receive a death benefit as a pension. Having a lower TBC account balance will help to maximise the value of benefits that can be retained in the pension phase.

More changes

In addition to the contribution changes above, the following three changes apply from 1 July 2022:

Reducing the eligibility age for downsizer contributions

The law has been amended to reduce the eligibility age from 65 to 60 years to make downsizer contributions into superannuation at the time the contribution is made. It is still possible to qualify where the property is sold prior to age 60. During the election campaign, the Australian Labor Party announced its intention to further reduce the minimum age to 55 from 1 July 2022, however, this change is yet to be legislated.

This downsizer measure, combined with the changes regarding the removal of the work test and ability to use the bring-forward rule later in life, significantly broaden the ability to contribute the proceeds from the sale of a qualifying property to super.

First Home Super Saver Scheme (FHSSS)

The law has been amended to increase the maximum releasable amount of voluntary concessional and NCCs under the FHSSS from $30,000 to $50,000. The objective of the change is to allow first home buyers to buy their first home sooner. This does not change the maximum annual contributions that count towards the FHSSS. This will remain at $15,000 per annum.

Removing the $450 per month threshold for superannuation guarantee eligibility

Laws have been made to increase superannuation coverage for the working population by removing the current $450 per month minimum income threshold under which employees do not have to be paid the superannuation guarantee by their employer.

The superannuation contribution changes that commenced on 1 July 2022 provide a broader range of people, particularly those age 67 to 75, with further opportunities to use the superannuation system to meet their retirement objectives.