Why you need an A-Z of super contributions for the new year

The start of a new year is a time to sit back, take a break and think about some of the challenges to be faced. When it comes to superannuation, 1 January signals the halfway point in the financial year, so working out what is possible for clients over the next six months is important. Let’s have a look at what can be done with a client’s super contributions, as they provide the lifeblood to help build retirement savings.

Super contributions can be made for clients in many situations including those made by an employer or themselves. Employer contributions can be made for Superannuation Guarantee purposes, under an industrial award or as part of a salary sacrifice arrangement. Clients can make personal contributions and may contribute for their spouse or even children. From a tax perspective, the amount contributed may be tax deductible or non-deductible and depend on a client’s work status, age and the amount already accumulated in super.

TYPES OF CONTRIBUTION

Personal super contributions

Since 1 July 2022, personal non-concessional (non-deductible) superannuation contributions can now be made until just after a client has reached 75 years old without any need to meet a work test. However, if a client wishes to claim a tax deduction for contributions they make, anyone aged between 67 and 75 is required to meet a work test of at least 40 hours in 30 consecutive days in the financial year when the contribution was made.

From an advice perspective it’s important to make sure the client will not exceed their contribution caps and that the client’s total super balance on 30 June in the previous financial year is accurate. Otherwise any excess may result in a penalty applying.

Concessional contributions

The standard concessional (tax-deductible) contribution that applies for 2022-23 is $27,500, which considers total employer contributions and any personal contributions claimed as a tax deduction.

But that’s not all for some clients. They may wish to access a carry-forward concessional contributions rule for if they have a total super balance on 30 June in the previous financial year of no more than $500,000. A client who qualifies can carry forward the unused amounts under their standard concessional contributions cap since 1 July 2018. The carry forward amount is available from the client’s MyGov account and applies on a year-by-year rolling basis for up to five financial years.

Contributions made by an employer for an employee are concessional contributions and counted against a person’s concessional contributions cap. They include any contributions made for Superannuation Guarantee purposes under an industrial award and any salary sacrifice contributions.

Non-concessional contributions

The standard non-concessional contribution is capped at $110,000 for 2022–23 and can be made by anyone who has a total superannuation balance of less than $1.7 million on 30 June in the previous financial year. Clients can make non-concessional contributions if they qualify up to 28 days after the month in which they reached age 75.

Anyone who qualifies and is under the 75 age limit, which is 28 days in the month after the client turns 75, may have access to the bring forward rule for non-concessional contributions. It allows a client to contribute up to $330,000 over a fixed period commencing in the first year in which their non-concessional contributions are in excess of the standard non-concessional contribution cap.

If a client wishes to access the bring forward rule, it is possible to make non-concessional contributions of up to $330,000 at any time over a fixed three-year period if they have a total super balance on 30 June in the previous financial year of no more than $1.48 million. If the client has a total super balance between $1.48 million and $1.59 million, they can make non-concessional contributions of up to $220,000 over a fixed two-year period. If they have a total super balance between $1.59 million and $1.7 million, they will be limited to the standard non-concessional contribution of $110,000 each financial year.

Downsizer contribution

Downsizer super contributions of up to $300,000 are available on a once-only basis to clients who have sold their main residence which has been owned by at least one member of a couple for at least 10 years. The contribution must be made to super within 90 days of the sale of the residence.

Until 31 December 2022, the minimum age limit to qualify for the downsizer contribution was 60, but from 1 January 2023 the minimum qualifying age has been lowered to age 55.

There is no upper age limit or super balance limit applying to prevent a client from making a downsizer contribution.

Spouse contributions

A client can make non-concessional contributions for their spouse which are counted against the spouse’s non-concessional contributions cap. One benefit is that spouse contributions can be used to even out a couple’s super balances. To be eligible, spouse contributions can be made for a spouse under the age 75 limit, which is 28 days in the month after the spouse reached 75 years old.

If the spouse is a low-income earner with an adjusted taxable income of less than $40,000, it is possible for the contributing spouse to receive a tax offset of up to $540 for the first $3,000 of the spouse’s contribution. The tax offset is not available to the contributing spouse once their spouse has a total superannuation balance of more than $1.7 million.

Ceasing work contributions

Ceasing work contributions are permitted on a once-only basis after a client is at least 67 years old in the financial year after they have ceased work. These rules allow a client to make concessional (tax-deductible) contributions providing they have a total super balance of less than $300,000 on 30 June in the previous financial year.

Co-contributions

Another benefit of making non-concessional contributions to super is that low-income earning clients may qualify for the co-contribution. The co-contribution of up to $500 can be paid to the client’s super fund by the government if they have an adjusted taxable income of less than $57,016 for 2022–23 and make a non-concessional contribution of up to $1,000.

Low income superannuation tax offset

The low income superannuation tax offset is available to a client with an adjusted taxable income of less than $37,000. It applies to all concessional contributions because the tax payable on the contribution received by the fund is usually greater than the personal tax a low-income earner would pay if the contribution was paid to them as salary and wages.

The offset is calculated by the ATO and paid directly to the client’s superannuation fund.

CONTRIBUTION STRATEGIES

Contribution splitting

Contribution splitting can allow clients to split concessional contributions to their spouse. To qualify, the split to the person’s spouse can take place if they are under preservation age (currently 59 years) or between preservation age and 65 years old and have not retired.

Concessional contributions include the employer’s super guarantee contributions, salary sacrifice contributions and personal deductible contributions. It’s possible for the client to split up to 85 per cent of their concessional contributions or up to their concessional contributions cap, which has been explained previously. The general rule is that the splitting of the concessional contribution to the client’s spouse takes place in the financial year after it was made to the fund.

Concessional contributions made in the 2021–22 financial year will usually be split in 2022-23. To make the split the client is required to make an election informing the trustees of the split amount. However, a client:

• Rolling over or transferring the whole of their super to another fund, or
• Withdrawing all of their super as a lump sum, or
• With a combination of the above two actions

The election and split must be made prior to any of these events taking place. They could occur in the year in which the concessional contributions were made to the fund.

Recontributing to super

The recontribution strategy can be used once a client meets a condition of release once they have retired after reaching their preservation age (59) or when they reach age 65, whichever occurs first. It involves the withdrawal of a lump sum and recontributing the amount withdrawn back to the fund subject to the person’s non-concessional contribution cap. The strategy has been used for many years and can have some estate planning benefits if a taxable pension is paid to a member or death benefits will be paid ultimately to adult children of the deceased.

It is possible to recontribute amounts withdrawn from the super back to the fund as non-concessional contributions providing the client has a total super balance of less than $1.7 million. The effect of the recontribution strategy is reduce the amount of tax an adult child is required to pay on a superannuation benefit from the death of a parent. To see whether there is any benefit in using the recontribution strategy, advice is always recommended.

Extra contributions

To start the new year, advisers should discuss with their clients whether it is worthwhile to make additional contributions to super and the tax and retirement benefits it brings. A relatively small increase in contributions, especially when a client is young, can make a real difference to the amount accumulated by the time retirement arrives.

Graeme Colley is executive manager at SuperConcepts.