Boosting your clients' super before year end – contribution strategies all trustees need to know
With the increase to contribution caps from 1st July 2021 you may now have an opportunity to increase your contributions and have more for retirement. From 1st July, the concessional contribution and non-concessional contribution limits are $27,500 and $110,000 respectively. Your contributions for FY20 can also be increased by using one either a carry-forward, reserving or bring forward strategy. These strategies allow for more increased contributions in any one year. They are outlined below:
Carry forward concessional contributions strategy
From 1 July 2018, members who have a total superannuation balance of less than $500,000 on 30 June the previous financial year may be entitled to contribute more than the concessional contributions cap. Unused contributions for eligible members can be made from 1 July 2019.
Please refer to the following table:
*Reserving strategies could increase this figure for a given financial year.
It is important to note that members can access their unused concessional contributions caps on a rolling basis for five years. Amounts carried forward that have not been used after five years will expire.
Please note the member contributing the concessional contribution must have taxable income at least equal to the contribution.
A reserving strategy allows a member to contribute up to twice the concessional contribution limit in the current year and obtain a personal tax deduction for the entire contribution in the year it was made. For FY21, the total concessional contribution that can be accepted will be $52,500 (i.e. $25k for FY21 and $27.5K for FY22). For a reserving strategy to work:
- The fund’s trust deed must not require contributions to be immediately allocated and allow the use of a contribution reserve.
- The contribution needs to be allocated within 28 days after receipt. Working backwards, the fund must receive the contribution prior to 28 days before year end. Its best to contribute mid-June to allow for processing delays.
- The member making the contribution needs to have taxable income equal to or more than the concessional contribution amount in the year contributed.
- Trustees should also ensure the ATO is notified of the use of the strategy by completing and lodging a “Request to Adjust Concessional Contributions” [NAT 74851] by the time the fund’s SMSF Annual Return and the individual’s income tax return are lodged.
- The contribution that is to be reserved needs to be deposited separately from other concessional contributions.
Bring Forward Strategy
If a client is 64 years old or younger at any time in a financial year, you may be able to make non-concessional contributions of up to three times the annual non-concessional contributions cap in a single year. Please note that a change to this age restriction is currently before parliament. If passed, this law would change the age restriction to be 66 years or younger for 2020–21 and later financial years.
To be eligible in FY21, your client's total super balance will also need to be $1.38 million or less on 30 June for you to be able to bring forward your next two years of caps. This would allow you to make a total of three years’ worth of after-tax contributions (or $320,000 after increases to NCC caps are introduced on 1 July) in a single financial year.
If your client's balance is between $1.4 million and $1.5 million, the ATO says you can make a total of two years’ worth of contributions (or $200,000) in one income year. But if your client has over $1.5 million in super, the ATO says you will not be entitled to use the bring-forward rule and will only be entitled to make non-concessional contributions up to the annual cap ($100,000).
Finally, bear in mind the ATO’s advice that if your client's total super balance is $1.6 million or more, your annual non-concessional cap will be zero.
The bring-forward rule is automatically triggered as soon as you make a non-concessional contribution that exceeds the annual cap. For example, if you contributed $150,000 as a non-concessional contribution in the 2020–2021 financial year, this would be $50,000 over the annual cap.
Please note from 1 July 2021, your total super balance increases to $1.7m, meaning if your super balance was less than $1.48m you will be eligible to contribute $330k from the 1st of July 2021 if you are under 65 years of age.
With appropriate planning, the personal tax benefits to members could be significant and this presents the opportunity to boost superannuation savings for your clients who have little to no superannuation savings. Please ensure your clients are aware of this and contact your PWG advisor should you need assistance in preparing any strategies.