How the 2021 budget affects your clients' SMSF

In the budget this year, the government did not make any fundamental changes to superannuation. They took the opportunity to create greater flexibility with contributions and addressed important changes to legacy defined benefit pensions trapped in SMSFs. Below is a summary of the key changes.

First Home Super Saver Scheme

The government has announced that it will increase the maximum amount your client can withdraw of voluntary concessional and non-concessional contributions under the First Home Super Saver Scheme (FHSSS) from $30,000 to $50,000.

Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per year will count towards the total amount able to be released. The increase in maximum releasable amount will apply from the start of the first financial year after Royal Assent most likely in FY23.

With Melbourne’s median house price increasing by $60,000 since 1 January 2021, it is hard to see how the extra $20,000 of savings will get your client into their first home sooner. This scheme may be of interest to some family groups that could invest their children’s trust distributions to their SMSF to create a nest egg when they leave the roost.

Reducing the age for downsizer contributions

The government will reduce the eligibility age to make downsizer contributions into superannuation from 65 to 60 years of age. The measure will have effect from the start of the first financial year after Royal Assent, most likely in FY23.

Since 1 July 2018, the downsizer contribution rules have allowed people to make a one-off, post-tax contribution into super of up to $300,000 per person from the proceeds of selling their home. Both members of a couple can contribute in respect of the same home, and contributions do not count towards non-concessional contribution cap.

The work test removed for contributions from 1 July 2022

A work test currently applies to anyone wishing to make personal contributions between the ages of 67 and 74 years old (inclusive). It requires a person to work at least 40 hours in 30 consecutive days in a financial year before they can make personal contributions to super. The work test also applies to salary sacrifice arrangements.

From 1 July 2022, the government proposes to abolish the work test for non-concessional contributions (including ‘bring forward’ contributions) and salary sacrifice contributions for anyone aged between 67 and 74 years old. It also applies to contributions made for a person’s spouse.

However, the work test will continue for anyone wishing to claim a tax deduction for personal superannuation contributions.

This change will not only allow members to increase their superannuation balances but also makes it easier for a couple to rebalance them to maximise their transfer balance caps.

SMSF residency requirements to be relaxed

To gain tax concessions, superannuation funds are required to meet three tests to qualify as an ‘Australian superannuation fund’. These include the establishment test, central management and control test, and active member test. In some situations, SMSFs are unable to meet the definition if members were temporarily absent from Australia and made contributions to the fund. The penalty is that the fund would be taxed as a non-complying superannuation fund and the income and assets are taxed at 45%, resulting in a significant penalty for a relatively minor breach of the rules.

The government has announced that it will relax the residency requirements for SMSFs and small APRA funds (SAFs) by extending the time trustees can be temporarily absent from Australian from two to five years and continue to meet the central management and control test. In addition, the active member test, which restricted contributions being made to an SMSF or SAF when members were overseas, is proposed to be abolished.

Members of SMSFs and SAFs will have the opportunity to continue contributing to their preferred fund when undertaking work or pursuing other activities overseas. It is anticipated that the change is expected to commence from 1 July 2022.

SMSF legacy pension conversion

The Government will (finally) allow individuals within SMSFs to exit a specified range of legacy retirement products, together with any associated reserves, for a two-year period. The measure will have effect from the first financial year after the date of Royal Assent of the enabling legislation. The measure will include market-linked, life-expectancy and lifetime products, but not flexi-pension products or a lifetime product in a large APRA-regulated or public sector defined benefit scheme.

Previously, your client could only roll over to a like for like product. By allowing members to get full access to the underlying capital and reserves of their old defined benefit products, they can enjoy the benefits of more flexible retirement products. Please note any new pension may now become assessable by Centrelink for the aged pension.

ATO clarifies impact of contribution indexing and bring forward NCC

Last month, we incorrectly reported that your client can bring forward an extra $20,000 of non-concessional contributions given the NCC cap increases to $110,000 from 1 July 2021. The ATO has published on its website that only $100,000 per year for the next two years and be brought forward despite the cap increasing to $110,000. So based on a member balance of $1 million, your client can contribute under the bring forward rules a non-concessional contribution of $300,000 in this financial year and $330,000 in the following year.

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