Opportunities and pitfalls for clients in the year ahead

By Mark Gleeson, Senior Technical Manager

In this article we highlight the key changes impacting financial planners from 1 July 2020. The most significant change to super is the ability of clients age 65 and 66 to make voluntary contributions without satisfying the work text. Unfortunately, legislation to extend the bring-forward rule to these clients is still outstanding.

As 1 July 2020 passes, the compounding value of the catch-up concessional contribution measure becomes evident. If a client has not made concessional contributions in recent years and has a total super balance below $500,000 at 30 June 2020, their concessional contributions cap is a significant $75,000 for the financial year 2020/21. Advisers should consider the opportunities for eligible clients as the cap rises. We also highlight the unexpected and unpleasant surprise awaiting foreign residents who sell their family home and discover the capital gains tax main residence exemption is no longer available.

In this article, we discuss the following topics:

Contribution conundrums at age 65 and 66

The age extension for the three year non-concessional contribution (NCC) bring-forward rule did not pass through Parliament. Consequently, only clients who are age 64 (or under) at the start of the financial year are eligible to access the three year bring-forward rule. Clients also need to have a total super balance of less than $1.4 million as at 30 June 2020 to access the full $300,000 bring-forward amount. The legislation to increase the age at which people can access the three year bring-forward rules from age 64 to 66 is still outstanding.

As Parliament does not sit again until 4 August 2020, the uncertainty may continue for some time. While this legislation may be passed in the new financial year and be made retrospectively effective from 1 July 2020, financial advisers can only act on the proposal when it is legislated. We will keep you updated on any developments.

From 1 July 2020, clients who are age 65 and 66 can make voluntary contributions, such as non-concessional contributions, to super without satisfying the work test (or work test exemption). A regulation to implement this change is already effective. However, these clients will be restricted to NCCs of up to $100,000, subject to their total super balance and assuming they are not already in a bring-forward period from a prior year. If the legislation passes, the bring-forward rule will be extended. The tables below outline the current and proposed rules.

Current rules from 1 July 2020

Step 1. Can my client make personal contributions to super? Step 2. What is the amount of the NCC cap?

If under age 67 at time of contributing – Yes

If 67* or older at time of contributing and work test (or work test exemption) satisfied - Yes

If 67* or older at time of contributing and work test (or work test exemption) not satisfied - No

If under age 65 at 1 July – up to $300,000^

If age 65 or over at 1 July – up to $100,000^ (unless already in a bring-forward period)

* Once a client reaches age 75, they can contribute on or before the 28th day of the following month.
^ The total super balance may restrict this amount.

Proposed rules from 1 July 2020

Step 1. Can my client make personal contributions to super? Step 2. What is the amount of the NCC cap?

If under age 67 at time of contributing – Yes

If 67* or older at time of contributing and work test (or work test exemption) satisfied - Yes

If 67* or older at time of contributing and work test (or work test exemption) not satisfied - No

If under age 67 at 1 July – up to $300,000^

If 67 or more at 1 July – up to $100,000^ (unless already in bring-forward period)

* Once a client reaches age 75, they can contribute on or before the 28th day of the following month.
^ The total super balance may restrict this amount.

The minimum age to make a downsizer contribution remains at 65 and there is no proposal to change this age requirement.

Catch-up concessional contributions become more effective

The 2020/21 financial year is the second year a client can use catch-up concessional contributions amounts if their total super balance is below $500,000 at 30 June 2020. Accordingly, some clients may have access to a concessional contributions cap of $75,000 in 2020/21, that is, three amounts of $25,000 if they have made no concessional contributions since 2018/19 and have a qualifying total super balance.

A client will have a concessional contributions cap in the 2020/21 financial year based on the current concessional contributions cap ($25,000) plus unused amounts from 2018/19 and 2019/20. Although the measure allows for carrying forward unused amounts for up to five years, the earliest financial year available for the measure is the 2018/19. Any amounts unused for 2017/18 and earlier financial years are disregarded.

You should check that the client’s total super balance is less than $500,000 at 30 June of the financial year before the client wishes to use the catch-up amounts. Many advisers forget this key requirement for the catch-up concessional contribution measure. As super balances may have reduced since COVID-19, many clients may now qualify for catch-up concessional contributions in the 2020/21 financial year if their total super balance is below $500,000 at 30 June 2020. For further details on the catch-up concessional measure, refer to our previous TechConnect Bulletin: Catching up on concessional contributions

Catch-up concessional contributions - example

Bruno, age 66, has not worked in several years and wants to sell an investment property in August 2020. There is a $150,000 gross capital gain on the property. Bruno wants to know how to best manage his capital gains tax bill when the property is sold. You discover that his total super balance at 30 June 2020 is $265,000. Although he does not satisfy the work test, clients age 65 and 66 can contribute to super from 1 July 2020. Bruno has not had any concessional contributions for several years and so his concessional contributions cap for the 2020/21 financial year is $75,000. This consists of the current cap of $25,000 plus two amounts of $25,000.

As Bruno held the property for more than 12 months, we apply the 50% discount on the capital gain and reduce the assessable amount to $75,000. Bruno makes a personal contribution to super of $75,000 and submits a notice to claim the full amount as a tax deduction within the required timeframe. Rather than pay tax on the capital gain at his marginal rate, Bruno has reduced tax payable to 15% tax at the fund level. Bruno does not need to apply or submit any paperwork relating to utilising his unused concessional contributions although he must still lodge a notice of intent to claim a deduction.

Salary sacrifice to super strategy from 1 July

A salary sacrifice to super strategy has the most benefit for a client if commenced in early July as the client has a full financial year to take advantage of the concessional contributions cap. The catch-up concessional contributions measure may expand the opportunities here.

Although many clients can now make personal deductible contributions, the automated nature of salary sacrifice may appeal to clients who would struggle to save the equivalent amount required to make a personal deductible contribution at the end of the financial year.

One of the historical drawbacks of salary sacrifice was that employers could reduce super guarantee (SG) payments. However, since 1 January 2020, salary sacrifice amounts are included in an employee’s ordinary time earnings so employers must pay SG on these amounts. Furthermore, employer contributions made under a salary sacrifice arrangement are prevented from satisfying an employer’s SG obligations from 1 January 2020.

Salary sacrifice works favourably together with catch-up concessional contributions. If your client has a total super balance below $500,000 at 30 June 2020, their concessional contributions cap is somewhere between $25,000 and $75,000. The increased concessional contributions cap for these clients provides a great opportunity to build super via salary sacrifice.

If you are unsure whether salary sacrifice or personal deductible contributions are more effective, don’t worry, you are not alone. This previous article in the TechConnect Bulletin explains how to decide: Should clients use salary sacrifice or personal deductible contributions to build super?

Rising preservation age

Clients born before 1 July 1962 have already reached their preservation age of 57. In the 2020/21 financial year, clients born between 1 July 1962 and 30 June 1963 will attain preservation age when they reach age 58.

There are a range of super-related strategies which become effective when your client reaches preservation age, including:

  • Permanent retirement condition of release
  • Commencement of a transition to retirement income stream
  • Low rate cap for lump sum withdrawals
  • Severe financial hardship (the 39-week rule)
  • Withdrawal re-contribution strategy (the ability to withdraw)

Preservation age depends on a client’s date of birth as outlined in the following table.

Date of birth Age Eligible upon attaining preservation age between
Before 1 July 1962 Attained Already eligible
1 July 1962 to 30 June 1963 58 1 July 2020 to 30 June 2021
1 July 1963 to 30 June 1964 59 1 July 2022 to 30 June 2023
From 1 July 1964 60 From 1 July 2024

Rising preservation age - example

Gavin is born on 20 May 1963. Using the preservation age table, Gavin’s preservation age is 58. Gavin is not eligible to commence a transition to retirement income stream until 20 May 2021 when he reaches age 58.

You need to be aware of your client’s actual preservation age when recommending super based strategies like transition to retirement and other conditions of release.

New super and tax thresholds from 1 July

The Australian Taxation Office (ATO) has released super and tax thresholds for the 2020/21 financial year.

Threshold 2019/20 2020/21
Transfer balance cap $1.6 million $1.6 million
Concessional contributions cap $25,000 to $50,000* $25,000 to $75,000*
Non-concessional contributions cap $100,000 / $200,000 / $300,000^ $100,000 / $200,000 / $300,000^
CGT contribution cap $1.515 million $1.565 million
Low rate cap $210,000 $215,000
Untaxed plan cap $1.515 million $1.565 million
Co-contribution $38,564 / $53,564 $39,837 / $54,837
SG quarterly contribution base $55,270 $57,090
Employment termination payments cap $210,000 $215,000
Tax-free redundancy formula $10,638 / $5,320 $10,989 / $5,496

* If eligible for catch-up concessional contributions
^ The ability to use these caps depends on age and total super balance at 30 June of the previous financial year.

Ensure you use the updated figures when performing calculations in the new financial year for clients. The capital gains tax (CGT) contribution cap continues to be indexed and provides significant opportunities for eligible small business clients to build their super.

Last year the super guarantee remains at 9.5%

Super guarantee (SG) is an obligation on employers to make sufficient contributions to super for their employees. The 2020/21 financial year is the last time the rate is at 9.5%. From 1 July 2021, the rate increases to 10% and increases by 0.5% points for each financial year thereafter. From 1 July 2025, the rate reaches 12% and remains at this level for subsequent financial years.

Financial year SG rate (%)
2020/21 9.5
2021/22 10
2022/23 10.5
2023/24 11
2024/25 11.5
2025/26 and later 12

Clients who are employees on total employment cost packages may have reduced after-tax income in future financial years. That is, as the super component of remuneration increases, the income component decreases. Accordingly, some clients may have reduced net income going forward.

You will need to monitor the increased SG as part of any plan to increase super through concessional contributions. This is because for any given amount of the concessional contributions cap, an increased SG amount results in a smaller amount remaining and available for salary sacrifice or personal deductible contributions. The catch-up concessional contributions rules may reduce this problem in future years.

You may need to inform clients who are relying on the increased rates to build their super sufficiently that a 12% SG rate may still be insufficient to satisfy their retirement objectives, however, if they are able to make additional contributions this is likely to assist them in building their super sufficiently.

If you have clients who are employers, they should start to consider how they will fund the SG rate increases to ensure they satisfy their obligations in future years. Employer clients should also ensure their payment systems use the increased rates from 1 July 2021.

Early access to super expires 24 September 2020

Eligible clients may access up to $10,000 from their super between 1 July 2020 and 24 September 2020. This amount can be received in addition to any COVID-19 early release amounts received in the 2019/20 financial year.

To be eligible to access the lump sum from super, a person must be:

  • unemployed
  • eligible for a Jobseeker Payment, Youth Allowance for job seekers, Parenting Payment (including the single and partnered payments), special benefit or farm household allowance
  • on or after 1 January 2020:
    • made redundant
    • had their working hours reduced by 20% or more
    • be a sole trader and had their business suspended or there was a reduction in business turnover of 20% or more.

The payments are tax-free and not treated as income for the various income tests. Clients can apply for the lump sum via their myGov account.

The ATO has warned against using the COVID19 super withdrawal to make personal deductible contributions. Schemes that attract the ATO’s attention under Part IVA of the Income Tax Assessment Act 1936 (which is the general anti avoidance rule for income tax) include:

  • artificially arranging affairs to meet the eligibility criteria
  • withdrawing and recontributing super to claim a tax deduction
  • contributing an amount of super to claim a deduction and then withdrawing that amount.

The ATO may apply Part IVA, cancel any tax benefit obtained and apply administrative penalties and interest charges. The withdrawal itself may be assessable at marginal rates under section 304.10 of the Income Tax Assessment Act 1997. Clients should keep records demonstrating that they have satisfied the criteria and should not use the amounts for recontribution purposes. The ATO provides further guidance on their website: COVID-19 Early release of super - integrity and compliance

Halving of the pension drawdown minimums continue

The minimum pension payments required from account-based pensions, transition to retirement pensions and market-linked pension (term-allocated pensions) are reduced by 50% for both 2019/20 and 2020/21 financial years.

Where an income stream commences part way through the financial year, a pro-rata minimum applies based on the reduced percentages.

Age

Standard minimum drawdown rate (%) Rate reduced by 50% for 2019/20 and 2020/21 (%)
Under 65 4 2
65 – 74 5 2.5
75 – 79 6 3
80 – 84 7 3.5
85 – 89 9 4.5
90 – 94 11 5.5
95 and older 14 7

Clients may wish to reduce income payments and take advantage of the new minimum for the financial year 2020/21. This approach may provide the following benefits:

  • Preserve capital and avoid selling at a low unit price.
  • Reduce tax payable for clients under age 60.
  • Reduce assessable/taxable income for clients under age 60 and possibly increase benefits, for example, low income tax offset, co-contribution, based on assessable/taxable income.
  • Reduce social security income test assessment for a grandfathered account-based pension.

New tax pain for foreign tax residents selling the home

Legislation introduced in December 2019 is likely to see huge capital gains tax bills for foreign tax residents disposing of their main residence from 1 July 2020. The CGT main residence exemption is available to all Australian residents but is no longer available to foreign residents. The exemption disregards a capital gain or loss for income tax purposes when a person disposes of property that was their home. The exemption applies for the period the property was treated as the person’s main residence.

Transitional provisions allowed the exemption to apply where a foreign resident sold a home that was acquired before 7:30pm (AEST) 9 May 2017 and the CGT event happens on, or before, 30 June 2020.

The changes will impact many foreign residents who have a home in Australia or those departing Australia permanently or for an extended period. The exemption may be available to a foreign resident whose foreign residency does not exceed six years and who meets the life event test, that is, if any of the following life events happened during the period of foreign residency:

  • the person, their spouse, or the person’s minor child had either a terminal medical condition or passed away, or
  • the disposal of the home is the consequence of a court order, maintenance agreement, financial or written agreement resulting from the breakdown of the relationship between the person and their spouse.

While financial advisers cannot provide tax advice, the main residence exemption is an important consideration for clients who own an Australian home. Clients should seek tax advice to understand and consider their options.

Foreign resident loses CGT exemption - example

Jared purchased a home on 1 June 2012 and lived in it until he left to settle in Spain with his new wife on 1 July 2016. He rents the home and subsequently sells the property on 10 July 2020. The exemption does not apply because when he signed the contract of sale, he was a foreign resident. While Jared’s period of foreign residency does not exceed six years, he does not meet the life event test. The ability to treat the home as the main residence for up to six years when the home is rented does not apply because Jared is not eligible for the exemption. The full amount of the capital gain is added to Jared’s assessable income at the non-resident marginal tax rates. The period of time Jared used the property as his main residence is disregarded.

For further guidance on the CGT exemption issues for foreign residents selling their main residence, please read this article contained in a previous TechConnect Bulletin: Taxing times for foreign residents

Instant asset write-off thresholds for small businesses extended until 31 December 2020

Small businesses with aggregated annual turnover of less than $500 million may be eligible for an increased instant asset write-off on assets of up to the value of $150,000 from 12 March 2020 until 31 December 2020. The measure was set to finish on 30 June 2020, but the Government passed legislation to extend the measure until 31 December 2020.

The measure applies to new or second-hand assets first used, or installed ready for use, between 12 March 2020 until 31 December 2020 (inclusive). Certain assets are excluded, for example, horticultural plants and capital works deductions. There are limits to deductions for certain cars. The threshold applies on a per asset basis, so eligible businesses can immediately write-off multiple assets. Clients should confirm the entitlement to the tax deduction with their accountant.

Childcare costs return

The Early Childhood Education and Care Relief Package was extended from 28 June 2020 to 12 July 2020. From 13 July 2020, Child Care Subsidy and Additional Child Care Subsidy will recommence. This effectively means that the free childcare period ends. Some clients will therefore experience increased childcare costs.

The new 2020/21 financial year brings with it several new opportunities for certain clients, but for others there are changes which could have negative consequences.


More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.