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By Mark Gleeson, Senior Technical Manager
There are key changes impacting financial planners from 1 July 2021. Both the concessional and non-contribution contribution caps receive a boost through indexation. Furthermore, total super balance thresholds increase for certain measures and allow more opportunities for non-concessional contributions.
The catch-up concessional contribution measure increases in tax-effectiveness yet again. If a client has not made concessional contributions since 1 July 2018 and has a total super balance below $500,000 at 30 June 2021, their concessional contributions cap is $102,500 for the financial year 2021/22. Advisers should consider the opportunities for eligible clients as the cap rises.
Although the general transfer balance cap increases to $1.7m from 1 July 2021, many clients do not receive the full cap increase. You need to advise clients of their personal cap and plan accordingly. The minimum amounts from pensions are halved again and provide a further opportunity to preserve capital for your clients.
This article covers the following changes:
The age extension for the non-concessional contribution (NCC) bring-forward rule passed the Senate in June 2021. Consequently, from 1 July 2020, clients who are age 66 (or under) at the start of the financial year can use the bring-forward rule. Clients also need to have a total super balance below the relevant threshold and not be in a bring-forward period.
Since 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).
The annual NCC cap increases to $110,000 and the 3 year cap increases to $330,000 from 1 July 2021. The total super balance thresholds that restricts NCC caps also increased.
The tables below summarise the three step process you can use to plan NCCs from 1 July 2021.
Contribution rules from 1 July 2021
* Once a client reaches age 75, they can contribute on or before the 28th day of the following month. The work test requires at least 40 hours of gainful employment during a period not exceeding 30 days at some point in the financial year. The work test exemption requires that (1) the work test was satisfied last financial year, and (2) total super balance at 30 June prior is below $300,000, and (3) the work test exemption has not been used in a prior financial year.
^ Check total super balance in step 3.
Let’s apply the steps above to identify NCC opportunities.
Step 1. Can my client make NCCs to super?
As Tejase does not satisfy the work test (or work test exemption), any NCCs must be made on or before 10 October 2021. That is, he cannot make NCCs from 11 October 2021 (the day he turns age 67) as he is not eligible contribute.
Step 2. What is the amount of the NCC cap?
His NCC cap is $330,000 for 2021/22 because he was under age 67 at 1 July 2021. He is not currently in a bring-forward period.
Step 3. Is total super balance below the relevant threshold?
Tejase’s total super balance of $1.45m at 30 June 2021 is below $1.48m. Accordingly, the total super balance does not restrict the amount of his NCC cap as per the table above.
In summary, Tejase can make a $330,000 NCC on or before 10 October 2021.
The standard concessional contributions cap of $25,000 increases to $27,500 from 1 July 2021. You may need to review your client’s strategy to take advantage of the cap increase. Accordingly, clients may need to revise salary sacrifice arrangements. The increase in super guarantee to 10% in financial year 2021/22 (discussed later in section number 7) should also be considered when calculating the amount to salary sacrifice. Clients can also consider personal deductible contributions to utilise the increased concessional contributions cap, if eligible to contribute to super.
The Government has also removed the excess concessional contributions charge from 1 July 2021. The charge is the interest penalty that applies on the increased tax payable due to the excess. The excess concessional contribution is still taxed at marginal rates with a 15% tax offset.
The 2021/22 financial year is the third year a client can use catch-up concessional contributions amounts if their total super balance is below $500,000 at 30 June prior. Accordingly, some clients may have access to a concessional contributions cap of $102,500 in 2021/22 – the standard cap ($27,500) plus three amounts of $25,000 if they have made no concessional contributions since 2018/19 financial year and have a total super balance below $500,000 at 30 June 2021.
A client will have a concessional contributions cap in the 2021/22 financial year based on the current concessional contributions cap plus unused amounts from financial years 2018/19, 2019/20 and 2020/21. 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. Your client can check the catch-up amounts and their total super balance in myGov account. There is no change in the process or notice of intent to deduct form when claiming tax deductions using catch-up concessional contribution amounts.
The total super balance is the total amount of super (both accumulation and pension phase) that an individual has at the test time – which is 30 June of the previous financial year. For example, the test time for the 2021/22 financial year is 30 June 2021. For most clients, this is simply the sum of super accumulation accounts, transition to retirement pensions, account-based pensions and term-allocated pensions.
If someone has exceeded their transfer balance cap, has a defined benefit super interest, other types of super income streams or a self-managed super fund (SMSF) with a limited recourse borrowing arrangement, calculating their total super balance is more complicated.
Restrictions on a person’s total super balance at 30 June of the previous financial year are included in the eligibility criteria of a range of super measures. The table below highlights the relevant TSB amount thresholds from 1 July 2021. Some of the thresholds are indexed, whilst others are not indexed. Accordingly, it is important to understand the new thresholds to provide technically accurate advice.
Employees who start a new job on or after 1 November 2021 will have employer super contributions directed to their existing ‘stapled fund’ (defined in the regulations) if one exists, unless they choose another fund.
Employers will obtain information about the employee's existing superannuation fund from the ATO, if it is not provided by the employee. The purpose of this amendment is to reduce the instances that members accumulate multiple superannuation accounts every time they change jobs.
Employees can advise their employer to make contributions to a different fund if they wish. The employer can contribute to their default fund only if the employee has no stapled fund or has not chosen a fund.
From 1 July 2021, SMSFs can have a maximum of 6 members, an increase from the previous limit of 4. The measure aims to increase choice and flexibility for members.
Clients with larger families may want to take advantage of the measure and admit new members or establish a fund with up to 6 members. Clients may also wish to admit business partners into the fund and consider investments such as business real property. A larger pool of superannuation assets increases economies of scale for investment and may allow greater diversification.
SMSF trustees should consider the additional administration and decision-making complexities with more members. The estate planning needs of all members should also considered. Accordingly, it is important to ensure that the trust deed and any death benefit nominations reflect the estate planning wishes of members. Some state and territories prohibit more than 4 individual trustees and so a corporate trustee may be required in these cases.
Super guarantee (SG) is an obligation on employers to make sufficient contributions to super for their employees.
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.
Clients who are employees on total employment cost packages may have reduced after-tax income. That is, as the super component of remuneration increases, the take-home component decreases. Accordingly, some clients may have reduced net income from 1 July and future financial years.
You 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 be available to allow the increased contributions.
You may need to educate your clients who rely on the increased rates. A 12% rate is still considered to be insufficient to satisfy retirement objectives. Additional contributions are likely to build super sufficiently.
Employer clients must ensure their payment systems use the increased rates from 1 July 2021.
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 2021/22 financial year. The halving of minimum amounts also applied for the 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.
Clients may choose to reduce income payments and take advantage of the reduced minimum again. This approach may provide the following benefits:
The general transfer balance cap (TBC) of $1.6m increases to $1.7m from 1 July 2021. The new cap allows more superannuation interests to be rolled over to retirement phase income streams.
While this is great news for clients, the increased general TBC will create more complexity. You will need to take extra care in establishing a client’s unique personal transfer balance cap.
The $1.6m TBC will continue to apply to members who have used 100% of their TBC any time before 1 July 2021. The $1.7m TBC applies to those who have not yet commenced a retirement phase pension before 1 July 2021. Clients who have used a portion of the cap will effectively receive the unused portion of the $100,000 increase.
For example, if a client’s highest transfer balance is 75% of the $1.6m cap, they will receive 25% of the $100,000 increase, that is, $25,000. The ATO announced that individuals may access their indexed transfer balance cap via myGov from 5 July 2021.
As a result of the increase in the general transfer balance cap, the defined benefit income cap will also increase to $106,250 per annum from 1 July 2021. This cap applies to certain capped defined benefit pensions for example lifetime pensions.
For further guidance on the TBC increase, please refer to our TechConnect Bulletin article.
The ATO has released super and tax thresholds for the 2021/22 financial year.
^ 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 providing advice and performing calculations in the new financial year for clients. The indexed contribution caps provide new opportunities for clients to build their super.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
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.