Five tips for super in the new financial year

In this article, our TechConnect Team provide five tips or reminders to help ensure your clients’ super strategies remain on track in the new financial year.

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1. Making personal tax-deductible super contributions

Before 1 July 2017, people could only claim a deduction for super contributions if their employment income was less than 10% of their total income from all sources – known as the 10% test.

The 10% test has since been abolished, which means anyone who is eligible to contribute to super can potentially claim a tax deduction for personal super contributions, regardless of their employment arrangement.

The removal of the 10% test provides greater flexibility for clients who have employment income to top-up their concessional contributions, such as, Super Guarantee and salary sacrifice contributions. This may reduce their tax bill because these are tax-deductible contributions.

What does my client need to do?

It’s important to remember that in order to claim a tax deduction, the member must lodge a valid Notice of intent to claim a deduction form with their super fund and receive an acknowledgement from the fund by the earlier of:

  • the lodgement of their tax return for the year in which the contribution was made
  • 30 June of the financial year following the contribution
  • the commencement of an income stream that is based in whole or part on the contribution.

In addition, you should be aware that any withdrawals or rollovers could partially or fully invalidate a subsequently lodged notice of intent.

Be aware that the amount of super contributions that can be claimed as a deduction is limited to a client’s taxable income. It is not possible to create a tax loss by claiming a deduction for personal super contributions.

The rule of thumb is that to maximise the tax benefits, a person should generally be left with at least $20,542 of taxable income after all deductions for the 2017/18 financial year and at least $21,595 of taxable income for the 2018/19 financial year. This is the effective tax-free threshold of a person in the current financial year after applying the low income tax offset and the low and middle income tax offset (2018/19 onwards).

The flow chart below provides a step-by-step guide for tax-deductible super contributions:

Need more help?

IOOF can provide you with a range of technical information that can help your clients. To find out more, contact your Client Solutions Manager.

2. Government super co-contribution

If a client derives at least 10% of their assessable income from employment (including self-employment), they may be entitled to the government super co-contribution if their income is below $52,697. The maximum co-contribution amount of $500 can be credited to the member's super account by the ATO for personal after-tax super contributions (ie NCCs) of $1,000 or more if your client’s income is $37,697 or less.

The income for this 10% test is the total of; assessable income, reportable fringe benefits and reportable super contributions. However, to calculate the co-contribution entitlement, the income is defined as the total of assessable income, reportable fringe benefits and reportable employer super contributions less allowable business deductions.

To qualify, the member needs to be under 71 at the end of the contributing financial year and if over 65, they meet the work test to be able to contribute.

3. Super estate planning issues

A client’s super beneficiary nominations play a significant part in their estate planning strategies. The below points may help you to ensure the client’s super beneficiary nominations correctly reflect their preferences:

  • A binding nomination needs to be refreshed every 3 years. It is important to consider whether your client’s binding nomination needs refreshing. As an alternative, many products now offer non-lapsing nominations which do not need to be regularly updated.
  • A binding nomination can be made for a SIS ‘dependant’ (ie dependant for super law purposes). While an adult child generally is not a tax law dependant, they are a SIS dependant and can be a nominated as a binding beneficiary to receive the member’s death benefit directly from super without having to go through the deceased estate.
  • A reversionary death benefit pension is exempt from the recipient’s pension transfer balance cap for 12 months from the date of the member’s death. This can be important to a couple whose combined pension balance exceeds $1.6 million. Upon a member’s death, the surviving member of the couple has 12 months to take action to reduce the combined pension balance to below their transfer balance cap. An effective way to do so is to roll back their own pension to accumulation phase in order to keep the maximum amount in the super system. A death benefit pension cannot be rolled back to the accumulation phase.

4. First Home Super Savers scheme

From 1 July 2018, people are able to request the release of funds they have been saving by using their existing super account under the First Home Super Savers scheme (FHSS) for purchasing a first home. It is important to remember that there are several restrictions and conditions that must be adhered to. One of the most important is that people must not sign a contract to purchase or construct residential premises until after they have been granted a release or they may be liable to pay FHSS tax.

The flowchart below explains how the scheme works.

Not all super funds allow people to withdraw amounts under this scheme.

5. Downsizer Contributions can be made from 1 July 2018

The Downsizer Contributions measure was designed to reduce pressure on housing affordability in Australia. This new super measure allows an individual aged 65 or over to use the proceeds in relation to one sale of their main residence to make ‘downsizer contributions’ of up to $300,000 (or $600,000 if a couple) into super. To be eligible, the contract for sale, not the settlement date, must be entered into on or after 1 July 2018.

It’s important to note that the property does not need to be a current home. When this measure was first announced in the May 2017 Federal Budget, it was understood that only current homes could be eligible, however, the Government has since broadened its scope. Downsizer contributions are also not subject to the below restrictions that apply to non-concessional contributions (NCC).

Conditions and eligibility

The following conditions need to be met for people to be eligible for the downsizer contributions measure:

Age

The individual must be aged 65 or older at the time the contribution is made.

Qualifying property

  • The contract for sale (not the settlement date) must be entered into on or after 1 July 2018.
  • The property that is sold must be located in Australia and cannot be a   houseboat, caravan or other mobile home.
  • The property must have been owned by the   individual, or their spouse for 10 or more years just prior to disposal. This means the property is not required to be owned by both members of a couple.
  • The property must qualify for the main residence capital gains tax (CGT) exemption in whole or part. This means the property does not need to be a current home. It could be an individual’s former home which has been   subsequently used as an investment property, or left vacant. As long as a   property is eligible for at least a partial main residence CGT exemption, this property is able to satisfy this condition.
  • The property can be a pre-CGT asset (purchased before 20 September 1985) if this pre-CGT property could qualify for whole or partial main residence CGT exemption if the property had been a CGT asset (ie if purchased after 19 September 1985).
  • There is no requirement to actually downsize or purchase another home.

Downsizer contribution cap

The total amount of downsizer contributions that can be made is the lesser of:

  • $300,000 per individual, and
  • The total proceeds received by an individual or their spouse from the sale of the property.

For example, if a qualifying property is sold for $200,000, then this is the maximum downsizer contribution permitted by an individual or able to be shared between the member and their spouse.

On the other hand, if this property is sold for $700,000, $300,000 will be the downsizer contribution cap for an individual. The spouse of the individual can also make $300,000 downsizer contribution and this is the case even if the spouse does not hold an ownership interest in this property.

90 days’ timeframe and approved form

  • The contribution must be made within 90 days of the change in ownership (ie settlement); and
  • a choice must be made by the individual to treat a contribution as a downsizer contribution. This choice must be made in the approved form and given to the super fund before or at the time the contribution is made. It is expected that this form will be similar to the ATO’s contributions for personal injury election form and the capital gains tax cap election form.

Deductibility

A downsizer contribution cannot be claimed as a deduction.

Work test

A downsizer contribution can be made regardless of whether the individual is working or not.

Upper age limit

The under age 75 restriction does not apply to a downsizer contribution. There’s no upper age limit when making a downsizer contribution.

Total super balance

A downsizer contribution is not subject to the total super balance test which is relevant when determining an individual’s NCC cap. However, once a downsizer contribution is made, it will increase an individual’s total super balance.

NCC caps

A downsizer contribution is excluded from being a non-concessional contribution and does not count towards an individual’s NCC cap.

To take advantage of the downsizer contributions measure, clients need to submit a ‘Downsizing contribution into super form’. When clients submit this form, they are confirming they have met all eligibility requirements.

More information

If you have any questions in relation to this article, or would like more information, please contact a Client Solutions Manager.

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 IOOF Investment Management Limited (ABN 53 006 695 021, AFSL 230524) based on information that is believed to be accurate and reliable at the time of publication.