The Federal Budget for 2020/21, delivered on 6 October 2020 included surprisingly few changes regarding superannuation.
Probably the most noteworthy change is that super funds will now follow you when you change employer, rather than the default state of play being that a new fund is created each time. Please find a link below with more details on that and some other measures announced:
Fewer changes to superannuation in this budget can in part be attributed to many changes having already occurred, with the most positive regarding the ability of older Australians being able to contribute more into their super.
Rules until 30 June 2020
Until 30 June 2020, those aged 64 and under could make voluntary super contributions without any restrictions. For those aged 65-74, to make voluntary super contributions you needed to prove that you were working at least 40 hours in a 30-day period that financial year. Those aged 75 and over could not make voluntary contributions to super (though compulsory employer contributions were still allowed).
There was a noteworthy exemption to the above in that those aged 65 and above (no upper age limit) who sold the family home that they owned for at least 10 years, could potentially deposit $300,000 per person into super regardless of working status or account balance.
From 1 July 2020, the age limit without needing to meet that work test has increased. This means anyone up to the age of 66 can continue to make voluntary super contributions, even if they are not working. Effectively, those who benefit most are those aged 65 and 66 who want to contribute to super but are no longer working. These extra two years can be quite useful, particularly if the member still has a large amount of wealth outside of super, has received a leave payout upon retirement, sold an investment or received an inheritance.
Mike is aged 66 and retired five years ago. Mike has $1 million in super and has recently inherited $100,000. Prior to 1 July 2020, this $100,000 would need to remain outside of super unless Mike returned to work. From 1 July 2020 however, Mike can contribute this entire $100,000 into his super account, thus having more of his investment wealth in the one tax-free location of which he has full access.
The age limit increase can also have benefits for those who are 65 and 66, retired, but do not have any wealth outside of super.
Generally, when you pass away, your superannuation can be left to a spouse tax-free, or left to another financial dependent. However, when the last member of the couple or a single person passes away, their children or other future beneficiaries can pay up to 17% tax on the deceased’s superannuation balance. There are lots of strategies to help mitigate this, and one is a ‘re-contribution strategy’.
This is where you withdraw money out of super and re-contribute it back into super the next day. This can reduce the taxable proportion of the super fund and therefore reduces the amount of tax the ultimate beneficiaries may pay. There are a lot of rules to consider when implementing a re-contribution strategy however, so this is definitely something worth seeking professional advice over.
In summary, increasing the super contribution age limit from 64 to 66 without needing to meet a work test could provide a number of valuable opportunities that should be explored.
If you did have any questions about your own personal financial position, please do not hesitate to contact a member of the William Buck team.