After spending a week of my annual leave painting the house, getting stuck into some re-contribution strategies is a very welcome change!
From 1 July 2022, there have been some good news changes to contribution rules and limits which I’ll outline for you as well as discuss some possible opportunities resulting from the changes.
Firstly, the super guarantee (SG) rate that employers are required to pay on your income has now increased from 10% to 10.5%. The rate will gradually increase each financial year until it reaches 12% in 2025/26 and later years. In light of the higher SG rate, if you’re making any additional contributions over and above SG, you should review your total concessional contributions to ensure they remain within the concessional contribution limit of $27,500 pa.
In addition, on 1 July 2022, new rules were introduced to make it easier for people aged 67 to 75 to contribute to super. The new rules create opportunities for you to move more money into super for retirement, equalise super balances between you and your partner, and reduce the potential tax your beneficiaries may pay if you pass away.
Two important changes to super rules allow people aged between 67 and 75 to top up or restructure their super, to make the most of the tax effective super environment.
- Contribute to super regardless of employment status
For those under 75, the removal of the work test means you can now contribute to super without meeting a work test. This is a significant change as prior to the new rules, if you were between age 67 and 75, you had to have worked at least 40 hours within 30 consecutive days to contribute.
- Contribute up to $330,000 as an after-tax contribution
You can now make an after-tax (non-concessional) contribution of up to $330,000 over a three year period, under changes to the bring-forward rules**. Prior to this change, you had to be under age 67 to utilise the bring-forward rule.
** Note: the cap you have available under the bring-forward rule will reduce if your total super balance is $1.48 million or more and is reduced to nil if your total super balance is $1.7 million or more.
These changes may enable a number of strategies that would otherwise not be possible. For example, if your partner’s super balance is lower than yours, you can both benefit from topping up their super. The new rules allow contributions to be made into your partner’s super account as long as they are under age 75. If you don’t have money outside of super to contribute, you can withdraw funds from your own super account to contribute to your partner’s.
The result is that your super balances are more even, which can have many benefits:
- Giving the spouse with the lower balance a greater sense of financial independence and security.
- Qualifying for a range of concessions, which may help reduce tax.
- Having more money in the tax-free pension environment at retirement (by taking full advantage of your respective transfer balance caps – this is the maximum amount that each of you can use to start a tax-free pension).
- You may gain protection against future legislative changes to tax or super rules.
The changes may also allow you to reduce the tax that your adult children will have to pay if they inherit your super. If a tax dependant (such as a partner) receives a lump sum super death benefit, they do not pay tax, however, your adult children likely will. Your super account is generally made up of two components:
Taxable component
If you pass away and this is paid to someone who is not a tax dependant (such as an adult child) they pay up to 17% in tax.
Tax-free component
If you pass away and this is paid to your adult child, they don’t pay tax. By withdrawing the taxable component as a tax-free lump sum and recontributing that same money back into super as an after-tax (non-concessional) contribution, it converts to the tax-free component. This allows you to increase the tax-free component of your balance, reducing the tax any non-tax dependent beneficiaries may pay if you pass away.
Re-contribution strategies are complex, so it’s important to discuss your situation with your financial adviser to weigh up the pros and cons of such a strategy particular to your situation and to ensure the strategy is implemented correctly to avoid costly mistakes.
Michelle Sanchez
Authorised Representative (No 325471)
