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Removal of Work Test and Eligibility for Recontributions

Removal of Superannuation Work Test Under Age 75

Several key superannuation changes come into effect from July 2022. One of these is the amendment of super regulations to allow super funds to accept contributions for a member while they are under age 75 (including the period up to 28 days after the end of the month in which they turn 75), regardless of their work status.

The recent legislation also confirmed the ability to use the “bring forward rules” effectively increasing the annual limit of $110,000 to a maximum of $330,000 by bringing forward future years contributions. The legislation stopped short of allowing for tax deductible contributions and are limited to “non-concessional” contributions only. We have written previously about the opportunity these new rules will provide for people in this age bracket who receive an inheritance. The new rules open the door for super as an investment option (including account-based pensions) for people between 67 and 75, who were previously ineligible. These rules will also allow for better estate planning using a superannuation re-contribution strategy. Re-contribution the act of taking money out of super and then putting it back in.   How a Re-Contribution Strategy Works All superannuation funds and account-based pensions have tax components. The most common are tax-free and taxable. Typically, the tax-free component comes from personal super contributions (non-concessional contributions). The taxable component is typically employer contributions and salary sacrifice (concessional contributions). These tax components exist in your super regardless of your age, even for people over the age of 60 who typically think of their super is being tax-free upon withdrawal or receiving income payments. Withdrawing existing super and then making a subsequent contribution with your own cash can reduce the taxable component in the fund and replace it with a tax-free component. When a super fund (including account-based pension) pays a death benefit to a non-dependent (such as a child over the age of 18), tax of 15% applies on the taxable component. Reducing the taxable component can significantly reduce the tax that children could pay upon receiving a superannuation benefit in future. This is one of the few taxes that can apply upon transferring wealth your children.   Withdrawing from Super The ability to withdraw is determined by the superannuation preservation rules. You must meet a condition of release to withdraw from super. Withdrawals after age 60 are tax free but prior to age 60 there may be tax implications.   Contributing to Super How much you can contribute back in will depend upon your age. If under age 75 (from July 2022), you could contribute $110,000 or use the bring-forward rules to contribute $330,000 (and forego the ability to contribute for the next two years). People over 75 are not able to make a personal contribution to super regardless of their work status.   Re-contribution Strategy Example Ted and Sally are recently retired at age 70. Ted has $1 million in super which is 100% taxable. Sally has no superannuation. How can they minimise the potential impact of tax on their future beneficiaries?

         Ted could withdraw $660,000 and re-contribute $330,000 each into new super account for both himself and Sally, using the bring forward rules.

         Alternatively, they could each contribute $110,000 each in the current financial year, plus a further $330,000 in July. This would give them $440,000 of tax-free superannuation each. By eliminating $880,000 worth of taxable superannuation, they could potentially be saving their beneficiaries $132,000 in tax.

Ted and Sally need to plan carefully and act before turning age 75. By delaying this strategy, they could miss a great opportunity to maximise the legacy left for future generations.

 

 

DISCLAIMER: 

This is intended to be general advice only. Goldsborough Financial Services has not taken into account the objectives, financial circumstances or investment needs of any particular person.  For specific advice on your situation please contact your Goldsborough Financial Planner.

Author
Director | Certified Financial Planner ® | B.Ec, Grad Dip FP | Authorised Representative No. 227293

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