IT'S A question on the minds of many older Australians - will the announced changes in the Federal Budget to the work test be of benefit to me?
The following situation started the conversation. 'I am looking to retire in June 2020 when I will be 66 years old. I am self-employed and my current super balance is around $200,000. I have a personal share portfolio that I have owned for years now worth around $135,000 with substantial capital gains of around $90,000. I would like to invest these funds into Super but I am in no rush to do so until I retire as I would trigger substantial Capital Gains Tax (CGT) liabilities. I have been able to make deductible contributions to Super of $20,000 each of the past two financial years.'
Currently individuals aged 65 to 74 must work a minimum of 40 hours in a consecutive 30- day period within a financial year in order to be eligible to make contributions to super. This is referred to as the Work Test.
Under the proposed changes, from July 1, 2019, people aged 65 to 74 with a total super balance below $300,000 will be able to make voluntary super contributions for 12 months from the end of the financial year in which they last met the Work Test. In other words, the Work Test will not apply to making super contributions in the financial year after they cease work.
The current concessional super cap of $25,000 and non-concessional super contribution cap of $100,000 in a financial year will continue to apply.
Assuming you retire on June 30, 2020 and are older than 65, you would be able to sell your shares in the financial year after you retire and contribute these funds to super.
The main advantage would be crystalising the capital gain in the new financial year when you most likely will have lower taxable income. The capital gain triggered by the sale of the shares can be offset by a personal deductible contribution to super. The deductible portion will count against your concessional contribution cap. Please note you would need to make the contribution on or before June 30, 2021.
As your super balance is likely to be less than $500,000 at June 30, 2020, you will also be able to utilise the concessional contribution 'catch up' provisions. This concession allows you to carry forward any unused concessional contribution cap for up to five years from July 1, 2018.
So, assuming you continue to contribute $20,000 until retirement, you would be eligible to claim a personal super tax deduction of $35,000 in the 2020-21 tax year when you sell your shares. This represents the $25,000 concessional contribution cap applicable to the 2020-21 tax year plus $10,000 representing the unused concessional contribution cap from the previous two financial years.
As an individual, 50 per cent of a capital gain is taxed at your marginal tax rates. Your personal deductible super contribution of $35,000 should offset the CGT liability on the sale of shares, assuming you have little or no other taxable income in the 2020-21 tax year. Contributions tax of 15 per cent would still apply to the $35,000 contribution.
In total, you would be able to contribute $135,000 to super - $100,000 would count against your non-concessional cap of $100,000 and $35,000 would count against your concessional contribution cap incorporating $10,000 under the concessional contribution carry forward rules.
Please note under the current super rules, you would not be able to make contributions to super after June 30, 2020 unless you satisfied the work test of a minimum of 40 hours in a consecutive 30-day period within a financial year.
If the legislation for the Budget announcement does not get passed, you would be obliged to satisfy the work test and therefore have additional taxable income in the financial year prior to making the contributions.
Either way, this strategy provides substantial tax savings and greater contributions to super for retirement planning purposes.
Andrew Heaven is an AMP financial planner at WealthPartners Financial Solutions. Any general advice in this story doesn't take account of personal objectives, financial situation and needs.
This story first appeared in The Australian.