JUNE is always an important time to think about last minute contributions to superannuation but this year brings some new rules and new opportunities.
But, be warned: you only have two more weeks to act.
One new issue to think about these days is the limit on non-concessional contributions (the contributions people make from their own money and for which they don't claim a tax deduction). This is commonly understood to be $100,000 a year or a cumulative $300,000 over three years if you access the "bring forward rule".
From 2017/18 onward the non-concessional contribution limit sometimes depends on how much money the contributor already has in superannuation.
That leaves two areas of focus in June 2018:
- the usual rush to make sure any money that's to go into superannuation in the current financial year lands in the right hands on or before Friday 29 June; and
- (a new concern) looking forward to next year and possibly taking steps now to make sure contributions can be made next year.
First and foremost, someone intending to make contributions now should double check they are allowed to do so, based on their age and work status. For example, contributions are not allowed after an individual's 65th birthday unless they meet a statutory work test (which essentially requires them to have done at least 40 hours of paid work during a 30 day period). Contributions are generally not allowed at all for people over 75. No work test applies for someone under 65 and even those over 65 don't have to be working right now - they just have to have met the work test at some point this financial year before they make the contribution.
Let's assume there's no age / work test barrier to making a contribution.
For the first time, there is second test to worry about in 2017/18. An individual's ability to make a non-concessional contribution now depends on their "total superannuation balance" at the previous June 30 (so for this year, June 30, 2017 is the key date). Broadly speaking total superannuation balance is the total amount someone has in superannuation across all their superannuation funds.
There is an important exception for people who had started a process called a "bring forward" in either 2015/16 or 2016/17 and they are not covered in this article. For everyone else, the rules are as follows:
Total superannuation balance at June 30, 2017 / Maximum non-concessional contribution in 2017/18
- $1.6m or more / $nil
- $1.5m but less than $1.6m / $100,000
- $1.4m but less than $1.5m / $200,000 (they can "bring forward" next year's non-concessional contribution limit *)
- Less than $1.4m / $300,000 (they can "bring forward" the next two years' non-concessional contribution limit *)
So how does this impact contribution planning right now in the final days of 2017/18? Providing they are allowed to contribute at all (the age / work test), are not already midway through a bring forward process triggered in 2015/16 or 2016/17 and were under 65 at some point during 2017/18.
Think about someone whose total superannuation balance was $1.5m at June 30, 2017 but has grown during the year. If they miss the opportunity to contribute this year and their total superannuation balance crosses the magic threshold of $1.6m at the end of this month, their chance to make more non-concessional contributions may well have disappeared forever. No pressure but June 30, 2018 just became a lot more important.
The same applies to the other thresholds - someone crossing from just under $1.4m to just over that threshold at June 30, 2018 will find their opportunities more limited next year. This additional urgency will be new for many people and definitely merits early planning.
Paradoxically, the same rules can sometimes encourage taking small amounts out of superannuation around this time of year (assuming withdrawals are possible - for example, those who have retired or can withdraw some of their superannuation via a transition to retirement pension).
Remember that someone with a total superannuation balance of $1.61m at June 30, 2018 cannot make non-concessional contributions at all during 2018/19 while someone with only $1.59m can contribute $100,000. A small withdrawal now may therefore pave the way for a more than compensating contribution next year.
Finally, the new limits put some interesting new considerations into the mix for those undertaking a strategy known as a "withdrawal and recontribution". This is a strategy where money is taken out of superannuation and then put back in. It has tax benefits when it comes to estate planning because it generally means that more of an individual's superannuation is tax free to certain beneficiaries such as adult children.
These strategies are now far harder to implement where the total superannuation balance is high - someone with $1.6m at June 30, 2017 may well be able to withdraw some of their superannuation now but would not be able to put it back in during 2017/18.
This is where getting the timing right brings rich rewards. Making the withdrawal in 2017/18 but the recontribution in 2018/19 might allow someone hovering around $1.6m to withdraw and recontribute $300,000.
Remember that their contributions in 2018/19 will be based on their total superannuation balance at June 30, 2018. If this is only $1.3m (because they have just withdrawn $300,000 from their $1.6m in super) they have $300,000 to play with.
Contributions are always top of mind as the end of the financial year draws near. But the stakes are even higher in 2017/18.
Meg Heffron is head of SMSF education at www.heffron.com.au.