The coronavirus pandemic has led to declines in investment markets around the world. Many super strategies depend on a person’s total super balance at 30 June of the preceding financial year. So, despite it being hard for someone to see their super balances significantly reduced, a lower 30 June 2020 total super balance could provide new super opportunities for the 2020/21 financial year.
What is the ‘total super balance’?
The total super balance is the total amount of super (both accumulation and pension phase) that an individual has at the test time – which is 30 June of the previous financial year. For example, the test time for the 2019/20 financial year is 30 June 2019. For most people, this will simply be the sum of their super accumulation accounts, their transition to retirement pensions, account-based pensions and term-allocated pensions.
If someone has exceeded their transfer balance cap, has a defined benefit super interest, other types of super income streams or a self-managed super fund (SMSF) with a limited recourse borrowing arrangement, calculating their total super balance is more complicated.
Super strategies linked to the total super balance
Restrictions on a person’s total super balance at 30 June of the previous financial year are included in the eligibility criteria of a range of super measures. These are shown in Table 1, below. Rates and thresholds are applicable for the 2020/21 financial year.
Total super balance restriction (at 30 June of the previous financial year)
Non-concessional contributions to super
The ability to make after tax (non-tax deductible) personal and spouse contributions into super.
Must be less than $1.6 million. Balances between $1.4 million and $1.6 million may impact the amount of non-concessional contributions that can be brought forward (see below).
From 1 July 2018, a person’s unused concessional contributions cap can be carried forward for up to five financial years, allowing a concessional contribution greater than the general concessional contributions cap of $25,000 per year. Unused concessional contributions from the 2018/19 financial year can first be used in the 2019/20 financial year.
Must be less than $500,000.
Post retirement year work test exemption
The ‘work test exemption for recent retirees’ allows a super fund to accept voluntary contributions if the person last met the work test in the immediately preceding financial year. From 1 July 2020, the person must not have used the work test exemption in a previous financial year.
Must be less than $300,000.
A person who makes a personal non-concessional super contribution of at least $1,000 may be eligible for a co-contribution of up to $500. The co-contribution is paid by the Government to the person’s super fund. To be eligible, the person must:
· be under the age of 71 at the end of the relevant financial year;
· satisfy a 10% income test; and
· have total income of less than $54,837. The co-contribution reduces where total income exceeds $39,837 (2020/21).
Spouse contributions allow a taxpayer (the contributing spouse) to contribute directly into their spouse’s (the receiving spouse) super account. A spouse contribution of at least $3,000 may entitle the contributing spouse to a non-refundable tax offset of up to $540. The eligibility criteria includes:
· the receiving spouse must be less than age 701 and satisfy the work test or be eligible for the work test exemption where required.
· the receiving spouse’s income must be less than $40,000. The tax offset reduces where income exceeds $37,000.
Must be less than $1.6 million (applies to the receiving spouse).
Ability of SMSFs to use segregated assets for ECPI
SMSFs and small-APRA funds must use the proportional method to calculate exempt current pension income (ECPI) if at any time in the year, the fund is paying a retirement phase pension, and a fund member in the relevant financial year:
· has a total super balance exceeding $1.6 million at 30 June immediately preceding the relevant financial year;
· has an income stream (other than a transition to retirement [TTR] or certain deferred annuities) just before the start of the relevant financial year (this can be from any provider).
Please note: An SMSF may still segregate for investment return purposes.
Must be less than $1.6 million (only applies to certain fund members).
Super measures that are not restricted by the total super balance include:
downsizer super contributions;
capital gains tax (CGT) cap contributions (contributions relating to the small business CGT concessions); and
personal injury contributions.
Non-concessional contributions to super
In the period 2017/18 to 2020/21, the non-concessional contributions cap is $100,000. To be eligible to make non-concessional contributions, a person must answer ‘Yes’ to the following questions:
Is the person’s total super balance at the previous 30 June less than $1.6 million?
Will the contribution be received by the person’s super fund on, or before, 28 days after the month the person reaches age 75?
If the contribution is received by the super fund on, or after, the person reaches age 652, is the work test satisfied or is the person eligible for the post-retirement year work test exemption?
If the person is already in a bring-forward period, is there any residual non-concessional contributions cap remaining?
If the person is under the age of 65 at the start of the relevant financial year and they are not already in a bring forward period, they may be eligible to bring forward future years non-concessional contributions depending on their total super balance. Table 2 illustrates the bring forward rule for the 2020/21 financial year.
Total super balance as at 30 June 2020
Bring forward period
Maximum non-concessional contributions
Less than $1.4 million
$1.4 million to less than $1.5 million
$1.5 million to less than $1.6 million
$1.6 million or above
Tips and traps
A significant reduction in the value of a person’s total super assets in the 2019/20 financial year will not change their eligibility for any of the above measures in 2019/20. The relevant total super balance for the 2019/20 financial year is the 30 June 2019 balance.
If a person’s total super balance is at least $1.6 million, their concessional contributions cap is not reduced to nil and they may be eligible to utilise the standard concessional contributions cap. It is the non-concessional contributions cap that is reduced to nil.
The total super balance is not the same as the transfer balance cap. The transfer balance cap is a limit on how much super can be used to commence retirement income streams. If a person has already used their $1.6 million transfer balance cap, a decline in the value of the assets supporting the retirement income streams will not allow them to transfer more of their accumulation super benefits to a retirement income stream.
Taking advantage of lower super balances
If a person’s total super balance is still reduced at 30 June 2020, it could provide new opportunities for the 2020/21 financial year. Unfortunately, not everyone will be in a financial position to take advantage of these opportunities. But for those who can, the benefits can be quite substantial.
Table 3: If the 30 June 2020 balance falls below
The person may be eligible to make non-concessional contributions and start receiving spouse contributions. If eligible, the person may qualify for the Government co-contribution and a contributing spouse may be eligible to receive the spouse contribution tax offset. SMSF members can utilise segregation strategies to manage tax in the SMSF.
The person can utilise their unused concessional contributions cap from the 2018/19 and 2019/20 financial years. Where applicable, they must satisfy the work test or be eligible for the work test exemption.
The person may be eligible to use post-retirement year work test exemption.
Example 1: Holly takes advantage of catch-up concessional contributions
Holly, age 53, previously inherited an investment property from her deceased parents with a large unrealised capital gain. Holly was a successful small business owner and following the advice of her financial planner, she focused on building her super for retirement.
At 30 June 2019, her total super balance had grown to $600,000. Unfortunately, Holly’s business and super balance have felt the full impact of the COVID-19 lockdown. Holly is hoping to sell the inherited property. The sale proceeds will be enough to re-establish her business, clear debt and leave some for investment. She is not comfortable with selling in the current conditions and is hopeful that she will be able to sell the property in the 2020/21 financial year.
Holly’s super interest is now approximately $400,000 and given her drastic reduction in income, she will not make concessional contributions in the 2019/20 financial year, unlike last financial year when she utilised the full $25,000 cap. The unused concessional contributions cap of $25,000 from the 2019/20 financial year can be carried forward. If Holly’s total super balance remains less than $500,000 at 30 June 2020, Holly can use her unused concessional contributions in 2020/21, allowing concessional contributions of up to $50,000 to offset the anticipated capital gain and other income.
Without the reduction in Holly’s super balance, she wouldn’t be eligible for catch-up concessional contributions, the unused cap for 2019/20 would be lost and she would pay more tax in the 2020/21 financial year.
Example 2: Brayden and Eilish take full advantage of their lower super balances
Brayden, age 61, and Eilish, age 62, are a wealthy couple nearing retirement. Eilish has her own medical practice, which employs Brayden on a casual basis. For the last few years, Brayden’s super balance has exceeded $1.6 million. Due to the market downturn, his super balance will now be below $1.4 million as at 30 June 2020. This will present him with new opportunities in the 2020/21 financial year.
The spouse contribution tax offset
If Brayden’s income for the 2020/21 financial year is below $37,000, Eilish can make a $3,000 spouse contribution for Brayden and receive a $540 tax offset. In the previous financial year, Brayden’s total super balance exceeded $1.6 million, making him ineligible to receive a spouse contribution without breaching his non-concessional contributions cap and Eilish ineligible to receive the spouse contribution tax offset.
The Government co-contribution
If Brayden’s income for the 2020/21 financial year is below $39,837, he may be entitled to a Government co-contribution of $500 when making a personal non-concessional contribution of at least $1,000. If his income is more than $39,837 but less than $54,837, he may be entitled to a part Government co-contribution. In the 2019/20 financial year, Brayden wasn’t eligible for the Government co-contribution because his total super balance exceeded $1.6 million.
As Brayden is under the age of 65 as at 1 July 2020 and his total super balance is less than $1.4 million as at 30 June 2020, he can use the three year bring forward period allowing up to $300,000 of total non-concessional contributions.
As spouse contributions are counted towards the non-concessional contributions cap, he could make a personal non-concessional contribution of $297,000 in addition to receiving the spouse contribution of $3,000.
If Eilish is likely to remain eligible for the spouse contribution tax offset and Brayden for the Government co-contribution during the next two years, they should consider leaving room under the non-concessional contributions cap as outlined in Table 4.
Total non-concessional contributions
Eligibility criteria includes Brayden meeting the income tests and having a total super balance of less than $1.6 million at 30 June 2021 and 2022.
Commencement of an account-based pension
If Brayden can satisfy the retirement condition of release (permanent retirement or cessation of a gainful employment arrangement on or after age 60) he can commence an account-based pension (not a TTR pension) which provides:
tax-free investment returns on assets supporting the pension; and
the commencement of a pension at a time when his super balance does not exceed his $1.6 million transfer balance cap (a limit on how much super can be used to commence retirement phase income streams). As the commencement value of the pension is assessed against the transfer balance cap, any future investment returns relating to the pension will not affect the transfer balance cap.
The benefits could be substantial if investment markets recover. Alternatively, if Brayden doesn’t commence an account-based pension:
investment returns will be taxed at up to 15 per cent. Some funds may have both realised and unrealised capital losses, but these cannot offset income items, such as interest, rent and dividends.
if the super interest at the time of commencement exceeds the transfer balance cap, the excess will have to remain in accumulation phase or be cashed out of the super system.
The benefits for Brayden and Eilish can be summarised as follows in Table 5.
Table 5: Benefits for Brayden and Eilish
Spouse contribution of $3,000.
* Eilish receives a $540 tax offset.
Personal non-concessional contribution of $289,000.
* More money invested in superannuation.
* Government co-contribution of $500.
* Potential future spouse and Government co-contributions.
Commence an account-based pension.
* Money invested in the tax-free retirement phase.
* Market recovery will occur in pension phase, allowing better use of the transfer balance cap.
Capturing positives from the coronavirus situation
With a range of super strategies linked to a person’s total super balance, a market downturn reflected in the 30 June 2020 total super balance may present new opportunities for clients in the 2020/21 financial year.
For some people, it may not be a reduction in their total super balance but simply a reduction in income that may provide eligibility to super strategies like the Government co-contribution and the spouse contribution tax offset.
Unfortunately, many people will be feeling the financial impact of the coronavirus situation and cannot take advantage of these new super opportunities. For people who are fortunately financially secure, they should identify what new super opportunities they can take advantage of in the 2020/21 financial year.
Scott Quinn, Technical Services Manager, IOOF TechConnect.
It is proposed to increase this to age 75 from 1 July 2020. This change has not been legislated at the time of writing.
It is proposed to increase this to age 67 from 1 July 2020. This change has not been legislated at the time of writing.
1. Brayden and Eilish take advantage of the Government co-contribution and spouse contribution tax offset in the 2020/21 financial year. They are confident they won’t be eligible in the following two financial years and don’t want to leave room under the cap. How much personal non-concessional contributions would Brayden make in the 2020/21 financial year?
2. In this article, what benefits has Brayden gained by commencing an account-based pension?
a. Investment returns are generated in a nil-tax environment and the transfer balance cap is used more effectively.
b. The pension payments will enable Brayden to salary sacrifice part of his employment income.
c. His tax-free and taxable percentage will be set at the commencement of the income stream.
d. Investment returns are tax-free and the pension payments supplement Brayden’s income needs.
3. Tahlia, age 63, commenced an account-based pension with $1.6 million and left $200,000 in accumulation phase. At 30 June 2019, her total super balance was $1,9 million. In May 2020, her account-based pension balance fell to $1 million and her accumulation interest to $150,000. She has no other super interests. Which of the following statements is correct?
a. As Tahlia’s account-based pension is now $1 million, she has room under her transfer balance cap to commence an income stream with the $150,000.
b. As her total super balance has reduced to $1.15 million, she can make non-concessional contributions in the 2019/20 financial year.
c. If her total super balance stays below $1.6 million at 30 June 2020, she can make additional non-concessional contributions in the 2020/21 financial year.
d. As her total superannuation balance has reduced to $1.15 million, she may be eligible for the Government co-contribution in the 2019/20 financial year.
4. On 30 June 2020, Nerida had a super accumulation interest of $400,000 and an account-based pension of $90,000. On 1 February 2021, her accumulation interest is $520,000 and her account-based pension is $120,000. Nerida didn’t use any of her concessional contributions cap in the 2018/19 or 2019/20 financial years. Nerida is about to make a concessional contribution in February 2021. What are the maximum concessional contributions she can make without breaching the concessional contributions cap?
5. Declan wants to make a concessional contribution to super. Which statement is incorrect?
a. He can use catch-up concessional contributions if his total super balance is less than $500,000 as at 30 June of the previous financial year.
b. He cannot make a concessional contribution if his total superannuation balance at 30 June of the previous financial year exceeds $1.6 million.
c. He can carry-forward any unused concessional contributions cap since 1 July 2018 for up to five years.
d. He must satisfy the work test or be eligible for the work test exemption where applicable.