Super Bill provides super opportunities in 2022 [CPD]
01 April 2022
01 April 2022
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More about FPA membershipWith yet another raft of super changes now law, 1 July will bring with it a range of strategic advice opportunities for older clients. In some cases, the changes could also flag a need to reconsider recommendations which were intended to be implemented before 30 June.
The recently legislated changes were first announced in the 2021 Federal Budget. For a while there, it looked as though the proposals wouldn’t be passed prior to the slated 1 July commencement date. An early Federal Budget and impending Federal Election threatened yet another end of financial year (EOFY) with uncertainty about prospective super contribution rules.
With the passage of the Treasury Laws Amendment (Enhancing Superannuation Outcomes For Australians and Helping Australian Businesses Invest) Bill 2022, financial planners can now approach the new financial year with clarity.
The changes include:
Below, three of the key super contribution changes are examined in more detail, including the advice opportunities, implementation considerations, and how advice could be impacted in the lead up to 30 June.
Note: One change that missed the cut has garnered almost as much interest as those which have passed. The proposal to provide an opportunity to exit certain legacy pensions was not part of this Bill and at the time of publication, these changes were not yet law.
Summary of change
The work test will no longer need to be met by individuals aged between 67 and 75 when making:
The work test will still need to be met (or work test exemption applied) to claim a tax deduction for personal contributions. There’s also no change to the requirement that contributions must be received within 28 days after the end of the month in which the person has turned 75.
Details
The work test has been removed from the SIS Regulations, effective 1 July 2022. This means that it will no longer be part of the contribution acceptance rules. As a result, trustees of super funds will not be required to ensure the work test has been met when receiving contributions.
From 1 July, the work test will instead become a requirement under tax law, should a person wish to claim a deduction in respect of a personal contribution that was made when they were aged 67 or over.
Where a client aged 67 or older wishes to make a personal deductible contribution (PDC) where the work test is met, they will need to lodge a Notice of Intent to claim with their super fund and follow the existing process.
Summary of change
Individuals aged less than 75 prior to 1 July will be eligible to access the NCC bring-forward arrangement, subject to meeting all relevant eligibility criteria. The work test will also not need to be met.
Currently, the bring-forward rule can only be triggered by a person aged less than 67 prior to 1 July. If a contribution is to be made on or after the person’s 67th birthday at any time during the bring-forward period, the work test needs to have been met for that financial year.
All other eligibility rules will continue to apply, including the total super balance (TSB) limits. Together with the changes to the work test, this could provide significant new contributions opportunities.
Details
It’s not expected there will be a tapering of the bring-forward for those approaching 75. This means that provided a person is aged less than 75 prior to 1 July (and meets the ordinary eligibility criteria, including that relating to TSB), the bring-forward may be triggered (also subject to the below timing requirement).
Note that while the Explanatory Memorandum indicated that the intention is not for a person approaching 75 to access NCC cap space that they wouldn’t otherwise have had available, the legislation does not support this approach. The Government has confirmed (albeit not publicly to this point) that tapering will not exist. We await further confirmation.
Contributions will need to be received no later than 28 days after the month the person turns 75.
Advice tip
Where a person turns 75 in June, they will not be eligible to trigger the bring-forward arrangement in July of the following financial year. Despite having a 28 day window in which to make personal contributions after the month in which they’ve turned 75, this doesn’t change the requirement that the individual must be 74 or under at some time during the financial year to be eligible to trigger the bring-forward rule.
Advice post-1 July 2022
In addition to being able to increase the total amount invested in super, the changes to the work test and bring-forward eligibility rules will provide a number of strategic opportunities, including:
The impact on EOFY advice
For some clients, the changes might impact existing contribution strategies between now and 1 July. An example would be where a client is looking to maximise personal contributions in what would otherwise have been the last financial year in which personal contributions could be made, where appropriate, they may instead consider a different contributions strategy. For example, some clients may have planned to contribute up to $330,000 in NCCs in 2021/22 if, under the current rules, it was the final year in which they could make NCCs. As a result of the changes, they may instead consider contributing up to the annual cap of $110,000 this year, and instead,contribute up to $330,000 in 2022/23 to maximise NCCs.
Example: Using recontribution to maximise super investments and simplify outcomes
Tony (72) passed away in January 2022, leaving a super death benefit of $450,000 to his wife Carmela
(70). Carmela has an account-based pension with a current balance of $310,000, and a small accumulation account receiving superannuation guarantee contributions. Carmela also owns two investment properties that are generating around $85,000 per annum in net income. She retired from her part-time job in February after Tony died.
Carmela has no upcoming expenses to consider and maximising super investments is appropriate from a tax perspective. She likes simplicity and would prefer to minimise the number of financial accounts she has. Until the recently legislated changes, she thought this financial year would probably be her final opportunity to contribute to super.
As a result of the changes to the work test and the bring-forward rule, Carmela has a range of options to consider, including:
Other considerations should include:
Summary of change
From 1 July, downsizer contributions will be able to be made by individuals aged 60 or over. In 2021/22 and prior years, downsizer contributions can only be made by a person aged 65 or older at the time the contribution is made. All other eligibility rules will remain unchanged. Note that there is no TSB or age limit for downsizer contributions.
Details
The rules require that contributions are made within 90 days of settlement and eligibility is based on the person’s age at the time of the contribution. This means that individual’s aged 60 to 64, settling on sales of eligible properties from early April, will be within this 90 day window to contribute once the age limit is reduced on 1 July. Note that the new rules don’t require settlements to occur on or after 1 July 2022.
While the ATO can exercise discretion to provide an extension of time for downsizer contributions, it has stated that an extension will not be granted where the only basis for the application relates to the person or their spouse meeting the age requirements.
Depending on circumstances, it may be worth discussing with clients the implications of the date of settlement and the resulting 90 day contribution window in relation to contribution opportunities. Eligible clients may wish to consider taking this into account when making arrangements to sell a qualifying dwelling. Legal guidance will be required, particularly in relation to contract terms.
The reduction in the eligibility age for downsizer contributions may provide a number of opportunities, including:
Even where sale proceeds are required to fund replacement housing or other expenses, a downsizer contribution can still be utilised to implement a recontribution strategy. Downsizer opportunities may also come as the result of a sale where the client isn’t actually downsizing at all (as there are no requirements relating to the application of the sale proceeds).
Clients aged 60 to 64 who will be settling on the sale of an eligible dwelling from early April and who had planned to make NCCs with the sale proceeds, may be able to consider the benefit of making a downsizer contribution instead, or as well as an NCC.
Downsizer NCC or PDC? Choosing the best way to contribute
A client may have more than one dwelling that they intend to sell in the lead up to or during retirement that may qualify for the downsizer rules. Alternatively, it may be the case that the property being disposed of qualifies only for a partial main residence CGT exemption. In these scenarios, consideration should be given to which type of contribution to make to maximise super investments over the longer term, and to manage tax.
Where eligible, consideration may be given to the benefit of contributing sale proceeds as an NCC to preserve the downsizer opportunity for a later time. As downsizer contributions are not subject to an upper age limit or TSB test, holding off on making use of the downsizer contribution cap until the sale of an eligible property in the future may help to maximise total contributions to super, where NCCs would otherwise not be possible3.
The downsizer rules do not require that the dwelling being sold is occupied as the main residence at the time of sale. Provided the other eligibility rules are met, it is sufficient that a property that has been owned for at least 10 years qualifies for at least a partial main residence CGT exemption. As tax deductions cannot be claimed for downsizer contributions, it is important to consider whether, for example, a combination of PDCs and downsizer contributions should be made to manage both CGT and contributions caps.
An invalid downsizer contribution is a personal contribution. This may occur where eligibility, timing or notification requirements4 are not met.
Where an invalid downsizer contribution is made, currently, a trustee needs to determine whether it can accept a personal contribution for the member in accordance with SIS Reg 7.04. This generally relates to whether the work test has been met. A contribution cannot be rejected based on TSB or contribution caps. If the contribution could be accepted by the trustee, it is an NCC.
As the work test will be removed from the SIS Regs and will no longer apply to NCCs in any case, this means that for a member aged up to 755, a failed downsizer contribution will be assessed as an NCC. This may result in an excess NCC where:
This may also impact the person’s ability to make other planned NCCs.
The changes to super contribution rules will provide a number of new opportunities in 2022 and beyond. In addition to building super, a number of strategic opportunities exist. It may also be important to re-engage with clients whose 2022 EOFY strategies may need to be reviewed.
There may also be some important reasons to engage with clients early in the financial year to review their circumstances in light of the changes. While more changes have been made to the super contribution rules, it’s great to see some of the most common complexities removed from the ‘Simple Super’ system.
Jenneke Mills, IOOF TechConnect.
***
To answer the following questions, go to the Learn tab at moneyandlife.com.au/professionals
1. Which of the following is correct regarding changes to the work test?
2. Jenny (62) is considering selling her home and moving into a smaller apartment that best suits her lifestyle needs. She would like to contribute some of the proceeds of the sale into her super fund. The new downsizer rules will enable:
3. The changes to the bring-forward rules will:
4. John (68) retired earlier in the current financial year. He has $400,000 he wishes to contribute to super, which includes proceeds from the sale of shares. His super balance is currently $390,000. He is planning to sell a property that qualifies for a partial main residence exemption in 2022/23. Which of the below strategies might provide a preferable outcome for John?
5. Changes to the work test mean that:
Footnotes
Super Bill provides super opportunities in 2022 [CPD]01 April 2022 With yet another raft of super changes now law, 1 July will bring with it a range of strategic advice opportunities for older clients. In some cases, the changes could also flag a need to reconsider recommendations which were intended to be implemented before 30 June. The recently legislated changes were first announced in the 2021 Federal Budget. For a while there, it looked as though the proposals wouldn’t be passed prior to the slated 1 July commencement date. An early Federal Budget and impending Federal Election threatened yet another end of financial year (EOFY) with uncertainty about prospective super contribution rules. With the passage of the Treasury Laws Amendment (Enhancing Superannuation Outcomes For Australians and Helping Australian Businesses Invest) Bill 2022, financial planners can now approach the new financial year with clarity. The changes include:
Below, three of the key super contribution changes are examined in more detail, including the advice opportunities, implementation considerations, and how advice could be impacted in the lead up to 30 June. Note: One change that missed the cut has garnered almost as much interest as those which have passed. The proposal to provide an opportunity to exit certain legacy pensions was not part of this Bill and at the time of publication, these changes were not yet law. Removal of work test and bring-forward changesRemoval of work testSummary of change The work test will no longer need to be met by individuals aged between 67 and 75 when making:
The work test will still need to be met (or work test exemption applied) to claim a tax deduction for personal contributions. There’s also no change to the requirement that contributions must be received within 28 days after the end of the month in which the person has turned 75. Details The work test has been removed from the SIS Regulations, effective 1 July 2022. This means that it will no longer be part of the contribution acceptance rules. As a result, trustees of super funds will not be required to ensure the work test has been met when receiving contributions. From 1 July, the work test will instead become a requirement under tax law, should a person wish to claim a deduction in respect of a personal contribution that was made when they were aged 67 or over. Advice tipWhere a client aged 67 or older wishes to make a personal deductible contribution (PDC) where the work test is met, they will need to lodge a Notice of Intent to claim with their super fund and follow the existing process. Bring-forward NCC eligibilitySummary of change Individuals aged less than 75 prior to 1 July will be eligible to access the NCC bring-forward arrangement, subject to meeting all relevant eligibility criteria. The work test will also not need to be met. Currently, the bring-forward rule can only be triggered by a person aged less than 67 prior to 1 July. If a contribution is to be made on or after the person’s 67th birthday at any time during the bring-forward period, the work test needs to have been met for that financial year. All other eligibility rules will continue to apply, including the total super balance (TSB) limits. Together with the changes to the work test, this could provide significant new contributions opportunities. Details It’s not expected there will be a tapering of the bring-forward for those approaching 75. This means that provided a person is aged less than 75 prior to 1 July (and meets the ordinary eligibility criteria, including that relating to TSB), the bring-forward may be triggered (also subject to the below timing requirement). Note that while the Explanatory Memorandum indicated that the intention is not for a person approaching 75 to access NCC cap space that they wouldn’t otherwise have had available, the legislation does not support this approach. The Government has confirmed (albeit not publicly to this point) that tapering will not exist. We await further confirmation. Contributions will need to be received no later than 28 days after the month the person turns 75. Advice tip Where a person turns 75 in June, they will not be eligible to trigger the bring-forward arrangement in July of the following financial year. Despite having a 28 day window in which to make personal contributions after the month in which they’ve turned 75, this doesn’t change the requirement that the individual must be 74 or under at some time during the financial year to be eligible to trigger the bring-forward rule. Advice opportunities – work test and bring-forward changesAdvice post-1 July 2022 In addition to being able to increase the total amount invested in super, the changes to the work test and bring-forward eligibility rules will provide a number of strategic opportunities, including:
The impact on EOFY advice For some clients, the changes might impact existing contribution strategies between now and 1 July. An example would be where a client is looking to maximise personal contributions in what would otherwise have been the last financial year in which personal contributions could be made, where appropriate, they may instead consider a different contributions strategy. For example, some clients may have planned to contribute up to $330,000 in NCCs in 2021/22 if, under the current rules, it was the final year in which they could make NCCs. As a result of the changes, they may instead consider contributing up to the annual cap of $110,000 this year, and instead,contribute up to $330,000 in 2022/23 to maximise NCCs. Example: Using recontribution to maximise super investments and simplify outcomes Tony (72) passed away in January 2022, leaving a super death benefit of $450,000 to his wife Carmela Carmela has no upcoming expenses to consider and maximising super investments is appropriate from a tax perspective. She likes simplicity and would prefer to minimise the number of financial accounts she has. Until the recently legislated changes, she thought this financial year would probably be her final opportunity to contribute to super. As a result of the changes to the work test and the bring-forward rule, Carmela has a range of options to consider, including:
Other considerations should include:
Extension of downsizer contributions to age 60Summary of change From 1 July, downsizer contributions will be able to be made by individuals aged 60 or over. In 2021/22 and prior years, downsizer contributions can only be made by a person aged 65 or older at the time the contribution is made. All other eligibility rules will remain unchanged. Note that there is no TSB or age limit for downsizer contributions. Details The rules require that contributions are made within 90 days of settlement and eligibility is based on the person’s age at the time of the contribution. This means that individual’s aged 60 to 64, settling on sales of eligible properties from early April, will be within this 90 day window to contribute once the age limit is reduced on 1 July. Note that the new rules don’t require settlements to occur on or after 1 July 2022. Advice tipWhile the ATO can exercise discretion to provide an extension of time for downsizer contributions, it has stated that an extension will not be granted where the only basis for the application relates to the person or their spouse meeting the age requirements. Depending on circumstances, it may be worth discussing with clients the implications of the date of settlement and the resulting 90 day contribution window in relation to contribution opportunities. Eligible clients may wish to consider taking this into account when making arrangements to sell a qualifying dwelling. Legal guidance will be required, particularly in relation to contract terms. Key advice opportunitiesThe reduction in the eligibility age for downsizer contributions may provide a number of opportunities, including:
Advice tipsEven where sale proceeds are required to fund replacement housing or other expenses, a downsizer contribution can still be utilised to implement a recontribution strategy. Downsizer opportunities may also come as the result of a sale where the client isn’t actually downsizing at all (as there are no requirements relating to the application of the sale proceeds). Clients aged 60 to 64 who will be settling on the sale of an eligible dwelling from early April and who had planned to make NCCs with the sale proceeds, may be able to consider the benefit of making a downsizer contribution instead, or as well as an NCC. Downsizer NCC or PDC? Choosing the best way to contribute A client may have more than one dwelling that they intend to sell in the lead up to or during retirement that may qualify for the downsizer rules. Alternatively, it may be the case that the property being disposed of qualifies only for a partial main residence CGT exemption. In these scenarios, consideration should be given to which type of contribution to make to maximise super investments over the longer term, and to manage tax. Where eligible, consideration may be given to the benefit of contributing sale proceeds as an NCC to preserve the downsizer opportunity for a later time. As downsizer contributions are not subject to an upper age limit or TSB test, holding off on making use of the downsizer contribution cap until the sale of an eligible property in the future may help to maximise total contributions to super, where NCCs would otherwise not be possible3. The downsizer rules do not require that the dwelling being sold is occupied as the main residence at the time of sale. Provided the other eligibility rules are met, it is sufficient that a property that has been owned for at least 10 years qualifies for at least a partial main residence CGT exemption. As tax deductions cannot be claimed for downsizer contributions, it is important to consider whether, for example, a combination of PDCs and downsizer contributions should be made to manage both CGT and contributions caps. Advice tipAn invalid downsizer contribution is a personal contribution. This may occur where eligibility, timing or notification requirements4 are not met. Where an invalid downsizer contribution is made, currently, a trustee needs to determine whether it can accept a personal contribution for the member in accordance with SIS Reg 7.04. This generally relates to whether the work test has been met. A contribution cannot be rejected based on TSB or contribution caps. If the contribution could be accepted by the trustee, it is an NCC. As the work test will be removed from the SIS Regs and will no longer apply to NCCs in any case, this means that for a member aged up to 755, a failed downsizer contribution will be assessed as an NCC. This may result in an excess NCC where:
This may also impact the person’s ability to make other planned NCCs. SummaryThe changes to super contribution rules will provide a number of new opportunities in 2022 and beyond. In addition to building super, a number of strategic opportunities exist. It may also be important to re-engage with clients whose 2022 EOFY strategies may need to be reviewed. There may also be some important reasons to engage with clients early in the financial year to review their circumstances in light of the changes. While more changes have been made to the super contribution rules, it’s great to see some of the most common complexities removed from the ‘Simple Super’ system. Jenneke Mills, IOOF TechConnect.
*** QUESTIONSTo answer the following questions, go to the Learn tab at moneyandlife.com.au/professionals 1. Which of the following is correct regarding changes to the work test?
2. Jenny (62) is considering selling her home and moving into a smaller apartment that best suits her lifestyle needs. She would like to contribute some of the proceeds of the sale into her super fund. The new downsizer rules will enable:
3. The changes to the bring-forward rules will:
4. John (68) retired earlier in the current financial year. He has $400,000 he wishes to contribute to super, which includes proceeds from the sale of shares. His super balance is currently $390,000. He is planning to sell a property that qualifies for a partial main residence exemption in 2022/23. Which of the below strategies might provide a preferable outcome for John?
5. Changes to the work test mean that:
Footnotes
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