End of Financial Year Superannuation Planning
Superannuation remained largely untouched in the latest Federal Budget and the previously announced (but not yet legislated) Division 296 tax on balances over $3M is not due to apply until after 1 July 2025.
So what should you be considering in terms of superannuation before the end of this financial year?
In this edition of FMA Insights, Director & SMSF Lead, Andrew Ma explores some of the key concepts and strategies to help you understand the opportunities that may be available.
1
Review Your Concessional Superannuation Contributions
Concessional contributions, often referred to as before-tax contributions or deductible contributions, include employer contributions (such as superannuation guarantee contributions and salary sacrifice contributions) and personal contributions claimed as a tax deduction.
The annual cap is $27,500 for the 2024 financial year and will be increasing to $30,000 from 1 July 2024 (2025 financial year).
This cap is inclusive of any compulsory employer contributions made on your behalf. Where your superannuation contributions for the 2024 financial year are less than the cap, you may consider topping up your superannuation with additional concessional contributions (either through your employer or personally).
The tax benefit will depend on your marginal tax rate. Any concessional contributions made to superannuation are taxed at a flat 15%. A personal concessional superannuation contribution on the other hand will reduce your taxable income (and the tax you need to pay at your marginal rate).
A taxpayer earning a $190,000 salary with an employer contributing 11% in Super Guarantee Contributions (SGC) will have approximately $20,900 of super contributions made on their behalf. Assuming no other concessional contributions have been made in the year, the taxpayer would have $6,600 left in their concessional cap.
An additional contribution of $6,600 would yield an additional tax refund of $3,102 based on a marginal tax rate of 47% and an overall net tax benefit of $2,112.
Timing of the contributions is important as the ATO counts the contribution once it is received by the Superfund. It’s important to check exactly how much cap is left and what additional employer contributions are expected before June 30.
Important Notes:
Those earning more than the Division 293 threshold of $250,000 will pay an additional 15% contributions tax on their concessional contributions. Income for Division 293 purposes is not just your taxable income, but also includes added back items, such as salary sacrifice, fringe benefits and investment/rental losses. The ATO then adds your super contributions on to this to get to the final income for Division 293.
If you are aged 67 and over, you need to satisfy a work test of gainful (paid) employment of at least 40 hours in a consecutive 30-day period during the financial year to be eligible to make personal concessional contributions to superannuation.
If you are over the age of 75, only mandated or compulsory super guarantee contributions are permitted.
If you are eligible to make a concessional contribution in which you are able to claim a tax deduction, then you need to ensure that you have notified your super fund in writing of your intention to claim a tax deduction and you should also ensure that you receive an acknowledgment of your intention from your super fund. Without the notice and acknowledgment, your claim for a tax deduction for your personal contributions will be invalid.
Note, your super contribution will not be counted for this financial year unless the payment is received by your super fund prior to 30 June 2024. This is not necessarily the date it leaves your bank account so check with your fund on any cut off dates to ensure the contribution is received before 30 June.
2
Carry-forward (Catch Up) Concessional Contributions
If your total superannuation balance across all funds is less than $500,000 on 30 June of the previous financial year, you may be eligible to make additional concessional contributions above the annual cap from any unused concessional contributions cap for the last five years.
This can be a useful strategy for those on a high taxable income (which may be from employment income or a one-off transaction like a capital gain on sale of an asset).
The 2018-19 year was the first financial year where you can access unused concessional contributions and any unused amounts from this year will expire after 30 June 2024.
Example: Let’s look at Gary who has only been using $15,000 of his concessional super cap for the last few years. Gary’s super balance at 30 June 2023 was $300,000, so he is well within the limit to make catch up contributions.
Gary could access his $27,500 concessional cap for 2023-24 plus the unused $55,000 from the prior 5 financial years.
If Gary doesn’t access the unused amounts from 2018-19 by 30 June 2024, the $10,000 will no longer be available.
If Gary had never made any concessional contributions since 1 July 2018, he would be eligible to make a concessional contribution of up $157,500 in the 2023-24 year.
Remember, you must be eligible to make a concessional contribution and the same contribution rules apply as noted at point 1 above.
3
Review Your Non Concessional Contributions
Non-concessional super contributions are payments you put into your super from your savings or from income you have already paid tax on. They are not taxed when they are received by your super fund.
The current cap is $110,000 per year or $330,000 brought forward over 3 years.
This will be increased to $120,000 per year or $360,000 brought forward over 3 years from 1 July 2024.
The pre-existing work test was abolished on 1 July 2022 for those aged under 75 looking to make non concessional contributions. This change has created an opportunity for individuals who are aged over 67 (but under 75), to boost their superannuation balances without undertaking paid work.
As we approach the end of the 2024 financial year (and the start of the new financial year), there is an opportunity to contribute $110,000 this financial year and $360,000 on or after 1 July 2024. This will allow you to effectively contribute $470,000 over a relatively short period of time. It is important that professional advice is sought before using the bring forward provisions.
Important Notes:
If you are over the age of 75, non-concessional contributions are not permitted.
Individuals with total superannuation balances of $1.9m or more on 1 July 2023 are not eligible to make non-concessional contributions to superannuation this financial year.
A non-concessional contribution of $330,000 brought forward over 3 years would only be applicable for those people that have not exceeded their annual non-concessional contribution cap of $110,000 in the prior 2 financial years.
If you are under age 71, engaged in employment and your total income is less than $43,445, the government will co-contribute 50 cents for every $1 of any non-concessional super contributions that you make, up to a maximum of $500. A reduced amount is available for those with income below $58,445.
Note, your super contribution will not be counted for this financial year unless the payment is received by your super fund prior to 30 June 2024. This is not necessarily the date it leaves your bank account so check with your fund on any cut off dates to ensure the contribution is received before 30 June.
4
Draw Your Minimum Superannuation Pension Before 30 June
If you are drawing a superannuation pension, please ensure that your fund has paid you the minimum pension before 30 June 2024. The minimum pension for the year is based on a percentage of your fund member balance as at the 1st of July or a pro-rata amount if the pension was commenced during the year.
For those with Self Managed Superannuation, costs incurred in running the fund do not count towards the minimum pension drawdown. This is important as the ATO will deny tax-free concessions for superannuation fund earnings where the minimum pension is not taken.
5
Consider Starting a Pension from Superannuation
If you are over the age of 60, consider commencing a pension from your super fund.
For those still working and over 60 but under 65, a “transition to retirement income stream” (TRIS) allows you to draw up to a maximum of 10% of your account balance each year. This strategy allows you to increase superannuation contributions (either through salary sacrifice or personal concessional contributions) which in turn reduces personal tax whilst supplementing the reduced take-home pay with tax-free withdrawals from the superfund.
Alternatively, if you are over 65 or at least 60 and retired or cease employment then you may be eligible to commence a retirement phase pension. The earnings on super funds paying retirement phase pensions are tax free up to the pension transfer balance cap currently set at $1.9 million.
6
First Home Savers
The First Home Super Saver (FHSS) scheme allows you to save money for your first home in your super fund.
Under the FHSS Scheme, voluntary contributions (both before-tax concessional and after-tax non-concessional) can be made into your super fund to save for your first home. Note that the standard employer super guarantee contributions will not count towards the scheme.
Under the scheme, you can withdraw up to $15,000 of eligible contributions made over a financial year or up to $50,000 in total for all years. Non-concessional contributions can be withdrawn tax free. Concessional contributions and total earnings will be taxed at marginal tax rates with a tax offset of 30%.
7
Organise Appropriate Valuations for Any Unlisted Assets or Real Property in Your SMSF
ATO data analysis has revealed that over 16,500 self managed superannuation funds (SMSFs) have reported assets as having the same value for three consecutive years. For trustees of SMSFs, where asset values are consistently reported at the same value, the ATO have indicated it’s likely your SMSF will be flagged for closer scrutiny by the ATO.
Each year, the assets of your SMSF must be valued at ‘market value’ and evidence provided to your auditor.
In most cases, the ATO require trustees to value an asset based on “objective and supportable data”. This may come from an external professional or from the trustee’s own research, both of which should contain comparable sales. The ATO expects that trustees should document the asset being valued, a rational explanation for the valuation, and the method in which the value is arrived at.
This is a hot topic with the ATO and a further blog post exploring this in more detail will be coming shortly.
8
Review of Estate Planning
Consider a review of your broader estate planning needs including determining whether Binding Death Benefit Nominations (BDBN) need to be drafted or updated for your superannuation benefits. Get in touch with us to discuss your requirements further.
SMSF trustees must consider whether their current trust deed allows the fund to take advantage of these strategies. Without an up-to-date deed, the trustee may not be able to operate in the manner that it wishes, without being in breach of the rules of the Fund. FMA therefore recommends that all SMSF holders, who have not reviewed their trust deed in the last 6 years, consider a deed update in light of recent and upcoming superannuation changes.
As always the FMA team are here to help. If you have queries regarding any of the content in this newsletter, please do no hesitate to contact our office directly on 02 9540 6888 or via email at info@fmapartners.com.au.
Disclaimer: The material and contents provided are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained. Please do not hesitate to contact the team at FMA Partners to discuss further.