Now more than ever there, there are more ways to boost your wealth with super contributions and the recent relaxing of the rules gives you scope to put money into your retirement fund, at a time that suits your circumstances and stage in life.
Superannuation – the most tax-effective investment vehicle
Since it became compulsory 30 years ago, superannuation has been the most tax-effective investment vehicle for saving for retirement. It is also well-regulated and offers a wide range of providers and investment options – meaning there is something to suit everyone.
For most people, contributing extra money to super to provide additional income in retirement is the best thing to do.
Superannuation rules have become increasingly restrictive
Over the past 15 years, limits on how much can be contributed, and by whom, have become increasingly restrictive. Further, amounts that can be taken from super in a tax-effective manner have been pared back, providing a double whammy to the super system, and prompting investors to look at other approaches.
The other option has been to start making additional contributions at a younger age, but this often isn’t a possibility for people in their 20s or 30s, particularly as it means the money is locked away.
Relaxation of eligibility rules for contributions
Pleasingly, in the past few years there has been some relaxing of the eligibility rules for contributions, giving people scope to put money into their super at a time that suits them.
One key change came into effect on July 1, 2022 regarding the work test. It means those younger than 75 no longer need to demonstrate that they are working at least part-time to make non-concessional (non-tax-deductible) super contributions. Previously, this was only open to those under 67 and further breaks the nexus between employment and super contributions. This can be very helpful if people receive an inheritance or sell an asset after retirement.
The law has been amended to reduce the eligibility age to make downsizer contributions into superannuation from 65 to 60.
Non-concessional contributions can be up to $110,000 a year, as long as the total super balance is less than $1.7 million.
Three years’ worth of contributions, up to $330,000, can be made as long as the total super balance is below $1.48 million, but this rules out any further contributions for the next two financial years.
Another welcome change from 1 July 2022, is that the age limit for the downsizer contribution has dropped from 65 to 60. This applies to those selling their primary residence and, if conditions are met, allows a contribution of up to $300,000 to super. It is not subject to non-concessional contribution limits, even though it is treated as an after-tax contribution.
A third recent change that is not well known is that if you have made less than the maximum concessional contribution to super since the 2018-19 financial year, you can make up that shortfall in the next five financial years, as long as your total super balance is less than $500,000 at the start of the financial year.
This can be handy for those re-entering the workforce after a break, or as their income increases and they get closer to retirement. The catch-up contributions can be made personally and claimed as a personal tax deduction, or in the form of extra employer (salary-sacrifice) contributions.
Different styles of superannuation contributions
The different styles of contribution (possibly in order of effectiveness but certainly depending on individual circumstances) are:
- Catch-up concessional contributions (employer or personal): for those with a total super balance under $500,000 who haven’t made the maximum contribution in recent years.
- Concessional contributions (employer or personal): up to $27,500 a year, although the work test needs to be satisfied from age 67. There is no limit regarding total super balance.
- Non-concessional contributions: up to $110,000 a year while total super balance is less than $1.7 million. There is no work test up to age 75, and you may be able to make three years’ worth of contributions in one go.
- Downsizer contribution: up to $300,000 on the sale of the primary residence. There is no limit regarding total super balance.
- Capital gains tax exempt contribution – upon sale of a business, up to $1.65 million (lifetime cap). There is no limit regarding total super balance.
Of these, the concessional contributions, downsizer and CGT-exempt contributions are not subject to the total super balance cap of $1.7 million. Earnings of the fund can also take balances above $1.7 million, meaning it is still possible to build superannuation balances above this level, and twice that for a couple.
Overall, these changes give people more options to contribute to super as they get older and reach retirement and are a welcome shift in approach by the government.
How can Walsh Accountants help?
The rules around these superannuation contributions can be complicated and it’s important to navigate the system appropriately.
If you’re looking to make additional superannuation contributions, we highly recommend you speak with our SMSF Manager Grant Sloggett. He will be able to assess your personal circumstances giving you guidance on the most tax effective and financially sensible way in which for you to make additional contributions.