The latest Self Managed Superannuation Fund updates
Pensions for 2023 – Reminder to pay before 30 June.
The Government has continued its 50% temporary reduction for superannuation minimum drawdown requirements for account-based pensions and transition to retirement pensions for the 2023 financial year. This measure will benefit retirees by reducing the need to sell investment assets to fund minimum drawdown requirements.
Your 2023 COVID-19 adjusted minimum pension was communicated to you at completion of your superannuation work for the 2022 year.
If a super fund fails to physically pay sufficient pensions to meet its minimum obligations, the fund will not be entitled to the tax exemption (i.e. it will lose its tax free income status). Other than in specific circumstances, it is not acceptable for the fund to accrue any pension shortfall in its financial statements.
Importantly, pensions paid by electronic transfer need to clear the super fund bank account on or before 30 June to be considered a pension for that year.
The COVID-19 pension reduction ceases on 30 June 2023. Therefore, from 1 July 2023 (and for the 2023/2024 financial year) minimum pensions will revert back to their pre-pandemic rates.
Superannuation contribution caps from 1 July 2023.
From 1 July 2023, the superannuation concessional and non-concessional contribution caps will remain at their current levels. There will be an indexation increase however to the maximum amount members can have in superannuation before non-concessional caps are prohibited. The contribution caps for the 2022/2023 financial year are:
Concessional cap - $27,500
Non-Concessional cap - $110,000 or $330,000 over 3 years
The Total Superannuation Balance (TSB) limit that determines if an individual has a non-concessional contributions cap of nil is increasing from 1 July 2023 from $1.7M to $1.9M. The $1.9M TSB cap remains in place for the FY23 year. The TSB cap and its function is explained further below.
Non-concessional contributions and the work test.
From 1 July 2022, passing the work test has not been required for those eligible to make a non-concessional contribution to super. In addition, the bring forward 3 year non-concessional rule (allowing non-concessional contributions of up to $330,000 in one financial year) was extended to those up to the age of 75. Note that the work test (40 hours work in a 30 day period) is still required for those over the age of 67 who seek to make a concessional contribution to super.
Super guarantee increasing from 10.5% to 11% on 1st July 2023.
On 1 July 2022, the super guarantee charge (SGC) will rise from 10.5% to 11%. If you have employees, you will need to ensure your payroll and accounting systems are updated to incorporate the increase to the super rate. From 1 July 2022 the minimum threshold for paying SGC was removed. This means that all employees, even those that earn less than $450 per month are eligible to receive superannuation payments from their employers.
The table below is a summary of the changes in the superannuation caps from the 2023 year to the 2024 year:
1. The annual concessional cap and carry forward concessional contributions – what do they mean?
Historically, the annual concessional (before-tax) contribution caps offered little flexibility for those who take time out of work, work part-time, or have ‘lumpy’ income and therefore have periods in which they make no or limited contributions to superannuation.
From 1 July 2019, the Government has allowed individuals with a total superannuation balance of less than $500,000 (just before the beginning of a financial year before a carry forward up contribution is made), to make ‘carry forward’ or ‘catch-up’ superannuation contributions. Individuals will be able to carry forward their unused concessional cap space from the 2019 financial year on a rolling basis for a period of five years. Amounts that have not been used after five years will expire.
Broadly, this means that, if an individual has not maximised their concessional cap in the FY19, FY20, FY21, FY22 or FY23 years, they can carry the unused amount of their annual contribution cap to the following year. For those that have a superannuation balance of less than $500K on 1 July 2023 and who have not made any concessional contributions (both employer or personal), then their concessional contribution cap for the FY24 year could be as high at $157,500.
As the contribution caps are a function of the individuals circumstances and not the superannuation fund, contact your accountant responsible for lodging your personal tax return to determine your modified (if applicable) contribution cap.
2. Non-concessional contributions
You can make after tax contributions to super that could come from your personal savings, transferring personal investments, an inheritance or from the sale of investments. For the 2023 and 2024 financial year the annual personal after tax contribution cap is $110,000. Further it may be possible to deposit up to 3 years of non-concessional contributions in the one financial year using the 3 Year Bring Forward Rule. This rule allows you to make substantial contributions to super and build up your retirement savings
Important: Key to the Government’s 2017 changes to superannuation were that, for those individuals with a Total Superannuation Balance (TSB) aggregated over all their super funds in excess of $1.7M, non-concessional contributions will generally not be allowable. In addition the 3 year bring forward provisions may be impacted if an individual’s superannuation balance is $1.4M or over. The specific workings of non-concessional contributions are technical in this regard and our office should be contacted for comment prior to considering such contributions.
From 1 July 2023 the TSB limit is being increased from $1.7M to $1.9M. This may allow those with superannuation balances less than $1.9M on 1 July 2023 the ability to still contribute non-concessional amounts to their super fund.
3. Total Superannuation Balance and Transfer Balance Cap.
On 1 July 2021 The Total Superannuation Balance (TSB) and Transfer Balance Caps (TBC) were uplifted by $100,000 to $1,700,000 each. This is being further uplifted to $1.9M on 1 July 2023.
The increase in the TSB will allow those with less than $1.9M in superannuation (on an individual basis) to contribute additional non-concessional contributions (as measured on the 1 July in the year of making the contribution).
The increase in the TBC will allow those commencing Account Based Pensions to start these pensions with a value of $1.9M (this has been limited between $1.6M and $1.7M from 1 July 2017). Importantly, for those that have already commenced an account based pension:
If the starting value of the account based pension was between $1.6M and $1.7M, no indexation is available.
If the starting value of the account based pension was less than the members TBC limit at commencement of the pension, then part indexation is available and the individual will have their own personal TBC.
4. The Work Test
If you are between ages 67 to 75 you will need to meet a work test to contribute a concessional contribution to superannuation. This means, in the financial year you intend to make a contribution, you need to be gainfully employed for at least 40 hours during 30 consecutive days in the financial year before the contribution is made. Gainful employment refers to an arrangement where the individual is being paid for services that individual renders and is generally achieved through such means as an employment arrangement, working as a contractor or through a partnership.
Downsizer contributions – a re-cap and reduction in eligibility age to 55.
From 1 July 2018 the Coalition introduced ‘downsizing’ provisions where, in the event you sell the family home, some of the proceeds from the home sale (up to a maximum of $600k for a couple) can be contributed to super. The key eligibility criteria for these provisions are as follows:
You (or your spouse) are 55 years old or over at the time you make a downsizer contribution (there is no maximum age limit).
The amount you are contributing is from the proceeds of selling your home where the contract of sale was exchanged on or after 1 July 2018.
Your home was owned by you or your spouse for 10 years or more prior to the sale.
The proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset.
You make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually the date of settlement.
These contributions are bound to be popular particularly when considering:
The size of the ‘new home’ is irrelevant for the purposes of accessing the downsizer contribution.
The downsizer contribution is available irrespective of a members superannuation balance (eg individuals can still access the downsizer contributions if their super balance is in excess of $1.9M)
The property being sold does not need to be your place of residence at the time of sale – merely it must have been your place of residence at some stage during the ownership period.
These contributions will not count towards non-concessional contribution caps.
A downsizer contribution can be made after receiving a deposit for the property with a subsequent downsizer contribution allowable from the settlement proceeds, subject to the sum of the contributions being no more than the $300,000 per person limit.
Please contact our office if you have further questions with regard to the downsizer contributions.
Administration changes from 1 July 2023.
In certain circumstances we are required to notify the ATO when withdrawals from superannuation in-excess of the minimum pension occur via a Transfer Balance Account Return (TBAR). Under the present rules, this notification is required either on a quarterly or annual basis (quarterly if the starting value of a pension was in excess of $1M).
From 1 July 2023 all super funds that are required to lodge a TBAR will be required to do so on a quarterly basis.
Bush & Campbell will work with clients impacted by this change and complete this process on behalf of the trustees obligations to the SMSF.
Tax rate proposed to increase for those with super balances over $3M.
As you will likely be aware, the current Federal Government has proposed a variety of changes to superannuation. On Tuesday, 28th February 2023, The Honourable Dr Jim Chalmers provided additional information on what these changes will be.
The below is a summary of these changes, as well as concerns and questions that we believe still need to be answered. Any change is yet to be formally presented in Parliament and will be subject to Royal Assent.
The Government proposes to introduce a third tax rate to the superannuation system for what they deem to be excessive superannuation balances of $3M or more. Currently, the tax rate for superannuation earnings in the accumulation phase is 15%, reducing to nil when in the pension phase.
Those in excess of $3M in superannuation will be able to retain their assets within super environment however earnings on assets in excess of $3M will be taxed at 30%.
The $3M test is on a per-person basis and not based on the total assets of the fund which could be held by multiple members.
The planned introduction is 1 July 2025. As a result the 2023/2024 and 2024/2025 financial years will not be impacted by these changes and there is adequate time in future to prepare for the consequences of any change and/or modify tax structures accordingly.
Application of changes
The planned penalty tax will impact earnings within superannuation funds where a member holds aggregate superannuation assets (over all their superannuation funds) in excess of $3m. Based on current understandings, any unrealised increase in the value of a superannuation investment will be classified as earnings.
Consider the example of Peter. Peter has a superannuation balance (invested in the one SMSF) of $4m on 1 July 2025. During the year the funds generates income of $300,000 in additional to having an increase in the unrealised value of its assets of an additional $200,000. At 30 June 2026 the value of Peter’s fund is now $4.5m.
The ATO will determine that Peter has $1.5m of superannuation assets in excess of the $3m threshold, representing 33.3% of the value of the super fund. The ATO will further determine that 33.3% of the $500,000 uplift in Peter’s superannuation value (which includes the unrealised capital gain) is a result of his excess superannuation assets and tax this portion of the funds ‘earnings’ at a 15% penalty tax rate. Peter will incur additional tax of $24,975 under the proposed changes. Peter will be able to pay this tax from the cash within the superannuation fund or from his own personal sources.
The proposed tax on unrealised capital gains is contrary to the current taxation system in Australia. Bush & Campbell is involved in advocacy against these proposed changes, particularly with regard to the taxing of unrealised capital gains.
The introduction of a third tax rate will further complicate what is an already complicated system. The introduction of the $1.6M Transfer Balance Caps and the Total Superannuation Balance rules in 2017 will broadly remove large superannuation balances from the superannuation system in time. Further, additional changes to superannuation create uncertainty for those seeking to build their superannuation and/or approaching retirement.
If you have questions with regard to the proposed changes to superannuation please contact Daniel Uden to discuss your concerns or questions.