Advisers urged to review TTR strategies after SG increase

While there was also an increase in SG rate for the 2021–22 financial year, Mr Day said the increase this year may have a slightly different impact as there is no increase in the concessional cap for the 2022-23 financial year.

“When we saw the rate of SG go from 9.5 per cent to 10 per cent, which was the first increase in quite some time, we also saw concessional contribution cap increase by $2,500 from 25,000 to $27,500,” Mr Day explained in a recent CFS FirstTech podcast. 

“That increase in the concessional cap compensated for the increase in the SG, but we’re not seeing that increase in the cap this year — it’s going to stay at $27,500, which means [SG] will chew up more of the cap space that’s left for salary sacrifice strategies.”

This means that clients who contribute up to maximum concessional cap may need to review their strategies for the 2022–23 financial year, he said.

Mr Day said clients using transition to retirement (TTR) strategies may also need to think about how the increase in SG will impact them.

“Transition to retirement strategies generally involve salary sacrificing, or making personal deductible contributions, up to the annual cap and then drawing TTR pension payments back out to replace that lost income,” Mr Day explained.

Speaking in the same podcast, CFS senior technical services manager Peter Wheatland explained that if the client is contributing up to the annual concessional cap of $27,500 and they're not able to use carry forward concessional contributions, then the increase in SG will mean that they have less concessional contribution cap available and will therefore need to reduce their salary sacrifice contributions.

Mr Wheatland said the impact of the SG increase on a TTR strategy will be different depending on what type of remuneration package they receive.

“So, if they receive X amount of salary plus SG, the reduction in salary sacrifice will actually increase their salary, which means they can reduce the pension payments from the TTR pension and have the same net cash flow,” he said.

However, it's important for advisers to take into account their client’s whole cash flow situation, he explained, particularly as the low and middle income tax offset has been removed for the 2022-23 financial year.

“This might increase their tax liability and would need to be taken into account when adjusting their TTR pension payments,” he said.

“Advisers need to sit down and figure out what’s happening with the [client’s] cash flow, what the impact is on their salary sacrifice and their TTR as well as taking into account the loss of the LMITO and factor all that in,” said Mr Day.

For clients on a remuneration package that is inclusive of SG, Mr Wheatland said the increase in SG will actually reduce their salary and they'll also need to reduce the amount of salary sacrifice to ensure they don't exceed the concessional cap.

“Whether they need to change the level of TTR payments will also depend on their total cash flow situation, including the removal of LMITO next financial year,” he added.