Under previous rules, clients aged between 67 and 74 (including up to 28 days after the end of the month the member turned 75) were required to meet the work test before making a contribution.
However, from 1 July, that requirement was removed (except where individuals wish to claim a deduction for their personal superannuation contribution).
As a result, clients in this age group can now make voluntary contributions, such as personal non-concessional contributions, all the way up to the upper age limit, which is 28 days after the end of the month in which they turned 75.
According to Colonial First State head of technical services Craig Day, these changes could allow clients in this age group to top up their super and implement a recontribution strategy to minimise any potential death benefit tax that may apply in the future.
This would involve withdrawing amounts of the taxable component and then recontributing that as a non-concessional contribution, which converts them to a tax-free component.
However, Mr Day said that because the age limit has increased to 75, it has become more complex because clients in this age bracket are most likely already retired.
“Therefore, instead of just withdrawing the amount of tax-free money from their accumulation account and then re-contributing it back into superannuation, we are instead likely to be fully or partially commuting an existing account-based pension,” he told SMSF Adviser.
“As soon as we start talking about commutation, things start to get a lot more complicated because we’re looking at superannuation rules in relation to when an amount out of an account-based pension can be commuted and the requirements around paying pro-rata pension payments.”
Mr Day’s comments preceded the SMSF Adviser Technical Strategy Day 2022, which will be held in Melbourne, Sydney, and Brisbane in October.
Mr Day will present a session at the conference where he will explore new possibilities for SMSFs with contribution strategies in light of recent regulatory and legislative changes, and provide a detailed view of the evolving contributions landscape and the benefits of recontribution strategies for estate planning and tax.
Spouse recontribution strategies
Mr Day also called attention to recontribution strategies that could maximise benefits for clients under the transfer balance cap rules by using a spouse recontribution strategy.
The transfer balance cap is applied on an individual level rather than across both members of a couple.
As a result, if one spouse has the vast majority of the super savings and has been limited by the amount, they can transfer into the tax-free retirement phase by the transfer balance cap while their spouse has the spare cap available.
In these situations, a recontribution strategy involving a spouse contribution could be very effective in evening up the couple’s super balances and therefore maximising the amount that can be transferred to the tax-free retirement phase.
However, as part of any super top-up or recontribution strategy it will be critical to also take into account the non-concessional cap rules. While the 1 July changes will allow a super fund to accept contributions from members in this age group, the non-concessional cap rules could still effectively limit a person’s ability to make non-concessional contributions.
For example, if the client’s total superannuation balance on 30 June 2022 was over $1.7 million, their non-concessional cap for 2022–23 would be nil.
“We absolutely need to take into account those non-concessional contribution cap rules and the client’s total super balance, and what would count towards that,” Mr Day said.
Other factors to consider
In addition to these new layers of complexity around recontribution strategies, advisers are required to consider potential social security implications for their clients because while they may have an SMSF, they may also be entitled to a concession card, such as the Commonwealth Seniors Health Card or a full or part age pension payment depending on their circumstances.
“If clients have got a grandfathered account-based pension, then any sort of commutation strategy could put at risk their eligibility to their concession card, or result in a reduction in their age pension entitlement or even potentially an increase,” Mr Day flagged.
“So, we need to understand all of these rules when attempting to implement re-contribution strategies for our clients.”
To hear more from Craig Day about the new opportunities for SMSFs around contribution strategies and how different contributions interact, come along to the SMSF Adviser Technical Strategy Day 2022.
It will be held on Thursday, 6 October at Crown Towers in Melbourne; Friday, 14 October at the Four Seasons Hotel in Sydney; and Wednesday, 26 October at the Brisbane Convention and Exhibition Centre.
Click here to buy tickets to the conference and secure your spot today!
For more information about the conference, including agenda and speakers, click here.
The opposite in fact, they have stated they would be ok with the strategy. Although there was a stipulation around the frequency and with contribution limits as they are you may have to do this a few times. This is less certain however there are still some natural protections.
Part IVA requires that the [i]tax payer[/i] gain an advantage, they generally don’t, the kids do, Part IVA then can be defended on that principle. The only application would therefore be legislative risk, it’s still a long bow that Part IVA could be applied to gain a tax advantage in case they change the law and they start taxing pensions.
Lastly I would be surprised if the ATO suddenly decided to go and slam what would largely be regular Australians without making it prospective given their previously stated leniencey.
Why would you re-contribute for the same member? I mean what is the “dominant purpose” of the transaction: reduce the taxed element in favour of the tax free in the event of death? Hasn’t the ATO already stated that they consider this subject to Part IVA?