New contribution caps to impact SMSF TTR strategies
With the new financial year seeing increases to contributions caps, the changes will affect different opportunities in the TTR strategy for SMSFs along with different considerations on tax implications that can be utilised, according to a technical specialist.
TTR strategies typically involve the use of a transition to retirement (TTR) income stream, which can be commenced once a client reaches their preservation age, without having to meet a full condition of release such as retirement.
In a recent technical update, Colonial First State senior technical manager Tim Sanderson said that with the changes in superannuation thresholds, the effectiveness of TTR strategies that had changed in 2017–18 will now change again in 2021–22.
He noted the TTR and concessional contributions strategies for clients aged 60 or over gain their benefit from making concessional contributions (lowering taxable income) and replacing the lost income with tax-free income stream payments.
“A higher concessional cap will therefore, in many cases, allow a more beneficial TTR strategy for these clients,” Mr Sanderson said in a recent Colonial FirstTech update.
“The non-concessional cap will also increase to $110,000 on 1 July 2021. This may allow some TTR client strategies to achieve their objectives more quickly, for example, where a client is drawing income from a TTR pension so that their spouse can then make non-concessional contributions to equalise superannuation balances between them.”
When it comes to carry-forward concessional contributions, Mr Sanderson noted that since 1 July 2019, clients that have unused concessional cap amounts from the previous five financial years can make use of these amounts to increase their concessional cap in a financial year, provided their total superannuation balance at 30 June prior to the financial year is less than $500,000.
“Clients who are commencing a TTR and concessional contributions strategy, and have unused cap amounts that they are eligible to carry forward, may be able to benefit more from their TTR strategy by making higher concessional contributions,” Mr Sanderson said.
“Depending on their situation (including TTR income stream balance and assessable income), this could include utilising all unused cap amounts in the first year of their strategy to maximise concessional contributions in that year or spreading out the use of their unused cap amounts throughout their TTR strategy.
“While spreading out unused cap amounts over the course of a TTR strategy may allow a greater tax saving (due to the progressive nature of marginal tax rates [MTRs]), it is important to ensure that unused cap amounts are not unintentionally lost due to the expiry of the five-financial-year time frame, or the client’s total superannuation balance increasing to $500,000 or more at 30 June prior to a financial year.”
Impacts from increasing SG rates and changes to personal income tax rates
With the changes in TTR strategies, it is also important to consider the superannuation guarantee (SG) rate, which has been maintained at 9.5 per cent since 1 July 2014, and increased to 10 per cent on 1 July 2021.
Under current legislation, this rate will further increase by half a percentage point each year until it reaches 12 per cent on 1 July 2025.
Mr Sanderson noted the SG rate impacts the effectiveness of TTR and concessional contributions strategies for employee clients by lowering the spare concessional cap available to the client to make further concessional contributions under the strategy.
For example, where a client has a salary of $150,000, in 2020–21, their spare concessional cap is $10,750 after 9.5 per cent SG. In 2021–22, their spare concessional cap is $12,500 after 10 per cent SG (higher due to $27,500 concessional cap), and in 2024–25, their spare concessional cap is reduced to $9,500 after 12 per cent SG, and further indexation of the concessional cap in the future may increase this figure.
“As well as lowering the spare concessional cap available, the increasing SG rate will make at least an annual review of TTR strategies very important to ensure that the strategy is maximised while not exceeding the concessional cap,” Mr Sanderson said.
“For self-employed clients not receiving SG, the change to the SG rate will have no impact on TTR strategies.”
The impact of changes to personal income tax rates and thresholds will also come into play strategically, as the government’s legislated three-stage tax plan has already increased the income tax thresholds, according to Mr Sanderson.
“A more generous low income tax offset (LITO) had also been introduced (1 July 2020), while a temporary low and middle income tax offset (LMITO) was introduced, and while due to end on 1 July 2021, the government has recently proposed extending to the 2021–22 year,” he explained.
“The following further tax changes are legislated from 1 July 2024, reducing the 32.5 per cent MTR to 30 per cent, removing the 37 per cent MTR and extending the threshold above which the 45 per cent MTR applies from $180,000 to $200,000.
“As a general rule, these personal tax reductions have or will negatively impact on the benefit of TTR and concessional contributions strategies in some situations, as the tax saving produced by salary sacrifice or personal concessional contributions will be less.”