Meg Heffron
Managing Director
The Treasurer announced 4 significant changes for superannuation contributions in the Federal Budget, all of which are expected to start from 1 July 2022 (subject to the relevant legislation receiving Royal Assent before that date).
They are:
- Making downsizer contributions available earlier (from age 60 rather than 65),
- Removing the work test for certain contributions for those between 67 and 74,
- Extending the bring forward rules up until 74 (we think), and
- Increasing the amount that can be withdrawn to purchase a first home under the First Home Savers Super Scheme from $30,000 to $50,000.
Downsizer contributions
The ability to make special extra contributions of up to $300,000 (or $600,000 in total for a couple) on selling a home has been around since 1 July 2018. The rules allow anyone who meets the eligibility criteria to make a “downsizer” contribution no matter how much money they already have in super.
Currently, it is only available to those who are over 65 at the time the contribution is made. The budget proposal, however, is to lower this to age 60. Since individuals are only allowed one downsizer contribution over their lifetime, this won’t necessarily mean individuals can contribute vastly more to super. But it will mean they can contribute earlier.
It will also create an interesting planning environment where individuals in the crucial 60-65 period (or in fact 60-74 if the changes to bring forward rules outlined below also become law) will be juggling both downsizer contribution opportunities and traditional non-concessional contribution/bring forward rules at the same time. Until now, the two have been mostly mutually exclusive. Under current law, for example, bring forward contributions can only be initiated up until the year in which the individual turns 65 and downsizer contributions are only possible after age 65. In the future they may well happen at the same time and the order could be important.
For example, let’s imagine the new rules are in place as planned for 2022/23. At 30 June 2022, Trish is 61 and has $1.4m in super. There have been no changes to the general transfer balance cap or the concessional contribution cap since 1 July 2021. She intends to sell her house and would also like to transfer some shares she owns personally into the fund as an in specie contribution using the bring forward rules.
In Trish’s mind the two events are not connected but in fact timing is everything. If Trish sells her house and makes a $300,000 downsizer contribution in 2022/23, she may find that her total super balance rules her out of making large non-concessional contributions in 2023/24.
In contrast, if she makes both contributions in 2022/23, she’ll be fine (her 30 June 2022 balance will be low enough to allow the normal three year bring forward allowance).
Equally, she could use the bring forward rules in 2022/23 and even sell the house in 2023/24 (making a downsizer contribution that year) because – fortunately – the size of her 30 June 2023 balance doesn’t matter when it comes to making a downsizer contribution.
Another crucial point – bringing downsizer contributions into play earlier means they will be preserved. If Trish wants to start a retirement phase pension with her downsizer contributions as soon as they have been made she will need to ensure that she’s either permanently retired (and doesn’t intend to work 10 or more hours per week in the future) or she will need to end a paid employment arrangement after she makes the contribution. This is not something we’ve had to contemplate to date because downsizer contributions have only ever been made after 65 – at which point preservation is no longer an issue.
Removing the work test for certain contributions
Can I just say what we’re all thinking? Hallelujah! No-one likes the work test – it introduces complexity, it creates risk (is the work I’m doing really enough?) and results in crazy situations where someone is not actually allowed to contribute until they’ve met the work test for the year even if they obviously will do so at some point. More fundamentally, it places an artificial barrier in the way of older people making super contributions. If we’re happy for workers to get more into super, why aren’t we happy for non workers to do so?
The budget proposal is that the work test would simply disappear for non-concessional or salary sacrifice contributions. Instead, the rules would be that these contributions can be made up until 74 (well, the fact sheet talks about age 74 but in reality, the way the current legislation is drafted, I suspect it would be “the 28th day of the month after the individual turns 75”).
The one fly in the ointment is that the Government’s fact sheet specifically differentiates between “salary sacrifice contributions” and “personal deductible contributions”. The work test would continue to apply for the latter. Seriously? Why make life complicated? The rules surrounding personal deductible contributions were simplified only a few years ago to make them more universally available (previously, only those who earned less than 10% of their income from employment could make them). Surely, we’re not going to taint a really good simplification measure like removing the work test by carving out just one class of contribution that still has to jump through that hoop!
I hope some sanity prevails here.
Extending the bring forward age to 74
This announcement appears almost accidentally placed in the middle of a sentence in the budget papers but the meaning seems clear – the Government proposes to allow anyone (no work test required) to use the bring forward rules right up until 74 (or probably “the end of the year in which they turn 75”) as long as they meet the usual eligibility criteria. We assume the “usual eligibility criteria” are the limits based on the member’s total superannuation balance. For example, someone intending to bring forward their contribution limits to contribute three years’ worth of non-concessional contributions at once in 2021/22 would need to have a total super balance of less than $1.48m at 30 June 2021.
In last year’s budget, the Government announced its intention to extend the bring forward age from 65 to 67 and that this would come into effect from 1 July 2020. That change has not made it through the Senate. I expect that legislation will be quietly dropped and replaced by a more far reaching change that extends the bring forward age well beyond 67 from (probably) 1 July 2022.
It certainly does allow older Australians who have missed out on super to get some additional contributions into their fund (SMSF or otherwise) in their later years. The Government still has the comfort of knowing that this additional concession can’t cost too much because the total super balance limits will still apply.
I mainly like it because it’s simple – if contributions can continue right up until 74, why have a different cut off age for bringing forward?
Increasing the amount that can be withdrawn under the FHSSS
This is the scheme that allows first home buyers to access some of their superannuation to put towards a deposit for their new home. Currently the limit is $30,000 and the proposal is to increase it to $50,000.
To date, we have seen very little uptake of this in SMSFs, probably for a number of reasons:
- While the average age of SMSF members is certainly coming down, it is still rare for an SMSF to be established before climbing the first rung of the housing ladder,
- As a general rule, it is only relevant for those whose personal income tax rate is above 30%, and
- Only “voluntary” contributions can be accessed and at most $15,000 of the contributions in any one year can be included in the withdrawal.
There is no proposal to change the $15,000 pa restriction – hence those wishing to access the full $50,000 would need to build up their voluntary super over several years. There were also some technical changes to the scheme.
All in all, there are several changes here that will have a positive impact on SMSF members – particularly those reaching the crucial 60+ age bracket who were concerned at missing the opportunity to maximise their balances.
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