- increasing the super guarantee (SG) rate from 9% to 12% (over the next 10 years)
- providing a contribution of up to $500 for workers with incomes up to $37,000
- extend the super guarantee age to 75 years (from 70)
- allow for concessional contributions of up to $50,000 for those over 50 where their account balance is less than $500,000
‘Doubling’ of the concessional cap
There is an effective ‘doubling’ of the concessional contribution limit to $50,000 for those over 50 years of age with an account balance of less than $500,000 from 1 July 2012. This is expected to provide greater flexibility for those nearing retirement by continuing with a separate higher concessional contributions cap.
The government view is that this will allow individuals to ‘catch up’ on their superannuation contributions at the stage in their lives when they are most able to do so. It will particularly benefit those who have had periods outside the workforce.
At first glance, there appear to be two strategies that may have application to take advantage of the larger concessional contribution amount. These are:
- Contribution splitting with spouses; and
- Using SMSF Reserves
1. Contribution splitting with spouses
For a single income family (or predominantly so), it is quite clear as a strategy to consider the use of contribution splitting to allow for the main ‘breadwinner’ to keep their balance under the threshold and allow for them to continue maximising their concessional contributions to $50,000 each year (where over 50).
I can understand the gesture by government to assist parents (typically women) who have been out of the work force to ‘catch up’ on their retirement savings. However, the reality in many cases would be that this person would typically not have a capacity to earn an amount to make a $50,000 concessional contribution work (after factoring in tax-free thresholds, etc.). The reverse however would typically apply to the primary income producer of the household.
Structured correctly, this strategy over a 10 year period could create an additional after-tax amount of $212,500 into super with concessional contributions (without factoring any fund earnings on this money). I’ll provide a worked example of this soon.
I believe this strategy needs to be considered immediately for clients under this $500k threshold, especially those getting ‘close to the mark’. You would anticipate a valuation at 30 June each year to be the determining factor to make larger contributions for the financial year ahead. An important note with contribution splitting is that this can’t be split until after year end (1 July), so careful planning will be required (in particular with salary sacrifice amounts)!!
2. Fund Reserves
The ability to ‘park’ income generated by the fund into an investment reserve is available within an SMSF environment and would allow for the members balance not to reach the $500,000 threshold and allow them to maximise contributions of up to $50,000 each year.
Once a member has reached this figure using concessional and non-concessional contributions, the fund could look to make allocations from the reserves back to the members in a ‘fair and reasonable’ manner. Furthermore, consideration would need to be given to staying within the 5% of the member’s balance when allocating from the reserves.
Refer to blog, “10 things you need to know about using SMSF reserves” for more details.
This measure will take effect from 1 July 2012 when the existing transitional concessional contributions cap was due to fall to $25,000. The Government will consult with the superannuation industry on the operation of the $500,000 threshold.
I love to hear from reader about any further super strategies you think may be available as a result of these budget announcements?