Supersizing Super

For many years, a ‘work test’ has greatly restricted clients from adding to superannuation beyond the age of 67 years and optimising the tax effectiveness of their overall wealth structure. As of 1 July 2022, this work test has been abolished. What this creates is a suite of opportunities for members aged under 75 years to contribute to super, applying strategies to enhance and secure their self-funded retirement savings and improve estate planning through after-tax death benefits left to beneficiaries.

Notwithstanding the change to the work test, annual contribution limits still apply which mean it can take a plan spanning many years to maximise superannuation. Now into the second half of this financial year, there are a number of strategies that could be adopted over the next six months to utilise this year’s contribution opportunity, three of which we have outlined in brief below.

Strategy: The most immediate strategy now available to members between the ages of 67 and 74 is to simply add funds. Clients often experience capital realisation events throughout life, such as the sale of assets, sale of business and inheritance; but if you experience such an event later in life, you may have missed the opportunity to add this capital to superannuation if you were not able to meet the former work test.

As of this financial year, you are now able to make Non-Concessional Contributions of $110,000 per year, or three years’ worth ($330,000) ‘upfront’ under the bring-forward provisions. The Total Superannuation Balance (‘TSB’) caveat does however still apply, so contributions can only be made in so far as your balance remains below the $1.7 million limit.

More strategically, ‘straddling’ contributions either side of 30 June can allow you to move more significant amounts into the lower-tax superannuation environment quickly.

Superannuation is concessionally-taxed and investing funds within that environment often results in lower tax on earnings as compared to investing in your own name or via a Trust. Furthermore, if you are operating a pension where earnings are tax-free, investing within superannuation maximises your after-tax earnings and the longevity of your capital.

Strategy: You and your spouse may have significantly different superannuation balances, however, each of you are entitled to a maximum Transfer Balance Cap (‘TBC’) of $1.7 million, being the maximum that can be converted into a tax-free income stream in retirement. Couples who are comfortable strategically spreading their wealth may be able to redistribute their balances to ultimately achieve a combined $3.4 million in the tax-free retirement phase.

Julie has $2 million in superannuation and her husband, Mike, has $1 million; a combined balance of $3 million. Both are aged 70 and have retired from work. Given the Transfer Balance Cap (‘TBC’) of $1.7 million, Julie’s total superannuation is split between $1.7 million in pension and $300,000 in accumulation mode. The earnings on Julie’s accumulation balance will be taxed at 15%, whereas earnings on pension balances are tax-free. As Mike still has an available TBC of $700,000, the couple’s overall tax position could be improved if Julie’s accumulation balance was redistributed to Mike. Simplifying the many technical steps involved, Julie would withdraw her $300,000 accumulation balance, Mike would contribute this $300,000 to his superannuation account as a bring-forward Non-Concessional Contribution (discussed in strategy 1) and convert the balance to pension mode. This ‘Balance Equalisation’ strategy would see 100% of the couple’s superannuation in tax-free pension mode.

While we have been advising our clients on this strategy for many years, the removal of the work test now makes it a viable and attractive strategy for a much broader group of clients.

This strategy effectively converts a taxable accumulation balance to a tax-free pension balance, saving 15% tax on earnings and improving the quantum and character of after-tax capital.

Strategy: If you are aged 60 years and over, you are probably aware that any amount you withdraw from superannuation is tax-free, but did you know the same is not necessarily true after you pass away? Every superannuation balance is categorised into tax components; the two most common being ‘taxable’ and ‘tax-free’, and the proportion in each of these components will determine how much tax your nominated beneficiaries will pay when inheriting your superannuation. This is a crucial but often overlooked factor in superannuation and estate planning.

If your nominated beneficiary is your spouse or a dependent (for example, a child under 18 years of age), your superannuation balance will always be paid to them tax-free, even if 100% of your balance is made up of a taxable component.

If your nominated beneficiary is not a dependent (for example, you nominate an adult child), the underlying components of your superannuation determine the tax. The proportion of your balance that sits in the tax-free component will be paid to your non-dependent beneficiary as the name suggests: tax-free, but the proportion that sits in the taxable component will attract tax of 17%.

To minimise the tax paid by your beneficiaries, the objective is therefore to maximise your tax-free component. This can be achieved through a ‘recontribution strategy’ whereby existing superannuation monies are withdrawn and recontributed as a Non-Concessional Contribution (NCC), which are treated as additions to the tax-free component.

Say you have a balance of $1 million; a $500,000 taxable component and a $500,000 tax-free component (50%/50%). You wish for your superannuation to be paid to your two adult children on your passing. Assuming you have met a condition of release, you could withdraw $300,000 which is treated as a proportional 50%/50% reduction in tax components. This leaves a balance of $700,000 made up of $350,000 in each of the taxable and tax-free components (50%/50%). You could then recontribute the $300,000 as an NCC, returning your balance to $1 million. However, an NCC is always a tax-free contribution, so your post-recontribution components are now $350,000 taxable and $650,000 tax-free (35%/65%). This example shows that without reducing the total funds in superannuation, a recontribution strategy has converted $150,000 from a taxable component to a tax-free component, reducing the potential ‘death benefit tax’ by $25,500.

Similar to the above, this strategy itself is not new, but now available to those aged 67 to 74 years as a result of the work test changes.

Whilst there is typically no financial benefit to you of a recontribution strategy, by improving the tax character of your superannuation balance you are leaving a more significant legacy to your beneficiaries.

Superannuation is one of the most tax-effective structures to operate wealth for retirement and with expert advice, can be utilised to its full potential, allowing clients to achieve their optimal wealth goals. As advisers, we understand the intricacies and immense detail and are able to guide and advise a strategy to best suit a client’s circumstances.

For over 50 years, Cameron Harrison has been navigating journeys for private investors and families with significant wealth to help their businesses succeed, and their wealth grow and be protected now and for future generations.

To discuss your superannuation contribution or longer-term retirement plans, please contact us on +613 9655 5000.