Super changes for the new year

It is the start of a new financial year and as always, there are changes to the super system. Here are five important changes that came into effect on 1 July.

1.     Employers will now contribute 10% to super

The rate of employer contributions to super (the so called ‘super guarantee levy’) is increasing from 9.5% to 10.0%. If you earn $100,000, your employer will now contribute  $10,000 rather than $9,500 to your super fund.

Super is payable on salary and wages, including bonuses, but not overtime. Technically, it is not payable on amounts in excess of a salary of $235,680, although many employers choose to pay it.

2.     Contribution caps are increasing

Thanks to inflation and indexation, the cap on concessional contributions will increase from $25,000 a year to $27,500. Concessional contributions include your employer’s compulsory super guarantee levy of 10%, any additional salary sacrifice contributions you make, plus any amount you personally contribute and claim a tax deduction for.

If you have automatic salary sacrifice arrangements in place, you should check with your employer to make sure that these are still appropriate.

The cap on non-concessional contributions, which are amounts you contribute to super from your own monies, will also increase from $100,000 to $110,000 a year.

3.     65 and 66 year olds can make big ‘one-off’ contributions to super

Known as the ‘bring forward rule’, you can effectively access three years’ worth of non-concessional cap space. If you receive an inheritance, have a windfall gain or sell an asset you hold outside super, you can get $330,000 into super in one hit – a couple could contribute $660,000! You do this, of course, because super is usually the most tax efficient structure to hold investment assets.

But there are two important caveats. Firstly, you were aged 64 years or younger at some time during the financial year. This has now changed with effect from 1 July, meaning that those aged 65 and 66 (during 21/22) can access this provision.

Secondly, your total superannuation balance (as at 30/6/21) is under $1.48m. If it is between $1.48m and $1.59m, the maximum amount you can contribute is $220,00. If it is between $1.59m and $1.7m, the maximum amount is $110,000. Above $1.7m, you cannot make non-concessional contributions.

4.     The cap on pension balances is increasing

Due to indexation, the limit that controls how much super can be transferred to the “tax free” pension phase, the ‘transfer balance cap’, is increasing by $100,000 to $1.7m.

Pensions can’t be bigger than $1.7m. If your super balance is more than $1.7m, the excess can stay in the system in the ‘accumulation phase’. Here, investment earnings are taxed at 15% rather than the special rate of 0% which applies to pension monies.

If you accessed in full the old cap of $1.6m, you will not be eligible to contribute any additional monies into the pension phase. If you started a pension but didn’t access the full amount, you will get a proportional increase. For example, if under the old cap of $1.6m you started a pension of $800,000 and had cap space remaining of $800,000, post indexation, your cap space will increase proportionally to $850,000 (meaning that you transfer balance cap will now be $1,650,000).

5.     SMSFs can now have up to 6 members

Arguably, one of the more important changes is to increase the maximum number of members an SMSF can have from 4 to 6 members. Admittedly, most SMSFs currently have  only two members, but this change will open the way for larger families, small businesses and partnerships to pool their super monies into a SMSF.

The benefit of having more members is that with larger funds under management, the effective cost of running the SMSF falls. Many of the costs are fixed (such as audit, accounting, ATO levy, platform fees and admin), so more members translate into lower cost ratios.

Further, with the ATO clamping down on discretionary trusts, SMSFs are proving to be  attractive as both investment and estate planning vehicles. My guess is that more and more families will consider the use of a SMSF for these purposes.

One thing for sure is that with 6 members, you need to have a corporate trustee (that is, establish a special purpose company to act as the trustee of the SMF). In fact, once you have more than two members, a corporate trustee is the way to go.

Changes announced on Budget night, which include abolishing the ‘work test’ for those aged 67 to 74, allowing more Australians to make a ‘downsizer’ contribution by reducing the age from 65 to 60, and increasing the amount that can be saved through the First Home Super Saver Scheme, won’t come into effect until 1 July 2022.

All prices and analysis at 6 July 2021. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.