Superannuation is essential to a happy and comfortable retirement, however the rules are complicated and difficult for most of us to navigate.

Here are the six most common superannuation questions that our team of experts are asked:

Question 1: What taxable contributions can be made for 2019-20 and future years?

The concessional contribution cap is $25,000 per member for the 2019-20 year. Any excess over the concessional contribution cap is taxed at the individual’s marginal tax rate. Concessional contributions are contributions that somebody is claiming a tax deduction for such as an employer or an individual.

Concessional contributions include:

• Superannuation Guarantee contributions.
• Employer voluntary / extra contributions (e.g. salary sacrifice)
• Member taxable contributions (claimed as a deduction in the member’s personal income tax return).

In relation to member taxable contributions, it is noted that:

• To be able to claim a tax deduction, the individual must complete and sign a contribution deduction notice (Section 290 notice)
• The deduction notice must be acknowledged in writing from the fund
• Having the correct paperwork to be able to claim a tax deduction is essential
• From 1 July 2017 the self-employed or 10% test no longer applies
• It is highly recommended that your personal tax position be reviewed and the contributions made to date be considered and if of benefit, a member taxable contribution be made up to the appropriate amount.

Question 2: How do the catch-up of taxable (concessional) contribution rules work for those with a superannuation balance below $500,000?

The 2019-20 financial year is the first year when the carry forward contribution provisions come into effect, where a fund member can carry forward unused taxable contributions for five years.

To be eligible, your Total Superannuation Balance (TSB) at 30 June of the previous year must be less than $500,000. This is assessed at 30 June of the prior year for each year in a rolling five-year period.

A member’s TSB is the total of the following amounts:

• Any accumulation phase interests,
• Any retirement phase interests (as reflected in your transfer balance cap), and
• Any rollovers between superannuation funds that are in transit on 30 June.

Individuals under age 65 and those aged 65 to 74 and who meet the work test (and the TSB test) will be eligible to access the catch-up concessional contributions.

That is, if they have not used their taxable or concessional contribution cap in a year, there may be the ability to make that unused contribution in a later year.

Being able to use a catch-up taxable contribution is a great strategy for a person who is expecting to have higher taxable income in an income year due to any work bonuses, large capital gains, trust distributions or private company dividends, and would like to claim a larger deduction from their personal superannuation contributions.

It is also a great strategy for people who are close to retirement and have spare cash to make a contribution and claim this contribution as a personal tax deduction and pay less tax personally.

Question 3: What tax-free contributions can be made for 2019-20 and future years?

Non-concessional contributions are contributions that an individual is not claiming a tax deduction for.

The non-concessional contribution cap is $100,000 for the 2019-20 year. Non-concessional contributions cannot be made if a member has a TSB greater than $1,600,000.

Both member concessional and non-concessional contributions can be made as cash or as in-specie contributions. An example of an in-specie contribution is transferring listed shares from an individual’s name to a fund and treating the value of those shares as a contribution to the fund.

Members aged under 65 have an option to contribute up to $300,000 over a three-year period, depending on their TSB.

The rule works as follows:

If an individual exceeds their non-concessional contribution cap, the ATO calculates an interest amount that is taxed at their marginal tax rate. The excess amount and the interest amount have to be paid out of the fund (once instructed by the ATO).

It is essential that making a non-concessional contribution be carefully be reviewed in terms of the cap rules prior to a contribution being made.

To be able to make a non-concessional contribution, a member must meet the work test being:

• If under age 65, there is no work test requirement, and
• If aged 65 to 74, they must meet the work test (being 40 hours over a 30-day period).

There are also small business or capital gains tax (CGT) relief provisions that allow further tax-free contributions to be made to a fund. The rules are complicated in this area, so tax advice is recommended.

Question 4: How do the ‘downsizing’ contributions rules work for those over age 65?

The Australian government passed legislation that allows people who are 65 years of age or older to make a downsizer contribution to a superannuation fund.

From 1 July 2018, people who are 65 years or older are able to make a downsizer contribution of up to $300,000 from the proceeds of selling their residential home.

The contribution is not a non-concessional contribution and does not count towards the contribution caps. It goes into superannuation as a tax-free contribution. If a member has more than $1,600,000 in superannuation, they are also still allowed to make a downsizer contribution.

If the downsizer contribution is made and is placed into retirement phase it will count towards a member’s transfer balance cap. The transfer balance cap, which is $1,600,000, limits the amount you can have in retirement phase.

If your house is sold and a downsizer contribution is made, there is also no requirement to have to purchase another home.

Who is eligible?

You are eligible to make a downsizer contribution up to $300,000 per person if you meet all the following requirements:

• You have reached 65 years of age at the date you make the downsizer contribution.
• The contribution is from the proceeds of a house sale where the sale contract was on or after 1 July 2018.
• You or your spouse owned the home for more than 10 years prior to the sale.
• The proceeds from the sale of the home are exempt or partially exempt from CGT. The house must be your main residence and is exempt from CGT.
• You have not made a downsizer contribution before such as the sale of another home.
• The downsizer contribution cannot be greater than the sale proceeds of your home. For example, if a couple sold their home for $400,000, the most they could make as a downsizer contribution is $400,000 combined.
• You make the downsizer contribution within 90 days of receiving the sale proceeds. (Note: If an extension of time is required, you can apply to the ATO).
• You complete the required ATO form and provide this to your superannuation fund before or when the downsizer contribution is made.

Question 5: When can I access benefits from a superannuation fund?

There are three key tests to be able to access superannuation benefits. This is also referred to as having met a condition of release. The three key tests are:

1. Reached preservation age and have permanently retired, or
2. Between the ages of 60 and 64 and leave an employer or permanently retire, or
3. Reached age 65.

If you meet one of the above, preserved benefits become unrestricted non-preserved benefits and the member has full access to their superannuation.

Preservation age:

Types of benefits that can be paid:

a) Lump sum benefits

Lump sum benefits are taxed as follows:

• Tax-free if aged 60 or older.
• If over preservation age and under age 60, the first $210,000 (re: the 2019-20 year) of taxable component is tax free and excess taxable at lower of marginal tax rate (MTR) or 17%.

b) Transition to retirement pension (TRIS)

A TRIS is a pension paid to a member between their preservation age and 65 and they have not met a condition of release.

A TRIS is received tax free if the member is aged 60 or older.

If under age 60, the taxable component of the TRIS is taxed at the member’s MTR less a 15% tax rebate.

As a result of changes to legislation post 1 July 2017, fund investment income from a TRIS is taxed at 15%. As a result, it is important to check if a condition of release has been met so that the TRIS can be converted to an Account Based Pension (ABP) where the fund income is received tax free.

A TRIS has a minimum yearly pension of 4% and a maximum pension of 10%.

c) Account based pension (ABP)

An ABP is a pension that is paid when the member has reached 65 years of age or they have met a condition of release (and over their preservation age).

As noted above, the ABP is received tax free if the member has reached aged 60.

As a result of changes to legislation from 1 July 2017, you are only allowed to transfer up to $1,600,000 into an ABP (being the lifetime limit).

If under age 60, the taxable component is taxed at the member’s MTR less a 15% tax rebate.

An ABP has the tax benefit that the fund’s investment income is tax free. There is no maximum pension payable for an ABP in that the whole balance can be paid out.

There are reporting requirements to the ATO in relation to starting an ABP (known as Transfer Balance Account Reporting or TBAR).

The fund must pay the required minimum pension by 30 June each year, being:

If the ABP minimum is not paid by 30 June, the tax-free income status is lost.

A member can underpay their pension by 1/12th and the fund will not lose its tax concessions. This allowance can only be used once by a member.

Question 6: What estate planning considerations should I keep in mind for my SMSF?

The following estate planning considerations should be made if you have a SMSF:

a) Who will receive my benefits in the event of my death?

Superannuation can be binding upon the death of a member to:

• spouse
• child
• person who is financially dependent
• estate (legal personal representative).

b) Will my benefits be paid as a pension or a lump sum upon my death?

Consideration should be given to whether upon death a spouse or a dependent would receive a death benefit as a lump sum or a pension stream.

c) Reversionary pension?

A reversionary pension is a pension that automatically reverts to a member’s spouse upon their death. To be a reversionary pension this needs to be nominated at the commencement of the pension. There are also implications regarding the $1,600,000 account-based pension limit.

d) What type of death benefit nomination do I have in place? Does it need to be updated?

The different types of death benefit nominations are:

• Binding Death Benefit Nomination (BDBN)
• Non-Binding Death Benefit Nomination (NBDBN)
• Death Benefit Agreement (DBA).

Death benefit nominations should be reviewed on an annual basis. A BDBN is normally only valid for three years and needs to be correctly completed to be valid. There have been a number of cases where a BDBN has been held to not be valid due to not being correctly completed.

e) Do I have life insurance or income protection in place and is it adequate?

Check whether you have appropriate life insurance and/or income protection in place, and whether your cover is adequate to meet your needs.

f) What are the tax implications of my benefits being paid after my death?

A death benefit paid to a spouse or dependent child is received tax free.

A death benefit to a non-spouse or non-dependent child results in the taxable component being taxed at 15%.

g) Are there any re-contribution strategies that I can / should take advantage of to improve my estate tax planning?

As tax is payable upon a death benefit to a non-spouse (the taxable component), there are tax benefits if a member can change their member balance to increase their tax-free percentage. This is normally done by taking money out of the fund and re-contributing it and is known as a re-contribution strategy. Any such strategy must allow for the normal contribution and benefit payment rules that apply.

h) Do I have the appropriate trustee structure set up for my SMSF?

The SMSF preferred trustee structure is a corporate trustee rather than having individuals as trustees.

For a SMSF, consideration should also be given to who will replace a member as a trustee or director upon their death.

Talk to the superannuation experts

With so much to consider, you might want to engage a superannuation expert to make sure you are getting the most value from your superannuation.

LDB’s team of superannuation specialists can help, so give us a call on (03) 9875 2900 or send us information via the contact form below.

This article was compiled by Rohan Mansfield, Principal at LDB Superannuation Services.

Editor’s note: This article was originally published on November 22, 2019, and has been updated to include new information.