part c - building your wealth contributions · building your wealth contributions page 123 note a...

PART C

Building Your Wealth

Contributions

Building Your Wealth Contributions

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3. SUPER CONTRIBUTION RULES ............................................................................................................. 119

3.1 GENERAL RULES ......................................................................................................................... 119

3.2 CONTRIBUTION LIMITS ............................................................................................................... 124

3.2.1 Treatment of Concessional Contributions made to Defined Benefit Schemes .......................... 124

3.2.2 Transitional Rules for Non-Concessional Contributions ............................................................ 125

3.2.3 Total Superannuation Balance ................................................................................................... 129

3.2.4 Catch up of Concessional Contributions .................................................................................... 130

3.2.5 Downsizing Post Age 65 ............................................................................................................ 130

3.3 STRATEGIES TO DEAL WITH EXCESS CONTRIBUTIONS ....................................................... 133

3.3.1 Contribution Reserves ................................................................................................................ 134

3.4 ATO PROCEDURE WITH RESPECT TO CONCESSIONAL CONTRIBUTON RESERVING ...... 136

3.4.1 Personal Deductibility of Superannuation Contributions ............................................................ 136

3.4.2 Made to a Complying Superannuation Fund (Section 290-155) ................................................ 137

3.4.3 The 10% Rule (Section 290-170) ............................................................................................... 137

3.4.4 Intention to Claim A Deduction (Section 290-170) ..................................................................... 138

3.5 SMALL BUSINESS CGT CONTRIBUTIONS................................................................................. 142

3.5.1 Basic Conditions ........................................................................................................................ 143

3.5.2 The Four Concessions ............................................................................................................... 145

3.5.3 The Small Business 15 Year Exemption .................................................................................... 145

3.5.4 Superannuation Contributions and the CGT Cap ..................................................................... 147

3.5.5 Payment Due Date ..................................................................................................................... 148

3.5.6 The Small Business Retirement Concession ............................................................................. 148

3.5.7 Tips and Traps ........................................................................................................................... 150

3.5.8 Considerations when Applying the SBCGT Concessions ......................................................... 150

3.6 CONTRIBUTION STRATEGIES .................................................................................................... 152

3.6.1 Contribution Splitting .................................................................................................................. 152

3.6.2 Maximise Contributions Prior To Retirement ............................................................................. 153

3.6.3 Benefit and Re-contribution Strategy ......................................................................................... 154

3.6.4 Benefit and Re-contribution Strategy (but not to you!) ............................................................... 155

3.6.5 Transfer of Active Assets (Business Real Property) & Small Business CGT Concessions ...... 155

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3.6.6 Removal of the 10% Test – Making Personal Concessional Contributions ........................... 157

3.6.7 Contribution Splitting for Total Superannuation Balance Purposes ....................................... 158

3.6.8 Contribution ‘Claw Back’ ........................................................................................................ 159

3.6.9 Using Excess Cash Flow to Consistently Maximise Concessional Contributions ................. 159

3.6.10 Using ‘Excess’ Superannuation above the $1.6M Cap to Withdraw & Re-Contribute........... 159

3.6.11 Downsizing Post Age 65 ........................................................................................................ 160

3.6.12 Contributions Post Age 65 ..................................................................................................... 160

3.6.13 Six Member Funds ................................................................................................................. 161

3.6.14 Increase in access to bring forward for 65 - 66-year olds ...................................................... 161


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3. SUPER CONTRIBUTION RULES

Almost 30 years on from the introduction of compulsory contributions for Australian workers, debate continues to rage about the adequacy of our retirement system given an ever-increasing disproportionate distribution of wealth, and the challenges that an ageing population presents. Whilst the use of contributions will help accumulate wealth within an individual’s superannuation fund and provide essential capital to enable investment decisions for retirement and wealth succession, the introduction of caps on how much can be contributed into superannuation, and the ever changing landscape we find ourselves faced with, means there needs to be a more holistic approach to building wealth. Now more than ever before, it is appropriate that assets are accumulated in joint names, trusts, companies AND superannuation over our lifetimes. This enables a balanced approach to asset building, and can assist with tax minimisation, wealth strategies using gearing, and access to monies when investment and business opportunities arise. This chapter will examine the many methods of building wealth, examining the various methods an individual can maximise their superannuation entitlements within the complex web of legislation which works today to enforce upper thresholds of what one can ‘get in’ to superannuation.

3.1 GENERAL RULES

Whether working and in accumulation phase, or restructuring wealth in preparation for retirement, it is important to understand the restrictions imposed by SIS, as to when a superannuation fund can accept contributions in respect of a member. Trustees are able to accept mandated contributions from an employer without restriction.

Definition ‘Mandated Employer Contributions’ are broadly defined as follows:

· Superannuation Guarantee Contributions; · Superannuation Guarantee shortfall; and · Contributions required under an Industrial Award.

Non-mandated contributions are any contributions, other than mandated employer contributions – naturally, these also include non-concessional contributions. Many aspects must be considered in determining whether or not a non-mandated contribution can be made on behalf of an individual.

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The following is a brief overview: • Non-mandated contributions can be made for a person who is under age 65. • Non-mandated contributions can be accepted for a member on or after 65 years and under age 75;

however, the member must satisfy an employment test in order to have their contributions accepted by the Fund trustees.

Proposed Work test amendments Announced as part of the 2019 Federal Budget, to be effective from 1 July 2020, the work test requirement will be removed for all individuals aged 65 and 66. In line with this measure, the bring-forward rules will also be extended and will mean that individuals aged 65 and 66 will be able, subject to transfer balance cap rules, to trigger the bring forward of non-concessional contributions.

Definition – ‘Employment Test’ The employment test is that the member must have been ‘gainfully employed’ for at least 40 hours in a period of not more than 30 consecutive days in the financial year that the contribution is to be made.

Clarification There is often confusion as to whether the above work test is required to be met BEFORE the contributions can be accepted by the Fund. Regulation 7.04 provides that a fund may accept contributions for members over 65 years of age if the member has been gainfully employed on at least a part-time basis DURING the financial year in which the contributions are made. However, the APRA circular on contributions provides that a member is gainfully employed on a part time basis during a financial year if the member has worked at least 40 hours in a period of not more than 30 consecutive days in that financial year. The trustee cannot take prospective employment into account – the member must have worked at least 40 hours in the financial year BEFORE the trustee can accept the contribution. As the APRA circulars provide guidance only, the SIS legislation takes precedence. At TAG Financial Services, we tend to take the conservative approach of having our clients meet the work test BEFORE the contributions are made, where possible. This is obviously a little more difficult when a member turns 75 in July. Your professional judgement is therefore required on a case by case basis. Only mandated contributions can be accepted by a superannuation fund on behalf of a member who is over 74 years of age.


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Tip For the purposes of meeting the 40 hours, 30 day consecutive period rule, the contribution does not need to be made within the 30 day period. For example, a member could work their 40 hours in July, and then make contributions to the fund for the rest of that financial year. As a result, it is recommended that the work be undertaken earlier in the financial year where possible – as this provides more flexibility on the timing of when contributions can be made.

Example

Doug turned 65 in August 2018. He retired from the workforce 5 years ago. He would like to transfer a property into the superannuation fund. Doug is permitted to use the bring forward non-concessional contribution provisions, but only until 30 June 2019. As he is planning on making the contribution after his 65th birthday, he would need to satisfy the gainful employment test at some point in the year ending 30 June 2019. Additional contribution restrictions also apply (i.e. non-concessional contribution limits). Where the member is age 75, the fund can no longer accept non-mandated contributions for that member. While the fund can still accept mandated contributions, it is rare that any employers are required by law or employment agreement to contribute beyond age 75.

Hint If a member has met the work test during the financial year, the trustee is permitted to accept contributions (whether they are employer contributions or non-mandated contributions) up to or before the day that is 28 days after the end of the month in which the member turns 75.

Example

Elizabeth turned 75 on 20 March 2019. During the 2019 financial year, Elizabeth satisfied the work test of 40 hours in 30 consecutive days, as she did some consulting work in August 2018. Elizabeth’s fund would be able to accept either an employer contribution or a non-concessional contribution (subject to additional conditions such as Total Super Balance) up until 28 April 2019. Members making contributions after age 75 in accordance with the above must still abide by the contribution limits.

Work test amendments With effect from 1 July 2019, individuals with total superannuation balances below $300,000, and aged over 65, will not be required to meet a work test prior to making a voluntary contribution to super (i.e. a non-concessional or personal concessional contribution) provided that they satisfied the work test in the preceding financial year. This was passed in December 2018 and was included in Treasury Laws Amendment (Work Test Exemption) Regulations 2018.

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Example

Kevin satisfied the work test in August 2019. He is aged 66. He makes a $40,000 non-concessional contribution to his superannuation fund in October 2019, and by 30 June 2020 his total super balance is $295,000. At any point in the following (2020/21) financial year, he is able to make a further non-concessional contribution of up to $100,000 without the need to again satisfy a work test.

The following table outlines the age-based circumstances that a contribution can be accepted by a Trustee into a Fund.

Under age 65 Age 65-69 Age 70-74 Age 75 & over

Superannuation Rollovers Superannuation benefits transferred or rolled over from other superannuation funds.

Yes Yes Yes Yes

Concessional (before tax) contributions Superannuation guarantee (SG) contributions including SG shortfall amounts.

Yes Yes Yes Yes

Industrial award, certified agreement and AWA contributions.

Yes Yes Yes Yes

Additional employer contributions and salary sacrifice contributions.

Yes Yes (note A)

Yes (note A)

Yes (note B)

Self-employed or personal deductible contributions.

Yes (note C)

Yes (note A & C)

Yes (note A & C)

Yes (note B)

Non-Concessional (after tax) contributions Personal or member contributions. (no tax deduction has been claimed)

Yes (note C & E)

Yes (note A, C & D)

Yes (note A, C & D)

No (note B & D)

Spouse contribution. Yes (note C & E)

Yes (note A, C & D)

No (note F) No

Other CGT contributions, employer termination payments and personal injury contributions CGT contribution (previously known as CGT exempt amount).

Yes (note C)

Yes (note A & C)

Yes (note A & C)

No (note B)

Directed termination payment (DTPs) (previously known as Employer eligible termination payment. (ETPs)

Yes (note C)

Yes (note A & C)

Yes (note A & C)

No (note B)

Personal injury contributions. Yes (note C)

Yes (note A & C)

Yes (note A & C)

No (note B)


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Note A Work Test: must have been gainfully employed for at least 40 hours within a 30 day consecutive period in the financial year in which the contribution is made (subject to changes effective 1 July 2019 discussed above). Note B 28 day rule: contributions may be made if the member meets the work test (per note a) and the contribution is received by the fund within 28 days after the end of the month in which the member turns 75. Note C TFN: If the member’s TFN is not provided to the fund within 30 days of the contribution being made, the contribution must be refunded to the member less taxes, fees, costs and insurance premiums, and reduced or increased for market movements. Note D $100,000 limit: If the member is 65 but less than 75 when the contribution is made, the fund can accept a contribution up to $100,000. Additional tests apply where total superannuation balances are above $1,300,000 but less than $1,600,000 (further details have been provided below on this measure). If a member of any age has a total superannuation balance of greater than $1,600,000, then all non-concessional contributions are prohibited. Note E $300,000 limit: Fund is able to accept contributions up to $300,000 if the member is less than 65 years old when the contribution is made. Again, additional tests apply where total superannuation balances are above $1,300,000. If a member of any age has a total superannuation balance of greater than $1,600,000, then all non-concessional contributions are prohibited. Note F The 2019 Federal Budget proposes this extends to those aged 74.

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3.2 CONTRIBUTION LIMITS

Contribution Limits – 2018/19 As a result of the Federal Government’s legislative changes, effective 1 July 2017 the contribution limits are:

Contribution Maximum amount (to avoid excess assessments)

Concessional Contribution $25,000~ Non-Concessional Contribution $100,000^

~ Individuals may have the capacity to increase this limit by accessing “catch up” concessional contributions (refer 3.2.4) ^Non-concessional contribution - $100,000, or up to $300,000 subject to bring forward and total superannuation balance rules.

3.2.1 Treatment of Concessional Contributions made to Defined Benefit Schemes

Amendments have been made to count contributions and certain other amounts from unfunded defined benefit schemes towards an individual’s concessional contribution cap. The amendments ensure that the calculation of notional amounts representing contributions to unfunded defined benefit schemes and both funded and unfunded defined benefit constitutionally protected funds accurately reflects the value of a member’s accrued benefits. The amendments ensure individuals with such superannuation interests are not unduly advantaged in saving for retirement. Essentially, they ensure that individuals are not able to double dip on these contributions. For the purposes of working out the individual’s defined benefit contributions for a financial year, certain modifications to the meaning of defined benefit contributions must be disregarded. These modifications reduce these contributions to nil for most contributions to constitutionally protected funds and to interests established under the Judges’ Pensions Act 1968. in subsections 293 150(3) and 293 195(2) of ITAA 97 respectively. These modifications must be disregarded to ensure that these amounts count towards an individual’s concessional contributions cap. The amendments are only intended to limit the ability of the individual to make other contributions by providing that the sum of the following amounts that are concessional contributions are treated as equal to an individual’s concessional contributions cap for the financial year if they would otherwise exceed that cap for that year: • contributions for the individual for the financial year in respect of a constitutionally protected fund; • their notional taxed contributions covered by the 2006 or 2009 transitional arrangements (see section

291 170 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997); and • the amount (if any) by which their defined benefit contributions (other than contributions covered by the

first circumstance above) for the financial year exceeds their notional taxed contributions for the financial year.


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The following example is extracted from the Explanatory Memorandum:

Contributions to Constitutionally Protected Fund and Unfunded Defined Benefit Interest Marvin has employer contributions to a constitutionally protected fund of $20,000 for the 2017/18 financial year. Marvin also has defined benefit contributions of $22,000 and notional taxed contributions for that financial year of $18,000 in respect of defined benefit interests (which are also not interests in a constitutionally protected fund). The difference between Marvin’s defined benefit contributions and his notional taxed contributions ($4,000) represents contributions in respect of unfunded defined benefit interests. Prima facie, Marvin’s total concessional contributions for the financial year are equal to $42,000. This is worked out by applying the rules introduced by these amendments and the current law, which provide that Marvin’s concessional contributions are the sum of his contributions to constitutionally protected funds, his notional taxed contributions and the difference between his defined benefit contributions and his notional taxed contributions ($20,000 + $18,000 + ($22,000 — $18,000)). However, as the sum of these amounts exceeds the concessional contributions cap of $25,000, the cap for newly included concessional contributions introduced by these amendments applies to treat the sum of these contributions as equal to the concessional contributions cap. Therefore, rather than having concessional contributions of $42,000, Marvin is treated as having concessional contributions of $25,000. Hence, Marvin does not exceed the concessional contributions cap for the 2017/18 financial year. When benefits are paid from Marvin’s constitutionally protected fund and his unfunded defined benefit scheme to him, they are subject to higher rates of taxation than his benefits paid from a taxed source.

3.2.2 Transitional Rules for Non-Concessional Contributions

We are now in the final year of the transitional period with regards to the bring forward rules for non-concessional contributions. The new rules applied to individuals who had activated the bring forward rule in the 2015/16 or 2016/17 financial years.

Strategy 1 Strategy 2 Strategy 3 Strategy 4 Strategy 5 2015/16 $180,000 $459,000 $181,000 $180,000 $180,000 2016/17 $540,000 Maximum

$1,000 Maximum $279,000

$200,000 $180,000 2017/18 - Maximum

$180,000 $100,000 *#

2018/19 - $100,000 * $100,000 * $100,000 *# * Assuming under 65 and Total Superannuation Balance less than $1,600,000. # Could trigger the bring forward provisions and make up to $300,000 non-concessional contributions (subject to Total Superannuation Balance being less than $1,600,000).

Once the 2020 financial year has commenced, the transitional provisions will have gone through their entire cycle, and the new reduced limit of $100,000 will apply under all circumstances from this time forward.

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3.2.2.1 Non-Concessional Contributions

The non-concessional cap was reduced to $100,000 per annum, commencing 1 July 2017. Previously, the non-concessional cap was six times the annual concessional contribution cap. The 2016 measures have reduced this to four times the annual concessional cap. The annual non-concessional cap will be subject to indexation as the concessional cap is indexed. The concessional cap is indexed in $2,500 increments in line with Average Weekly Ordinary Time Earnings (AWOTE). Additional new legislation provides added restrictions on an individual’s ability to make a non-concessional contribution. Only individuals who have a total superannuation balance which is less than the $1,600,000 transfer balance cap will be eligible to make a non-concessional contribution. Individuals who are approaching this amount will also have their ability to bring forward non-concessional contributions impacted (discussed below). 3.2.2.2 Bring Forward

Under new legislation, an individual’s ability to make a bring forward contribution has been altered and depends on their total superannuation balance. Where an individual’s total superannuation balance is less than $1,300,000, and the individual is under age 65, they are able to trigger the three years bring forward and contribute up to $300,000 as a non-concessional contribution. An individual may trigger their bring-forward prior to reaching age 65, however any non-concessional contribution they make after they turn 65 will still need to be made after they have satisfied the work test – i.e. 40 hours in a 30 day consecutive period. Therefore, unpaid work will not be sufficient to satisfy the work test. Section 292-85(3) of ITAA 1997 now provides that an individual is eligible to access the bring forward non concessional contributions cap in a particular financial year (the first year) if: • their non-concessional contributions for that financial year exceed their general non concessional

contributions cap; • their total superannuation balance is less than the general transfer balance cap; • the difference between the general transfer balance cap and their total superannuation balance (the first

year cap space) is greater than the general non concessional contributions cap; • they are under 65 years of age at any time in that financial year; and • a bring forward period is not currently in operation in respect of the financial year.

Total superannuation balance on 30 June 20XX

Non-concessional contributions cap for the first year

Bring forward period

Less than $1.4 million $300,000 3 years $1.4 million to less than $1.5 million

$200,000 2 years

$1.5 million to less than $1.6 million

$100,000 No bring forward period, general non-concessional contributions cap applies

$1.6 million or more Nil N/A


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If the first year cap space (the difference between the general transfer balance cap in the relevant financial year and an individual’s total superannuation balance as at 30 June of the previous financial year) is greater than two times the general non concessional contributions cap, an individual’s non concessional contributions cap for the first year is three times their general non concessional contributions cap and their bring forward period is three years. Example

Chris, aged 46, has a total superannuation balance of $590,000 on 30 June 2019. If Chris makes a non-concessional contribution of more than $100,000 in 2019/20, his bring forward cap is $300,000 and bring forward period becomes 3 years, as the difference between his total super balance ($590,000) and the transfer balance cap ($1,600,000) is greater than two times the non-concessional cap. In order for Chris (using the example above) to make a non-concessional contribution in the second year of his bring forward period, he must satisfy the following conditions: • His total superannuation balance as at 30 June 2020 must be less than the general transfer

balance cap (i.e. less than $1.6 million); and • He must not have used up his entire bring forward contribution in the 2019/20 financial year (i.e.

in Chris’s case, made a non-concessional contribution of less than $300,000).

If Chris’s total superannuation balance is greater than $1,600,000 at the start of the second year, then he is prohibited from making a non-concessional contribution.

Example

Using the example of Chris above, Chris makes a non-concessional contribution of $125,000 in 2019/20. At 30 June 2020, Chris’ total superannuation balance is $715,000. As a result, Chris satisfies both criteria and his non-concessional cap for the second year is $175,000. If Chris’s total superannuation balance had increased (say by strong investment performance) to $1,600,000 (or higher), then his second year non-concessional cap would be nil, even though he has not utilised non-concessional contributions from the first year triggering of the bring forward period. In order for Chris to make a non-concessional contribution in the third year of his bring forward period, he must have a total superannuation balance at the start of the third year which is less than the transfer balance cap (i.e. less than $1.6 million), and either: • He has not utilised the full second year non-concessional contribution cap; or • His first year non-concessional contributions were below the cap.

The second point above is essentially in place to ‘re-admit’ those who may have exceeded the general transfer balance cap in year 2, but at the end of year 2 are back below the threshold. If the first year cap space is between 1 – 2 times the general annual non-concessional cap – i.e. an individual has a total super balance of between $1.4 - $1.5 million, then the bring forward period is 2 years.

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Example Jonathon is aged 58 and has a total superannuation balance of $1,420,000 as at 30 June 2019. As a result, his bring forward cap is $200,000 and bring forward period is 2 years. For individuals whose total superannuation balance is between $1.5 million - $1.6 million, then there is no bring forward cap or bring forward period, however the individual is eligible to make the general non-concessional contribution up to the cap of $100,000.

Example

Byron has a total superannuation balance of $1,590,000 as at 30 June 2019. Byron is aged 62. Byron is able to make a non-concessional contribution in the 2019/20 financial year of no more than $100,000.

TFN alert: A super fund must have the members tax file number (TFN) on record before they can accept non-concessional contributions to a super fund. Without the member’s TFN, the member cannot make after-tax contributions.

Hint When the three years ‘bring forward’ provisions are triggered (i.e. at least $1 over the $100,000 non-concessional contribution limit), the three-year provision does NOT apply from the date the contributions are made. Rather, the three-year rule applies from 1 July in the year in which the provisions are triggered. For example, if $300,000 was contributed on 1 July 2019, the next non-concessional contribution would be able to be made on 1 July 2022. If the $300,000 was contributed on 30 June 2020, this would still count as the first of the three years, and accordingly, the next non-concessional contribution would be able to be made on 1 July 2022.

3.2.2.3 Contributions arising from structured settlements

Where payments meet the conditions under section 292-95 of ITAA 1997, they may be made to a fund without counting towards a member’s non-concessional cap. In addition, the payment can even be made where a member already has a total superannuation balance above $1,600,000. The payment must be: • For the settlement of a claim for compensation or damages, or in respect of a personal injury, based on

the commission of a wrong, or on a right created by statute. Settlement must be in written form, between the parties to the claim (irrespective if the agreement is approved by a court), or

• For settlement of a claim in relation to personal injury, under law relation to workers compensation, or • On the orders of a court.

Only payments in relation to personal injury are capable of being contributed to super. That is, payments in relation to compensation or damages to property cannot.


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Contributions must be made within 90 days of the latter of: • The date of agreement for settlement was made; or • The day the court order was made; or • The day the client received the personal injury payment itself.

In addition, the member must ensure that: • 2 legally qualified medical practitioners have certified that, because of the personal injury, it is unlikely

that the individual can ever be gainfully employed in a capacity for which they are qualified by education, experience or training, and

• No later than the time of making the contribution, the superannuation provider has been notified in the approved form, that the contribution is as a result of a structured settlement/personal injury.

Essentially, only individuals who meet a total and permanently disabled definition may make a contribution to super which can be excluded from their non-concessional cap.

3.2.3 Total Superannuation Balance

The concept of a ‘total superannuation balance’ was introduced with effect from 1 July 2017. This total superannuation balance is applicable to both the ability of an individual to make a ‘catch up’ of concessional contributions, and their ability to make non-concessional contributions, albeit at different values. Total superannuation balances have been introduced into the ITAA (1997) Act at section 307-230. Essentially, an individual’s total superannuation balance is the sum of: • the accumulation phase value of their superannuation interests that are not in the retirement phase at that

time; • the retirement phase value of their superannuation interests which is the balance of their transfer balance

account at that time (but not less than nil), adjusted to: - reflect the current value of account-based superannuation interests in the retirement phase; and - disregard any debits that have arisen in respect of structured settlements; and

• the amount of each roll over superannuation benefit paid at or before that time, that is received after that time, and not reflected in the accumulation phase value or the retirement phase value.

This sum is then reduced by the sum of any structured settlement contributions. In lay-terms, a total superannuation balance sums all accumulation and pension interests, based on the market value of all the assets supporting the member balance (not the pension commencement value) and ensures the total superannuation balance is not manipulated by rolling over amounts between superannuation funds where this rollover bridges a financial year, and accordingly is not reflected on the member balances in either fund as at 30 June.

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3.2.4 Catch up of Concessional Contributions

Effective from 1 July 2018, individuals with total superannuation balances of less than $500,000 can increase their concessional contributions cap in the financial year by applying previously unused concessional contributions cap amounts from one or more of the 5 previous financial years. As this measure will start effective 1 July 2018 – this will be the earliest the ‘5 year’ period can commence – so in effect this will only be available for use for individuals commencing the 2019/20 financial year. An individual has unused concessional contributions cap for a financial year, if they did not fully utilise their concessional contributions cap that year. The amount of the unused concessional contributions cap is the difference between the individual’s concessional contributions and the concessional contributions cap. The following example is extracted from the Explanatory Memorandum: Example - Unused concessional contributions cap

In the 2018-19 financial year, Layla’s employer made concessional superannuation guarantee contributions of $10,000 on her behalf to her superannuation fund. Layla did not make any deductible personal superannuation contributions to her fund. The concessional contributions cap for the 2018-19 financial year is $25,000. Layla’s unused concessional contributions cap amount for the 2018-19 financial year is therefore $15,000. Increased concessional contribution cap Between the 2018-19 and 2023-24 financial years, Layla’s concessional contributions and available unused concessional contributions cap are as follows:

2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 Concessional contributions

$10,000 $10,000 $10,000 $10,000 $10,000 $40,000

Available unused cap $15,000 $15,000 $15,000 $15,000 $15,000 0 Cumulative available unused

$15,000 $30,000 $45,000 $60,000 $75,000 $60,000

3.2.5 Downsizing Post Age 65

Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017 arose out of the 2017 Federal Budget, where the Government proposed an initiative for superannuation members over the age of 65, to be able to boost their retirement savings. By being able to boost their retirement savings, the Government also believes it will provide an additional benefit, in that with older Australians willing to sell their homes, it will provide an influx of homes onto the market for younger Australians, who are finding it difficult to get into the housing market.


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Accordingly, from 1 July 2018, should a superannuation member decide that they wish to downsize from their current principal place of residence, they will be able to make a contribution to their superannuation fund of up to 3 times the non-concessional limit (i.e. $300,000). The first year of eligibility will be the 2019 financial year (i.e. effective 1 July 2018). To be eligible to make a “downsizer” contribution, the member must: • Be aged over 65; • Make a contribution equal to all or part of the capital proceeds arising from the sale of an ownership

interest held by either the member (or their spouse), subject to a maximum of $300,000 per person; • It is not essential for each spouse to hold the asset – so a downsizer contribution may be made by a

couple where only one spouse owns the main residence; • The individual (or their spouse) must have owned the property for at least 10 years prior to the sale. This

period may include a period for which there was no dwelling on the land; • Any Capital Gain (or loss) arising from the disposal is either fully or partially disregarded by virtue of the

entitlement to claim the property as a main residence. This means the property only needs to have been the main residence for part of the ownership period.

• The downsizer contribution must be notified to the Trustee of the Fund at or before the time the contribution is made.

• The downsizer contribution can only be made once. • The contribution must be made within 90 days of settlement. The contribution will be treated like a non-concessional contribution (i.e. will be tax-free), however it is not a non-concessional contribution and does not fall within these limits. Members making this contribution will not be subject to a work test, and furthermore, the contribution will not count towards the total superannuation balance cap, which limits the ability to make non-concessional contributions when the balance exceeds $1,600,000. Other than being at least 65 years of age, there is no age limit on making the downsizer contribution. As a result, a member could be 90 years of age, and make the contribution (as discussed above, for most other types of contributions, they cannot be made after age 74). Should a couple sell a qualifying property for (say) $500,000 – then the combined maximum downsizer contribution which may be made will be $500,000 between the couple. Even though the legislation allows the contribution to be made even where an individual’s total superannuation balance is above $1,600,000, the member would need to separately consider their Transfer Balance Account before determining whether to put this contribution towards a pension commencement.

Note The legislation does not stipulate that the contribution must be made in cash, only that it is made within 90 days of settlement.

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Tip The ability to make a downsizing contribution irrespective of a member’s total superannuation balance means that we must take care which contribution is made first, in order to help client’s, maximise their retirement balances.

Tip If your clients updated their Trust Deed in the last few years to allow for the provisions of the Super Reforms, you should check carefully to ensure that a downsizer contribution will be permitted to be accepted, particularly if the Deed clauses specifically limits contributions being accepted for members over 75 years of age.


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3.3 STRATEGIES TO DEAL WITH EXCESS CONTRIBUTIONS

In many instances, it is not until the client receives an excess contribution notice that we are aware there is an issue. In some circumstances, we may become aware of an issue on the receipt of client information, when it comes time to prepare accounts. However, if we are able to determine that there is an issue prior to the lodgement of the return, the following are some strategies that may be able to be adopted to deal with the excess contributions. Education One of the best ways that we can proactively assist our clients in ensuring that they do not have excess contributions, is to educate them of the contribution limits and the implications of exceeding these limits. Importantly, we need to educate our clients on how excess contributions can occur, as often it is unexpected circumstances that lead to problems. For example, the following should be covered with clients: • Where contributions limits have changed in a year, that they have either notified their payroll of the limits

(i.e. if they are salary sacrificing) or that they themselves do not put in too much ; • The timing of when contributions are made (i.e. clients are often not aware that their June contribution

can be made in July, which will impact the following year’s limits); • That insurance premiums can sometimes count towards the concessional contribution limit; and • That the limits are per person, and that if they are putting contributions into multiple funds, these

contributions need to be accumulated as a total. Reallocation Where members make contributions from the same asset pool as their partner/spouse, contributions can be allocated to ensure that member’s concessional and non-concessional contributions remain with their relevant caps. Caution needs to be demonstrated here as this strategy may interfere with other planned contributions strategies and where one or both members are over age 65, the work test must be satisfied before the contributions can be made. Sub-regulation 7.08(2) of the SIS Regulations requires a trustee who receives a contribution in a month in relation to an accumulation interest to allocate the contribution to a member of the fund: • within 28 days after the end of the month; or • if it is not reasonably practicable to allocate the contribution to the member of the fund within 28 days after

the end of the month - within such longer period as is reasonable in the circumstances.

SISR 7.08(2) allows for the allocation at a later date, for example, where SMSFs contributions are allocated at the time the financial reports and tax return is prepared. However, special consideration must be given to circumstances where allocation within 28 days is required after the end of the month it was received. The use of reserves would classify as such circumstance.

Part C

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3.3.1 Contribution Reserves

Annual contribution limits and excess contributions have brought about the return of the use of contributions reserves. The consideration of SIS Reg 7.08(2) when allocating member contributions allows for allocation of member contributions 28 days after the end of the month in which the contribution was made. This provides opportunity for contributions made in June, when faced with the potential of an excessive contribution, to use contributions reserves to manage member benefits. Where a contribution is made in June of a financial year that results in an excess contribution, the contribution is able to be allocated to a contributions reserve to be allocated to the member’s benefit in July. As a result of the use of the contribution reserve, the contribution will count toward the contributions cap for the financial year in which it was allocated to the member, per section 291-25(3) ITAA 97, and not the financial year in which it was paid. Despite regulation 7.08(2)(b) allowing for allocation at a later date, sub-regulation 7.08(2) requires that any contribution allocated to a contribution reserve is allocated within 28 days of the contribution being made, allowing for the contributions reserving strategy to be applicable for contributions made in June of any given financial year. TD 2013/22 provides that should the conditions within SIS Division 7.2 be met, a contribution allocation is assessed in the year of the allocation, not the year the contribution is made and that the deductibility of the contribution is to occur in the year the contributions is made and not the year of allocation. With regards to non-concessional contributions, the ATO provides the following opinion, from the June 2009 NTLG Superannuation Subcommittee meeting, to provide clarification as to section 292-90(2) ITAA 1997: ‘Where a non-concessional contribution is allocated to a member’s account in a later financial year than the year the contribution was made, it will count towards the member’s non-concessional contributions cap for the financial year during which it is allocated to the member’s account.’ To avoid double counting of non-concessional contributions, the ATO will interpret the specific provision (paragraph 292-90(4)(a) of the ITAA 97) as applying rather than the general provision (subsection 292-90(2) of the ITAA97). The ATO believes this interpretive approach is necessary because to give subsection 292-90(2) precedence over paragraph 292-90(4)(a) would make the paragraph useless. Thus, the use of contributions reserves is allowed by the ATO to prevent a member incurring excessive contributions. This is despite section 292-90(2). Regulation 291-25.01(2) of the ITAR 1997 - allocations from reserves under Div. 7.2 SIS Regulations (regulation 7.08) are treated as concessional contributions and form part of the assessable income of the fund and count towards the concessional contributions cap under section 291-25(3) of the ITAA 1997. Regulation 292-90.01(2) of the ITAR 1997 – provides that allocations from a reserve under Div. 7.2 of the SIS Regulations, the amount is not included in the Fund’s assessable income and is allocated towards the non-concessional contributions cap, as per section 292-90(4) of the ITAA 1997.


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Beware – ATO Form for Reserved Contributions Where a contributions reserve has been used and the member has claimed personal concessional contributions, the Fund should complete ATO NAT form 74851 – to notify the ATO of a reserved concessional contribution. More details on this form and its application can be found below.

Note Whilst most amounts allocated from a reserve are either treated as concessional or non-concessional contributions, and therefore shown at either item K or L in the tax return, there are some exceptions. These exceptions include: • Amounts allocated to all members, or to a class of members to which the reserve relates, on a fair and

reasonable basis and the amount allocated for the income year is less than 5% of the value of the members interest;

• Amounts allocated for the sole purpose of discharging super income stream liabilities that are currently payable; or

• Allocations following the commutation of a pension, where the amount in the reserve is allocated to a member who is the primary beneficiary of the pension and it is used to support another income stream for that member.

These allocations that fall outside being treated as a concessional or non-concessional contribution should be shown at item O of Section F – Member Information of the tax return.

Part C

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3.4 ATO PROCEDURE WITH RESPECT TO CONCESSIONAL CONTRIBUTON

RESERVING

The ATO have instituted a ‘Request to adjust concessional contributions’ form (NAT 74851), for use effective from 1 July 2014. This form allows a smoother reporting of concessional contribution reserving strategies but is for SMSF’s only. You cannot use the form to notify the ATO of the reserving of a non-concessional contribution. In addition to the form, SMSF trustees will need to keep records to support the statements in the form, such as: • a resolution by trustees in year 1 in accordance with the SMSF’s governing rules not to allocate the

contribution when it is made but to accept it into a reserve; • evidence of receipt of the contribution by the SMSF; • a resolution by trustees to allocate the contribution from the reserve in year 2; • documentation in relation to any deductible personal contributions (notices and acknowledgements).

Hint – Potential to Increase Tax Deductions Reserving of concessional contributions provides an opportunity to allow an individual (or a related business) to claim superannuation contributions above the concessional cap as a tax deduction. This may be of particular benefit in years of unexpectedly higher personal taxable income (on the realisation of a large capital gain or spike in earnings). Care should be taken however, with respect to the following year’s income and contributions for an individual, that the strategy is not forgotten and a future breach of the contribution limit occurs.

3.4.1 Personal Deductibility of Superannuation Contributions

When considering whether our clients could claim a deduction for a personal contribution made to superannuation, we refer to Subdivision 290C of the ITAA 1997, which provides the sections dealing with deducting personal contributions. In accordance with Subdivision 290C, a person may deduct a contribution made to a fund if certain conditions are satisfied (section 290-150). There is no limit on the amount of the contribution or the amount of the deduction, however, excess contributions tax may be payable if the contributions exceed the non-concessional contribution cap.


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Personal contributions are only deductible if the following conditions are satisfied: • The contribution is to a complying superannuation fund (section 290-155); • A member who is under 18 years of age at the end of the income year must have derived income in the

year from carrying on a business or from employment related activities (section 290-165(1)); • The contribution must be made by the 28th day after the month in which the member turns 75 (section

290-165(2)); and • The member must notify the trustee in writing of their intention to claim the deduction. The notice must

be given by the earlier of when the member lodges their income tax return for the year or the end of the financial year following the year the contribution is made. The trustee must acknowledge receipt of the notice, and the contributor cannot deduct more than the amount stated in the notice (section 290-170).

• The individual has sufficient taxable income to claim the deduction (i.e. a refund cannot be created by claiming the tax deduction).

Beware Advisers must be aware of clients’ total superannuation balances when advising of contributions, because, unlike previous years, where a member exceeds their concessional contribution cap (and cannot make catch up contributions or reserve an amount), these contributions will also be treated as non-concessional contributions, which may give rise to an automatic excess non-concessional contribution by virtue of the member’s total superannuation balance exceeding $1,600,000.

3.4.2 Made to a Complying Superannuation Fund (Section 290-155)

In order for the member to be able to claim a deduction for personal contributions made to a fund, the fund must be a complying superannuation fund. The definition of complying superannuation fund is set out in section 45 of the SIS Act and is for tax purposes.

3.4.3 The 10% Rule (Section 290-170)

As a result of the 2016 legislative amendments, the 10% (substantially self-employed) rule has been abolished effective 1 July 2017. An individual is now able to deduct personal contributions, making these contributions concessional contributions, regardless of whether they earn 10 per cent or more of their total income from employment or related activities. Prior to 30 June 2017, a person who was engaged in work that results in them being treated as an employee for superannuation guarantee purposes, may be able to claim a tax deduction for the contributions, so long as less than 10% of their total assessable income plus reportable fringe benefits for the income year in which the contribution is made, comes from employee activities.

Part C

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Hint A member whose taxable income is below the tax-free threshold of $18,201 (or it will be after claiming a deduction for personal superannuation contributions) may want the contributions to be treated as non-concessional contributions instead. This is because the marginal tax rate for this level of income is 19% (4% greater than the tax paid by the fund). When the income is reduced to this level, treating the contributions as non-concessional contributions may be more beneficial at a later point in time when the amount is withdrawn from the fund (as it will add to the tax-free component within the member’s balance). However, advisers should be cautious here when discussing contributions with clients – as if an individual is ineligible to make a non-concessional contribution, excess contribution assessments are likely to be incurred.

Example

Paul is aged 63 and has a total superannuation balance of $2,500,000. He makes a $25,000 contribution and at the time of making the contribution, intends on claiming a personal tax deduction. Upon preparation of his personal tax return, Paul finds that his taxable income is only $20,000. Paul would need to decide whether to: a) claim a $20,000 personal deduction (even though he is essentially paying 0% income tax personally without the deduction); or b) forego the claim altogether. In each circumstance, Paul will be assessed with an excess non-concessional contribution of $5,000 (under example a) or $25,000 (under example b).

3.4.4 Intention to Claim A Deduction (Section 290-170)

In accordance with section 290-170 of the ITAA 1997, a person who is making, or has made a contribution to a fund and wishes to claim a tax deduction for that contribution, must give the trustee a written notice stating that they intend to claim a deduction under this section for all, or a specified part, of the contribution. In return, the trustee must, without delay, give the person a notice acknowledging receipt of the person’s notice. Under section 290-170(2), a person cannot: • Give a notice that is not in respect of the contribution; • Covers the whole or any part of an amount covered by a previous notice; or • Give a notice to the trustee of a fund, when not a member of the fund, the fund no longer holds the

contribution, or the trustee has begun paying a pension based on whole or part of the contribution.


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Example While dates and contribution caps are different the context here is what is most important (the example is from the Explanatory Memorandum). Example 1: Valid Notice of Intention to Deduct Rachel, who is 54, has a superannuation interest valued at $50,000. This interest includes a non-concessional contributions component of $10,000. She makes a $100,000 personal contribution in March 2013. The fund records this contribution against the contributions segment for Rachel’s superannuation interest which means that amount would be counted against the tax-free component of any superannuation benefit paid to Rachel. The value of her superannuation interest is $150,000. In June 2013, Rachel rolls over $60,000 leaving her with an interest of $90,000. The $60,000 rollover is comprised of a $44,000 tax-free component and a $16,000 taxable component. The tax-free component of the rollover is worked out as follows:

Rollover amount x Tax-free component of interest before rollover Value of superannuation interest before rollover

$60,000 x $110,000 $150,000

= $44,000

The tax-free component of the remaining superannuation interest is $66,000. Rachel then lodges a notice in September 2013 advising that she intends to claim a deduction for the $100,000 contribution made in the 2012-13 financial year.

That notice would not be valid as the fund no longer holds the entire $100,000 contribution. Rachel could give a valid deduction notice for an amount up to $60,000. This amount is worked out as follows:

Tax-free component of interest remaining x Contribution

Value of superannuation interest before rollover

$66,000 x $100,000 $110,000

= $60,000

Tax-free component of interest before rollover

$66,000 x $100,000 $110,000

= $60,000

Part C

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Example 2: Invalid Notice of Intention to Deduct

Libby has a superannuation interest valued at $150,000. Libby makes a $25,000 personal contribution in March 2013 so that her interest is valued at $175,000. If, before lodging a section 290-170 notice, she was to commence a pension using $160,000 of her $175,000 interest, her fund will have commenced to pay a superannuation income stream based on whole or part of the contribution. A notice Libby tries to give her fund to deduct the contribution will therefore be invalid. Furthermore, the outcome will be the same even if, after making her personal contribution, Libby were to commence a pension of only $140,000 leaving the value of her interest in excess of the amount she intended to deduct. If a member intends to claim a deduction for a personal contribution made, as well as split the contribution, in accordance with section 290-170, the member will need to lodge their notice of intention to deduct BEFORE lodging the contribution splitting application.

Beware Section 26-55 of the Income Tax Assessment Act 1997, provides that tax losses in a given year of income cannot be created and carried forward to a subsequent financial year, where the loss is a result of income tax deductions claimed as a result of personal superannuation fund contributions under section 290-150 of ITAA 1997. Furthermore, a person cannot deduct more for their personal contribution or part thereof, than the amount stated in their written notice.

A notice can only be varied and cannot be revoked or withdrawn, in accordance with section 290-180(1) of the ITAA 1997. Furthermore, in accordance with section 290-180(2), the variation can only be to reduce (including to nil) the amount stated in relation to the contribution. The variation is not effective if the person is not at that time a member of the fund, or the trustee no longer holds the contribution or has commenced to pay a superannuation income stream based on the contribution. A valid notice cannot be varied after the earlier of the time a person lodges their income tax return and the end of the financial year following the year the contribution was made. These time limits do not apply to a variation where the contribution was never claimed as a deduction (sections 290-180(3) and (4)). The ATO have also modified individual income tax returns to include a tick box for individuals to confirm that they have complied with the requirements to submit a S290.170 Notice to their superannuation fund.


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Example

Annalise lodges a section 290-170 notice of intent to claim a personal deduction for a personal contribution of $7,000 she made during the 2018/19 financial year. The Trustee of Annalise’s fund acknowledges the notice, and so the deduction is claimed by Annalise in her personal tax return. After lodging her tax return, Annalise requests an amendment to vary the amount claimed as a tax deduction to $4,000. As the $7,000 deduction was allowable, Annalise is unable to vary the section 290-170 notice. However, supposing Annalise’s assessable income was only $4,000 for the 2018/19 financial year. As she had no other deductions other than the deduction she is claiming for the personal superannuation contributions, $3,000 of the deduction would be lost (as this exceeds her assessable income). In this instance, Annalise would be able to vary the section 290-170 notice down to $4,000 (but not below this amount).

Part C

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3.5 SMALL BUSINESS CGT CONTRIBUTIONS

Advisors can enhance their client’s wealth within superannuation by recognising an opportunity where the Small Business Capital Gains Concession may apply. If a client has a member balance over $1.6m, there may be an opportunity to make further contributions by triggering the Small Business Capital Gains Tax (SBCGT). The benefit of this strategy, is that contributions do not count towards the Non-Concessional Cap. Often when businesses commence, a simple business structure is established. When a business is in growth or maturity phase the current business structure may no longer be applicable. A strategic review of the group may highlight a need to restructure the group. As part of the restructure process, the use of the SBCGT concessions may be applicable which may allow a client to contribute to superannuation. If a client is considering retirement or selling a business, good advice at the time may directly enhance their superannuation balance as well as potential taxation savings. There are many commercial reasons why a business group may consider a restructure of their entities. Some of the reasons could be as follows: • Asset Protection – The individual may be considering a “more risky” business such as property

development and therefore may wish to isolate this risk from established wealth. • Asset Protection – The operating trading structure may hold passive investments. The passive assets are

at risk from the operations of the trading entities. • Asset Protection -The main operating entity has built up wealth within the entity. The retained earnings

are at risk from current operations. • Succession Planning – There may be a key employee involved in the business that the current owners

wish to reward with ownership. • Strategic Planning - The business may operate in a structure that would make selling the business more

problematic. • Commercial considerations. The business has transitioned from a family business to a more commercial

business. • Family situations. Families are complex and as the family expands or there is a breakdown in family

relations, there may be a need to restructure based on the family needs.

While this section discusses restructuring and the use of the SBCGT legislation to contribute to superannuation, the lack of applying this legislation should not negate the need to review the business structure.

Note The SBCGT concessions will not be available to capital gains made by a superannuation fund. It is common that the land and buildings used in the business of a related party be owned by a superannuation fund. A superannuation fund will not satisfy the SBCGT concessions as the trustee or the members of the fund do not control the fund in the manner required by the concessions.

To qualify for the SBCGT concessions there are several conditions that must be satisfied. These are called the ‘basic conditions’.


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3.5.1 Basic Conditions

In order to apply the Small Business Capital Gains Tax concessions, the seller needs to satisfy the basic conditions which are in the form of three tests. Initial Conditions test The Initial Conditions test requires that the seller be a small business entity with turnover of less than $2 million or that the seller satisfy the $6 million asset test. Active Asset test The second Active Asset test requires that you own an asset used or held ready to use in a business carried on by you, your affiliate or an entity connected with you. If the asset being sold are shares or units - 90% test The third 90% test needs to be satisfied if the asset is a share in a company or a unit in a unit trust. Within each of these requirements there is complex legislation to determine if the taxpayer can satisfy the initial conditions and therefore apply the SBCGT concessions. The Maximum Net Asset Value (MNAV) test must be measured just before the CGT event and includes the net assets of the entity, entities connected to you, and an affiliate. Assets that are for personal use are excluded from the calculation of the MNAV. Assets that are typically excluded are the principal place of residence, a holiday residence (if not rented) and superannuation. If the asset being sold is a share in a company or a unit in a unit trust, the current legislation requires the taxpayer to pass the 90% test. The taxpayer (entity) claiming the concession must be an individual CGT concession stakeholder in the company; or the 90% test is satisfied – meaning the CGT concession stakeholders in the company together have a small business participation percentage in the interposed entity of at least 90%. Effective from 8 Feb 2018 if the asset being sold is a share or unit the following additional tests have to comply: • The small business must be a small business with a turnover of less than $2Million. This means if the

business has ceased you cannot use SBCGT concessions. • The object entity must have carried on business just prior to the event • The object entity must satisfy the $6 million maximum net asset value test. • The share must satisfy the look through 80% active asset test.

The proposed legislation states the object entity must itself be a small business entity or satisfy the maximum net asset value test. The legislation effective from 8 February 2018 has reduced the percentage control of other entities from 40% to 20%, so therefore entities that previously were not included in the net asset value test will now be included. The result of the legislation change means that the ability for the net asset value test being under $6 million will require more analysis and may be more difficult to satisfy. These rules should be reviewed carefully with the legislation.

Part C

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The following diagram is a summary of the SBCGT and the steps that need to be undertaken:

No

No

No

No

Yes

Yes

Yes

The small

business capital

gains tax

concessions

cannot be applied

Step 1 - Diagram of the Group

Step 2 - Is there a CGT asset?

Step 3 - Who is a connected

entity and who is an affiliate?

Step 4 – Basic Condition 1

Is the CGT asset an active asset?


Do you pass one of the following?

• Maximum net asset value test; Small business entity test, or

• Partner in a partnership which is a small business entity.


Do you pass the additional

condition - If the asset being sold

are shares in a company or units

in a trust?

Step 7 - Apply the SBCGT

concessions:

• 15-year exemption; • 50% active asset reduction; • Retirement exemption; or • Small business roll-over.


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3.5.2 The Four Concessions

Once the basic conditions of the small business CGT concessions are satisfied, then the following four concessions can be applied (please note, each of the tests may have further requirements to be satisfied): • the small business 15-year exemption; • the small business 50% active asset reduction; • the small business roll-over; or • the retirement exemption.

If the 15-year exemption applies there is no need to consider the other concessions. If the 15-year exemption does not apply, then the taxpayer may consider any of the other three concessions and these can be chosen in any order. There is some debate over whether the taxpayer has to use the 15-year concession. While the legislation for the other three concessions states that they can be disregarded, the legislation is silent regarding whether the 15-year concession can be disregarded.

3.5.3 The Small Business 15 Year Exemption

This is the most valuable of the SBCGT concessions, as it allows a capital gain to be disregarded under certain conditions. The net proceeds of the sale can be contributed into superannuation. Also, capital losses and the general 50% discount do not need to be applied before the 15-year exemption. Therefore, capital losses can be carried forward to offset against other capital gains. Application to Individuals This exemption provides a total tax-free capital gain if the individual has: • Satisfied the basic conditions (maximum net asset value test or small business entity test and the active

asset test); • Continuously owned the CGT asset for at least 15 years; • The individual is 55 or over; and • The individual is retiring or is permanently incapacitated.

If the asset is shares in a company or interests in a trust, the company or trust must have had a significant individual for a total of at least 15 years.

Hint For shares in a company or interests in a trust there needs to be a significant individual for a total of at least 15 years of the whole period of ownership. The significant individual does not need to be the same individual for the whole period.

Part C

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Application to Company and Trusts This exemption provides a tax-free capital gain if the company or the trust has: • Satisfied the basic conditions (maximum net asset value test or small business entity test and the

active asset test); • Continuously owned the CGT asset for at least 15 years; • The company or trust has had a significant individual for a total of at least 15 years. Please note, the

period does not need to be continuous or the same significant individual; and • The significant individual is 55 or over and is retiring or is permanently incapacitated.

Section 152-110(2) of the ITAA 1997 deems the income is not assessable or exempt income in the hands of the trust or company, and the payment is exempt in the hands of the shareholders or beneficiaries. To determine if there is a significant individual for a company or unit trust is based on direct or indirect ownership of these entities, by tracing through the group to determine the ownership. The payment (net proceeds after cost base) of the exempt amount should be made to the stakeholders within two years of the CGT event and it is this payment the individuals can contribute. The amount of the exempt payment is based on the percentage ownership of the company and unit trust. For a discretionary trust to establish a significant individual, the distributions of the trust are required to be considered. An individual must be beneficially entitled to at least 20% of the income and capital distributed by the trustee for each of the 15 years. The trust deed should also be considered to determine the definition of income to ensure that the significant individual has rights to both the income and capital. This can be further complicated if the trust has had no distribution. For a discretionary trust that did not make a distribution of income or capital or had a tax loss or no taxable income in the relevant year, the above is applied assuming the trust had a significant individual for the year. A discretionary trust must have a small business percentage to apply the concessions. As there is no beneficial ownership, the payment is based on deeming rules. The payment to the stakeholder is based on the number of individuals involved in the distribution. The use of this exemption may have an unintended outcome as it is the stakeholders who are allowed to contribute their exempt portion of the payment to the superannuation fund. The stakeholders’ percentage is based on percentage ownership for a company and a unit trust. A discretionary trust stakeholders’ percentage is dependent on the number of individuals that receive a distribution. Connection with retirement Whether the CGT event occurred in connection with an individual’s retirement will depend on the relevant facts and circumstances. There must be at least a significant reduction in the number of hours the individual works or a significant change in the nature of the present activities. However, that then does not necessarily need to be a permanent and everlasting retirement from the workforce. The CGT event in connection with retirement could occur sometime before retirement or after retirement.


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Examples The ATO Advance Guide provides the following examples as to the likely scope of the term ‘in connection with retirement’: A small business operator, aged over 55, sells his business. Under the terms of the sale, he agrees to be employed by the new owner for a few hours each week for two years. The sale of the business would be in connection with the small business operator’s retirement. He has permanently or indefinitely ceased being self-employed and has commenced gainful employment on a much-reduced scale with another party, although still performing similar activities. A small business operator and spouse are both pharmacists, are both aged over 55 and carry on business through two pharmacies. They sell one (and make a capital gain) and, accordingly, reduce their working hours from 60 hours a week each to 45 and 35 hours a week respectively. There has been some change to their present activities in terms of hours worked and location. But there has not been a significant reduction in the number of hours or a significant change in the nature of their activities and, therefore, there has been no ‘retirement’. If, on the other hand, one spouse reduced their hours to nil (stopped working), there would be a significant reduction in the number of hours that spouse was engaged in the business activities. The sale would, therefore, be in connection with the retirement of that spouse. A small business operator, aged over 55, sells some business assets as part of a wind down in business activity ahead of selling the business. Within six months, she sells the business and ends her present activities. If it can be shown that the earlier CGT event was integral to the business operator’s plan to cease her activities and retire, the CGT event may be accepted as happening in connection with retirement.

3.5.4 Superannuation Contributions and the CGT Cap

The capital proceeds that qualify for the 15-year exemption may be paid into an individual’s superannuation fund. The amount will not count towards the individual’s non-concessional cap if the amounts are under the CGT cap amount of $1.515 million (for the year ending 30 June 2020) (indexed – was $1.480 million for the year ending 30 June 2019). Therefore, these payments are not included in the assessable income of the superannuation fund. The superannuation contributions covered by the CGT cap include: • The small business retirement concession cap of $500,000; • The capital proceeds amount which qualify for the small business 15-year exemption; and • The capital proceeds amount which would have qualified for the small business 15-year exemption but

for: - The disposal resulted in no capital gain or capital loss; - The asset being a pre-CGT tax asset; or - The taxpayer was permanently incapacitated and disposed of the asset before the end of the

15-year period.

Part C

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Individuals who require contributions to be treated towards their CGT cap amount must notify the superannuation fund that the amount is to count towards their CGT cap amount before or when the contribution is made.

3.5.5 Payment Due Date

As stated above, a company or trust can pay an amount to their shareholders or beneficiaries in accordance with their participation percentage. The shareholders or beneficiaries can contribute their amount into their superannuation fund. In this case, the company or trust must make a payment to the shareholders or beneficiaries within 2 years of the CGT event and then the shareholders or beneficiaries must make a contribution to their superannuation fund within 30 days.

3.5.6 The Small Business Retirement Concession

This concession provides an exemption of capital gains up to a lifetime limit of $500,000 if the basic conditions of the SBCGT concessions are satisfied (maximum net asset value test or the small business entity test and the active asset test) and the amount chosen to be exempted is specified in writing. If the recipient is under 55 years old the amount must be paid into a superannuation (or similar) fund. This concession can be applied before or after the 50% active asset reduction or the small business roll over concession. Application to Individuals If the retirement concession is for an individual taxpayer under the age of 55 years old, then the contribution must be made to a complying superannuation fund by the later of when the choice is made to apply the retirement concession (the lodgement of the income tax return) or when the proceeds are received. If the taxpayer has originally selected the roll-over concession and then did not meet the conditions of the roll-over concession, the taxpayer may subsequently choose to apply the retirement concession. If the subsequent choice to apply the retirement concession is made, the amount must be paid to a complying superannuation fund when you subsequently make the choice to apply the retirement concession. This will generally be when the subsequent tax return is lodged. If the proceeds are received in instalments, then the amount will need to be contributed to the superannuation fund in instalments. Application to Companies and Trusts This exemption applies to a company or a trust if the following conditions are satisfied:

• The company or trust satisfies the significant individual test; • The amount chosen to be exempted is specified in writing including the percentage attributable to each

stakeholder; and • The payment is made to CGT concession stakeholders. There are specific provisions within the 1997 Act, that ensure the income is not assessable or exempt income in the company or trust and that the payment is exempt in the hands of the shareholders or beneficiaries.


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If a company or trust is using the retirement concession, and the recipient is under 55 years of age, then the contribution needs to be made to a complying superannuation fund by the later of: • Seven days after the choice is made to apply the concession (the choice will be made when the tax return

is lodged); or • Seven days after the amount of capital proceeds are received.

If the company or trust originally selected the roll-over concession and then later conclude that they did not meet the conditions, the amount must be paid to a complying superannuation fund when you made the choice to apply the retirement concession (the choice will be made when the tax return is lodged). Retirement For an individual choosing the retirement concessions, they do not actually need to retire or terminate any activity. Payments made by a company or trust to an employee of an amount exempted under the retirement exemption are deemed to be payments in respect of the termination of employment of the employee. There is no need for an actual termination of employment. Determination of Age The age of the taxpayer is determined when you make the choice to apply the retirement exemption. Therefore, if a taxpayer is 54 years old at the time of the CGT event but 55 years old at the time of making the choice to apply the concessions (i.e. the lodgement of the tax return), the taxpayer will not be required to contribute the amount to a complying superannuation fund. Transfer of Real Property ATO Interpretative Decision ATO ID 2010/217 confirms that if an entity chooses to apply the retirement exemption, that the contribution to a complying superannuation fund can include real property instead of money, so long as it meets the relevant provisions of the SIS Act to transfer the property. Elections Required In relation to the application of the retirement exemption the taxpayer needs to make a separate written election to apply the concession prior to the due date of the lodgement of the return. The manner in which the tax return is prepared is not a sufficient written election. If the entity is a company or trust, the election must specify the percentage of the retirement concession attributable to each CGT concession stakeholder.

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Treatment within Superannuation Fund The capital proceeds that qualify for the small business retirement exemption and paid into an individual’s superannuation fund may count towards their CGT cap amount, if the individual elects. If elected, the amount will not count towards the individual’s non-concessional cap and these payments are not included in the assessable income of the superannuation fund. This amount will then form part of their ‘tax-free’ component of their superannuation balance. Individuals who require contributions to be treated towards their CGT cap amount must notify the superannuation fund that the amount is to count towards their CGT cap amount before or when the contribution is made.

3.5.7 Tips and Traps

The following are some tips in relation to applying the SBCGT concessions: • If the 15-year exemption applies, it must be applied if the entity is eligible (as discussed above, there is

currently debate on this point as the legislation is silent on this matter. Practical application has shown that exemption must be applied if the entity is eligible);

• Capital losses and the general 50% discount do not need to be applied before the 15-year exemption is applied. Therefore, the capital losses can be carried forward and offset against other capital gains;

• The retirement exemption, roll-over and 50% active asset reduction can be applied in any order; • The correct taxpayer is required to make the election; • The small business rollover concession can be applied, even though the taxpayer may not be intending

to acquire a replacement asset. This would have the effect of deferring the capital gain and cash flow benefits; and

• As stated above, by applying the small business roll-over, the taxpayer is deferring the capital gain for two years. In the year that the taxpayer did not acquire a replacement asset, a CGT event J5 would occur and the taxpayer would need to include the capital gain in their income tax return.

At the point of the J5 event, the taxpayer could choose to apply the retirement exemption. Assuming the taxpayer was 54 years old when the capital gain was incurred, by the time the taxpayer made the election to apply the retirement election they would have turned 55 years old. Therefore, there would now not be the requirement to contribute the retirement exemption amount to a complying superannuation fund.

3.5.8 Considerations when Applying the SBCGT Concessions

One of the intentions of introducing the SBCGT concessions, was due to the fact that many business owners invest all available funds into their business, rather than ensuring they have adequate superannuation balances. For these business owners, they consider their business to be their superannuation and that on the sale of the business, the proceeds will be sufficient to provide for their retirement. Whilst this may be the case for many business owners, and their intention is to sell the business in the lead up to retirement, as discussed above, many business owners may utilise the concessions when undertaking an “internal restructure”. This might occur because the business has outgrown its current structure.


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When undertaking an internal restructure, as opposed to a sale of the business to a third party, there are some additional items that should be considered, such as: • If there is going to be a transfer of company shares, and there is retained earnings in the company, and

these retained earnings are not transferred prior to the shares being transferred, careful consideration need to be given to not trigger the risk that this transaction may be considered to be dividend stripping.

• We have seen instances where the ATO would like preliminary engagement of legal advice around the strategy. In particular, there seems to be a level of scepticism around one of the arguments that this type of strategy is applied is to ensure asset protection is optimised. In this case, legal advice that documents the benefits around asset protection would be seen to be helpful.

• It is important that when applying the SBCGT concessions, that the intentions of the transaction are documented. We would recommend that this is completed as part of the strategy which is prepared prior to the transaction being undertaken.

• With regards to the valuation undertaken, the valuation methodology should be clearly documented. It is not a requirement that an independent valuation be undertaken, but it should be shown that a reasonable approach was taken to determine the valuation. This becomes even more relevant, when the value is closed to the net asset thresholds.

• When undertaking a big project like this for your clients, we would recommend that you speak to your client about taking out audit insurance. Whilst the transaction would not be undertaken in order for tax avoidance purposes, we are aware of situations where the ATO has audited these strategies and the application of the SBCGT concessions. These audits have taken over 2 years to be completed.

• It is imperative that the implementation of the concessions is thorough and in accordance with the strategy (for example, making sure correct boxes are ticked in the tax return). Furthermore, where the implementation of the strategy may result in loans being created, we have seen the ATO request copies of loan agreements and they do not seem to be satisfied by merely journal entries.

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3.6 CONTRIBUTION STRATEGIES

3.6.1 Contribution Splitting

Given the ability to withdraw tax-free benefits from superannuation for those over the age of 60, the older spouse is now the one we ideally want the most superannuation assets in the name of (whilst also taking into account the equalisation of accounts for transfer balance cap purposes – see example below). Whereas previously it was common for older spouses to split their superannuation contributions to their younger, low income earning spouses, the reverse is now true, given that the earning capacity of each of the spouses becomes irrelevant to the splitting decision. Now, one of the major factors of the decision, is the age of the member, firstly due to being able to potentially access tax-free income streams, but also whether they meet the definition of retirement sooner. Example

Peter and Sue have a SMSF. Peter is aged 58 years, and Sue is aged 60. Sue has recently retired. The fund has a total balance of $1,273,000, with Peter’s balance being $748,000, and Sue’s balance being $525,000. Peter is still working, and is planning to continue to do so, for at least another 7 years. You have discussed with Peter that he could commence a transition to retirement pension, but that the assets that would support his TRIS would not be exempt from tax, and that given he is under 60 years of age, the taxable component of the income stream he receives, will need to be included in his taxable income and taxed at his marginal tax rate (less an offset). Based on this, Peter decides not to commence a pension at this time. It is suggested to Peter and Sue, that given Peter is making the maximum concessional contribution to their SMSF, at the end of each financial year, this could be split to Sue. As Sue is 60 and retired, she could commence an account-based pension. This strategy would have the benefit of: • Providing an income stream to Sue, which would be tax-free; • Having over 40% of the assets in the fund in the tax-free environment; and • By splitting the contributions, Peter and Sue will reduce the likelihood that one of their balances

will go over the transfer balance cap whilst the other remains well under it. Essentially it will equalise the accounts.

In addition – should Peter and Sue receive passive income, Sue’s pension payment could help fund the payment of a concessional contribution for Sue – and provide additional tax savings (in the form of a tax deduction in her personal name).


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3.6.2 Maximise Contributions Prior To Retirement

In many instances in the lead up to retirement, it is worthwhile considering what assets your clients hold outside of superannuation and determine whether it would be worthwhile transferring these into the fund, where they may be in a much more tax effective environment. The benefit of moving the assets needs to be done by showing various scenarios for the client, to indicate their likely cash flow and income tax position, if they leave the assets where they are, versus moving them to the superannuation fund. The non-concessional contribution caps have limited the amount that we can convert from personally or family owned assets into superannuation holdings. For members aged under 65, the opportunity to transfer assets has not been entirely removed. If there are two members in a fund (typically husband and wife), then they will be able to transfer $600,000 into the fund at one point in time. Whilst significantly reduced from what we could previously get into the superannuation fund prior to 30 June 2017, this still leaves an ability to transfer many properties or shares into the superannuation environment. Example

David is self-employed and semi-retired, aged 58. His wife Elise is 57 years of age and not working. They have a Family Trust that owns various shares to the value of $1,130,000. The capital gain if they were to transfer the maximum amount of shares ($600,000) into the Super Fund would be $180,000. Because David is self-employed, we could potentially reduce the capital gains tax cost to David by claiming a tax deduction for the amount that is going into superannuation and therefore limit the tax cost of this transfer to $24,875. Capital Gain on Sale of Shares $180,000 Less 50% discount ($90,000) Tax on superannuation contribution ($25,000 x 15%) $3,750 Tax on capital gain at marginal tax rate ($90,000 less $25,000 = $65,000 x 32.5%)

$21,125

Total tax on transfer of shares $24,875 Putting in a higher deductible contribution would have caused the fund to have excess contributions, and therefore excess contributions tax would apply. The annual yield earned by the shares held by the Trust was $35,000 (fully franked). Therefore, by having these shares held by the superannuation fund, David and Elise will initially save approximately $8,750 per annum (the difference between the 32.5% tax rate paid by David and the 15% tax rate paid by the superannuation fund on the grossed up dividend income). On this basis, it would take only 3 years of the tax savings due to ‘pay for’ the upfront tax cost associated with the transfer. This is quite an attractive proposition.

Further to this – once David is retired, we could also commence to pay a pension to him which would be largely tax-free (as there is such a high tax-free component). This would mean that the super fund earnings would be tax-free and would therefore create an additional tax saving of approximately

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$7,500 per annum. If this were the case, the tax savings would meet the initial tax costs within the first year and a half and therefore would be an even more attractive option for David. The added advantage is that once David is aged 60 he can access his superannuation benefits tax-free (either as a TRIS or pension), and should David meet a retirement definition then this will mean that no part of these assets nor their income should be taxable to David or the Fund.

3.6.3 Benefit and Re-contribution Strategy

Because the amount of any benefits received by a member who is over the age of 60 is tax-free, it may seem that the strategy of withdrawing tax concessional components and then re-contributing them back into the superannuation fund as a non-concessional contribution is of no benefit. This is correct when you consider the tax position of the member themselves – however not so on their eventual death, as their children (if they are to be beneficiaries of the death benefit) may be liable to pay 17% tax on the taxable components of the benefit. However, by using the ‘re-contribution strategy’ each year that the member is eligible to do so, will continue to inflate the tax-free components that are likely to be received by their children on their death, thereby saving those children potentially tens or thousands of dollars in tax. Example

Ted who is aged 60 – has $500,000 in super (including $50,000 of non-concessional contributions) at the time when he started a pension from his fund on the 1st July 2013. When he dies at age 75, his superannuation balance was $350,000. His children will be taxed on 90% of the fund balance at a maximum tax rate of 17% - therefore the tax cost to them would be $53,550. If Ted had undertaken a program of using the re-contribution strategy whilst he was eligible to put contributions back into the fund (up to age 65 in his case), then the amount of the tax-free component of the fund would have increased to 100% of the Total Fund balance. Therefore, the total tax cost to his children would have been $NIL. Tax savings for the children in this case would have been $53,550. The best thing about this strategy is that it saves tax in the long run – but it will cost Ted nothing to achieve this result (other than the fees you charge to implement the strategy!).

Tip Another consideration for a benefit and re-contribution strategy, is the fact that a member’s tax-free component will be ‘quarantined’, should a future Government decide to re-introduce tax on income streams and lump sums for members over 60 years of age.

Budget Announcement Care should be taken to ensure that any re-contribution strategy does not breach any additional criteria which surround an individual’s ability to make a non-concessional contribution – such as total super balances in excess of $1,600,000.


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3.6.4 Benefit and Re-contribution Strategy (but not to you!)

This option is contingent on the same sort of “cashing” restrictions the above re-contribution strategy faces. This option opens another alternative where the member is aged over 65 and is not (and has no intention of) working, and therefore is not able to make a non-concessional contribution. The member may seek to re-contribute the cash into a member account for their ultimate beneficiaries (their children). This provides the child (often an adult at this time) with the superannuation benefits now and tax-free components as well. This option has proved quite popular with a number of our clients who look at “wealth succession” and are providing for their children’s retirement, as well as increasing their children’s engagement with superannuation. It also provides strong asset protection as given the cashing restrictions in superannuation; the children will not have access to the funds until they satisfy a condition of release. This strategy does need to be balanced with the needs of the client – after all, they are still alive! Care must be taken to ensure that they have sufficient superannuation or other resources at their disposal to allow them to live the retirement that they want to live. As with every strategy, the clients’ circumstances must first be discussed and understood, and strategies should always be developed with that in mind. The other significant consideration if looking at this alternative is whether the re-contribution goes into the same SMSF (in which case the children would need to be added as trustees of the Fund) OR made into their existing superannuation arrangements. Once again, these issues are a very personal consideration and often will involve the wishes and desires of not only the main client (the parent) but also of the children as well. Remember that in order for a SMSF to retain this classification you cannot have more than 4 members in total (possibly moving to 6 members), so if your client has their spouse still alive (2 members) and then has 3 children, then this strategy may not work within their existing SMSF. Depending on the circumstances, it may be appropriate to set up a separate SMSF for each child or for all children together – or wait and adopt this strategy when one of the parents passes, leaving only one member in the initial fund.

3.6.5 Transfer of Active Assets (Business Real Property) & Small Business CGT

Concessions

For assets and entities that satisfy all the Small Business CGT concession requirements, this strategy provides an additional means to further boost superannuation entitlements outside of normal concessional / non-concessional limits. Utilising the concessions may remove some (or all) of the Capital Gains Tax payable on the disposal / transfer. Care should be taken to ensure the costs of such strategies (such as stamp duty) are quantified and weighed up against the future benefits. Example

Brothers Paul and Martin Clarke together took control and ownership of their late fathers’ business in the 1960s. They continue to run this business to this day and their wives, Karen and Phoebe, and Paul and Karen’s children – Leigh and Gavin, also work in the business.

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The SMSF members are Paul and Karen, who are both over 65 years of age. As at 2018, a breakdown of the assets is as follows: Clarke Unit Trust Factory – Ascot Vale - $2,000,000 Factory – Springvale - $2,700,000 Cash - $100,000 Unitholders of the Clarke Unit Trust are the Paul Clarke Family Trust, the Martin Clarke Family Trust, Martin Clarke Superannuation Fund and the Paul Clarke Superannuation Fund – which each own 25 units. The factories combined yield $324,000 (6%) per annum. Paul Clarke Superannuation Fund ASX share portfolio - $2,500,000 (cost $800,000) Units in Clarke Unit Trust - $1,200,000 (cost $250,000) Cash - $100,000 The super fund generates cash flow from its investments of approximately $135,000 per annum. Pension payments required are $160,000 per annum. The Paul Clarke Family Trust holds an additional commercial property in Clayton that the business operates out of. This property was acquired in 1997 for $400,000 and is currently worth $1,400,000. Paul and Karen have decided to put the family home of 29 years on the market and downsize to a beach home. With the SBCGT concessions and the downsizer contribution, there is ability to move the Clayton property into their SMSF, potentially capital gains tax and stamp duty free. As the Clayton property is being leased by Paul’s business, it is considered an active asset for SBCGT purposes. The transfer to the SMSF will trigger the capital gain, but the concessions would reduce the gain to NIL.

Market Value of Clayton property $1,400,000 Cost $400,000 Capital Gain $1,000,000 50% General Discount ($500,000) Retirement exemption (SBCGT) ($500,000) Taxable Gain NIL

Given Paul and Karen are over 55 years of age, the retirement exemption means they do not have to contribute this to super. However, it is worth considering whether this should be made to super, given the dividends they continue to receive annually from the business.


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The following contributions could be made to the superannuation fund: Paul $300,000 Downsizing contribution Karen $300,000 Downsizing contribution Karen $500,000 SBCGT retirement contribution Leigh $150,000 Non-concessional contribution Gavin $150,000 Non-concessional contribution Total $1,400,000

Stamp duty concessions available in some States broadly allow duty free transfers: • From a Family (Discretionary) Trust to a beneficiary • From an individual to a superannuation fund where there is no consideration on transfer. The concept of “gifting” is where there is ultimately no change in beneficial ownership – that all people that benefit from the property (via the Trust and then as SMSF members) are the same, then there would not be stamp duty as a result. This means that no money can change hands which is what is occurring with the above strategy. Looking at the transaction from a cost / benefit analysis, the main savings of this strategy is the income tax on the rental yield, which will go from a tax rate of 39% (as all individuals are in this tax bracket) to a flat tax rate of approximately 15%. Even though the Paul Clarke Superannuation Fund holds pension accounts, as Paul and Karen have both exceeded their transfer balance caps already, the Clayton property will increase Paul, Karen, Leigh and Gavin’s accumulation balances. As such, it is more conservative to assume the tax rate is 15%. The annual savings are therefore: $84,000 x (39% - 15%) = $20,160

3.6.6 Removal of the 10% Test – Making Personal Concessional Contributions

From 1 July 2017, all individuals who make a contribution to superannuation will be able to claim a tax deduction up to a maximum value of the contribution or $25,000. The individual will no longer be subject to the self-employed test (i.e. the 10% rule). This effectively results in all individuals being able to salary sacrifice, subject to the contributions cap. There is no change to the deduction threshold – i.e. an individual cannot claim a personal tax deduction for a superannuation contribution and create a personal tax loss.

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Example Chris works part-time, earing $12,500 per annum. Chris’s salary is not sufficient for his employer to make a Super Guarantee contribution on his behalf. In addition, he personally receives gross dividends of $70,000 per annum (assume nil franking). Prior to 30 June 2017, Chris did not qualify as substantially self employed and was prohibited from claiming a personal deductible contribution. Note the 10% rule added back salary sacrificed contributions. In addition, he would have been limited by his salary from a salary sacrifice perspective to a maximum super contribution of $12,500. From 1 July 2017, the rule changes allow Chris to make a superannuation contribution up to the cap of $25,000 and provide an avenue to reduce his personal tax liability by $8,738. 2016/17 2017/18 Onwards Salary $12,500 $12,500 Dividends $70,000 $70,000 Personal deduction - ($23,000) Tax income $82,500 $59,500 Tax payable $20,122 $12,074 Tax Saving $8,738

In a multi-generational fund situation, a parent may be able to make a contribution on behalf of one or more of their children and then the child may have the opportunity to claim some or all of this as a tax deduction personally, up to the concessional contribution limits (taking into account the other contributions made for them by their employer/s during the year).

3.6.7 Contribution Splitting for Total Superannuation Balance Purposes

Given the legislative changes and the per person Total Superannuation Balance and Transfer Balance Cap limits of $1.6 million, it has once again become an important consideration, to try and ensure that spouses superannuation balances are spread more evenly. Additional factors such as payments of death benefits make this even more relevant. Example

Colin and Samantha are both aged 45. Colin is working and his superannuation balance is currently $500,000. He contributes $25,000 per annum as a concessional contribution. Samantha is not working, and her superannuation balance is $120,000. Should Colin simply continue maximising his superannuation contributions annually up to age 65, and Samantha does not return to work, then at a 5% rate of return, Colin would have approximately $2,189,000 and Samantha would have $334,300 as superannuation assets at retirement. Had Colin split his contribution annually to Samantha, then at age 65, Colin would hold $1,393,000 and Samantha $1,131,300 to their names. This would mean that both Colin and Samantha’s superannuation balances would be under the transfer balance cap amount, and accordingly, 100% of their fund balance could be in pension mode and receiving the full tax-free status (as opposed to 23% of the fund balance missing out on the tax exemption if the contributions had not been split to Samantha).


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3.6.8 Contribution ‘Claw Back’

Using the proposed concessional contribution claw back post 1 July 2018 is another effective method to ensure retirement wealth is maximised, especially in conjunction with the removal of the work test, where individuals may realise a large capital gain and offset this by a personal concessional contribution of up to $125,000. Example

Heidi is aged 63 and holds an investment property, which she acquired 2 years ago for $850,000. She has permanently retired. In April 2023 she sells the asset, realising a capital gain of $250,000. At the time, Heidi’s superannuation balance is $486,000. As Heidi has not used any of her concessional contribution annual limits since 1 July 2018, she is eligible to claw back the full five years’ worth of concessional contributions, meaning that she could make a concessional superannuation contribution of $125,000 in 2023 without exceeding her annual contribution cap. This would allow Heidi to ignore the Capital Gain realised on the property disposal (as discounting would bring the gain down to $125,000), and as a result the only tax cost of the transaction is the concessional contribution tax ($18,750 contributions tax paid in the fund).

3.6.9 Using Excess Cash Flow to Consistently Maximise Concessional

Contributions

While this does not represent a ‘big kick’ along to an individual superannuation balance, steady contributions over time will continue to compound and assist in wealth accumulation. This could be a particularly useful strategy for those members who cannot ‘physically spend’ their annual pension minimums – they could regularly gift this into family members superannuation and allow them to claim personal tax deductions for a present day boost, while boosting their superannuation balances (in a secure environment that they cannot touch until preservation age).

3.6.10 Using ‘Excess’ Superannuation above the $1.6M Cap to Withdraw & Re-

Contribute

A variant on the above may be for clients to utilise their ability to withdraw money from superannuation tax-free and re-contribute this into the spouse or child/ren’s (or grandchild/ren’s) superannuation account. In many instances, individuals do not have the capacity to make non-concessional contributions – the cost of living, education costs, mortgage costs, etc., all place immense pressure on a household’s saving capacity – individuals may look at an opportunity to make large non-concessional contributions on behalf of their family members now and provide the greatest opportunity for growth and compounding in the superannuation environment, to provide their children with the best opportunity to create a strong asset base in retirement.

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3.6.11 Downsizing Post Age 65

For members who are over 65 years of age and no longer working, there will be very few options available for them to contribute to superannuation. Members of this age are no longer able to use the bring forward provisions, and they must satisfy a work test in order to be able to make the contribution. With the new rules surrounding the total superannuation balance, if their balance is over $1,600,000, then the ability to be able to contribute non-concessional contributions will be removed entirely. For those over the age of 65, they now have an additional potential option to make a tax-free contribution into their superannuation fund. It is not essential for the sale of property to actually be a “downsizing” – just that the disposal of a property which was a main residence has occurred. Example

Nick and Jeanette, both aged 66, have lived in their home (their principal place of residence) for the past 20 years. With their children now all grown up and moved out of home, they have decided that their 5 bedroom home is no longer suitable for them, and they wish to downsize to a 3 bedroom home in Portsea. In October 2018, they sell their home and purchase a new property in Portsea. After the new purchase, they have $1,000,000 available to them. Both Nick and Jeanette are retired, and therefore do not satisfy a work test to be able to contribute $100,000 each of non-concessional contributions. As they resided in their home for over 10 years, they elect to put $300,000 each into their superannuation fund. This leaves them $400,000 outside of superannuation to invest or pass onto their children.

3.6.12 Contributions Post Age 65

For members who are between 65 and 74 years of age and no longer working, there will be an opportunity to contribute to superannuation, if their balance is less than $300,000. In the first year that these members no longer satisfy a work test, so long as their balance is below the maximum threshold, they will be able to contribute either concessional, non-concessional or catch up contributions. Example

Nicole is 68 years of age and has $280,000 in her self managed superannuation fund. She has decided that on 1 October 2019, she is going to permanently retire from gainful employment. Nicole will have the ability to make a concessional contribution of $25,000, a non-concessional contribution of $100,000 or utilise the catch up contribution provisions (if not previously utilised) until 30 June 2021.


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3.6.13 Six Member Funds

Unlegislated at the time of writing, this policy was announced in the 2018 Federal Budget, this proposal will make it easier for “family” funds to grow their liquid retirement wealth. Younger family members will be able to contribute and assist SMSF’s where the majority / largest assets are illiquid (i.e. – property) in meeting their ongoing obligations such as pension minimums needed for retired members, and potentially assist in retaining these illiquid assets in superannuation on a member’s death. Trustees will need to ensure that concerns over control and investment preferences / timeframe and considered and managed in instances where (say) “mum and dad” are retired, and are suddenly outnumbered as trustees by their 4 children.

3.6.14 Increase in access to bring forward for 65 – 66 year olds

Announced as part of the 2019 Federal Budget, this strategy further allows additional contributions to be made to super (subject to transfer balance cap restrictions) and means that strategies such as withdrawal and re-contribution strategies can be employed for longer. The increase in access to the bring–forward rules is also accompanied (assuming legislated) by a corresponding increase in the age to which the work test applies. If legislated, these rules will apply from 1 July 2020. Note that while these rules have essentially lifted the “bring forward” and work test age thresholds up to 67, there is no corresponding increase to the downsizing contribution age threshold (which will remain at 65).

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