The changes to rules for superannuation contributions has created an ideal environment for fund members to reduce their taxable components, but SMSF practitioners and their clients need to ensure they use them in the correct order to derive the most benefit, according to an SMSF strategist.
BT Financial Group SMSF strategy national manager Neil Sparks said the introduction of bring-forward rules and downsizer contributions created a “contribution nirvana” with multiple ways to contribute more to superannuation.
“We’ve now got this ability for people over 67 to be able to cash out and recontribute and, depending on their age, do so multiple times, as well as the opportunity to avail themselves of catch-up, concessional contributions, and we have also got downsizer contributions,” Sparks said during a presentation at the recent Self-managed Independent Superannuation Funds Association Annual SMSF Forum in Melbourne.
He noted the bring-forward rules could trigger a wave of cashing out and recontributing as every $100,000 of taxable component carries $15,000 to $17,000 of tax when paid to an adult beneficiary as a death benefit.
“We’ve got this situation where we can now from 67 years onwards start to cash out and recontribute up to $330,000, and if you were lucky enough to win the lottery and be turning 67 in July, you could put in $330,000 and do the same again at 70 and 73,” he said.
“You wouldn’t do that at 74 because you want to make as much as you possibly can, so you put in $110,000, but as long as you’re 74 on the close of business 30 June, you can put in another $330,000.
“It’s potentially a way to get a lot of money either into super for older Australians or to cash out and recontribute and wash away some of those tax components.”
He said these changes could also be used to top up the superannuation balance of a spouse, but an SMSF member’s transfer balance cap had to be considered in relation to any contributions.
“The order of the way you get clients to contribute to super is important,” he said.
“We know that with non-concessional contributions, once you reach the transfer balance cap you can’t make any more of them.
“So the worst thing you could do is make a downsizer contribution before you make a non-concessional contribution because the downsizer might push you up towards the cap and then you wouldn’t be able to make any further contributions.
“Make sure you do concessional and non-concessional contributions first, and then small business CGT (capital gains tax) and downsizer last because they don’t have any total super balance tests applied to them, which is definitely the way to go when you’re restructuring your clients’ affairs as a result of these changes.”
