Author: Brenda Hutchinson, Partner, TAG Financial Services
As 30 June approaches, one of the items that we generally discuss with our clients, is making superannuation contributions. It not only helps your clients to build their superannuation wealth, but in many instances, can be a strategy to reduce tax payable.
It is important for you to consider the different strategies, and which are best to help your clients achieve their goals. In addition, there are also some contribution timing strategies that we need to take into account this year.
1 – Concessional Contributions – first year of catch up contributions
This is the first year your clients will potentially be able to utilise the “catch-up” contribution provisions, that became effective from 1 July 2018. Where a member’s total superannuation balance (TSB) is less than $500,000, a member will be able to make additional concessional contributions, by applying previously unused concessional contributions cap amounts from last year.
For example, 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.
As a result, for the 2019-20 financial year, Layla could contribute up to $40,000 of concessional contributions.
2 – Non-Concessional Contributions – be careful of timing with regards to reduced total superannuation balances
Due to the effects of COVID-19 on the markets, many superannuation fund members would have seen a reduction in their fund balances. For some, this may even have meant their TSB fell below $1.6 million. However, when considering whether you can make a non-concessional contribution due to your TSB being over $1.6 million, you must consider the TSB at 30 June of the previous year.
So if your balance was over $1.6 million at 30 June 2019, but has fallen below $1.6 million with recent market volatility, you will not be able to make a non-concessional contribution before 30 June 2020. If you did, it would be treated as excess contributions.
If the balance has fallen below $1.6 million due to recent market volatility, then it may be worth considering whether a non-concessional contribution can be made in July 2020.
3 – Concessional Contributions – using reserves to “double” dip on the contribution deduction
Under the Superannuation Industry (Supervision) Regulations (SIS Regs.), there is provision to allocate contributions 28 days after the end of the month in which the contribution was made. As a result, this provides the ability to claim a tax deduction for the contribution made, without exceeding the contribution caps.
In order for your clients to be able to avail themselves of this strategy, the contribution amount to be “reserved” must be made in June (to meet the 28 day allocation rule) and must be a separate contribution which can be allocated.
For example, say John wanted to utilise the reserving strategy to claim a total tax deduction of $50,000.
If the $50,000 contribution was made in May, then he would not be able to reserve the $25,000, as allocating within 28 days would be in the same financial year (therefore resulting in excess contributions).
If the $50,000 was contributed in June, but in one payment, then you would also not be able to reserve this. Again, you would have an excess contribution issue.
In order to be able to utilise the reserving strategy, the contribution to be reserved must be made in June and a separate payment.
And finally, do not forget that in order for the contribution to be counted this year, you must make sure the contribution is actually received by the fund, by 30 June. For some clearing houses, this date will be before 30 June, so make sure your clients are organised with their payments.
We can provide advice in this area. If you would like to discuss a project, contact us on the above information. Our advice is quoted upfront for your approval before commencement.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2020. Please do not reproduce without the expressed written consent of the author.