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Changes to superannuation contribution caps and limits

Changes to superannuation contribution caps and limits

The Government has announced some very important changes to super and how Australians can save for their retirement.

In our February 2021 Newsletter, we discussed the general transfer balance cap (TBC) – the limit on the amount you can transfer into the tax-free retirement phase in super – is increasing from $1.6 million to $1.7 million on July 1.

From July 2021, concessional contributions will increase from the current limit of $25,000 p.a. to $27,500 p.a. and non-concessional contributions will increase from $100,000 p.a. to $110,000 p.a.

Kindly note: The advice contained in this article is of a general nature only. It has been prepared without considering your individual goals and objectives, or financial situation. Before making any decision about your super, please consider your personal circumstances and consult with your senior advisor at PrimeAdvisory.

Concessional (pre-tax) Contributions

From July 1, 2021 the annual concessional contributions cap is being indexed from $25,000 to $27,500.

These are pre-tax super contributions and include an employer’s compulsory award, Superannuation Guarantee (SG) and additional voluntary contributions – including salary-sacrifice – and personal contributions you may make for which you claim a tax deduction.

For people making voluntary pre-tax contributions, the increase in the cap for the 2021-22 financial year onwards will likely mean a bigger deduction and tax saving.

However, please be aware if you are a wage-earner and your employer pays the super fund’s administration fees and/or insurance premiums on your behalf, these amounts also count towards your cap.

The SG rate is legislated to increase from 9.5 per cent to 10 per cent from July 1, but there is considerable lobbying in the wake of the COVID-19 crisis to delay this increase once again. So, if you are wage-earning, the opportunity to make increased voluntary concessional contributions from July 1 will be partly absorbed by the increase in your employer’s SG contributions, provided the government does not postpone it.

If you want to use the catch-up rule this financial year – that is, you intend making additional contributions by utilising unused cap amounts from previous years – then you can only do it where you did not utilise the full $25,000 cap in 2018-19 and/or 2019-20, and your total superannuation balance – the total of everything you have in the super system – on June 30, 2020, was less than $500,000. The opportunity arises from unused cap amounts from previous years and until July 1 this year, the concessional contribution cap is $25,000 a year. The higher $27,500 cap does not come into play until the 2021-22 financial year.

If you wish to use the “contribution reserving strategy” in June this year to claim a larger tax deduction in 2020-21, then be mindful that the maximum deduction may be $52,500 (up from $50,000) with the second contribution now being up to $27,500 because it is being tested against the cap in 2021-22 – and do not forget to allocate this contribution by July 28.

Non-Concessional (after-tax) Contributions

From July 1, personal after-tax contributions are on the rise too.

The non-concessional contributions annual cap – currently $100,000 – is four times the concessional contribution cap. Accordingly, with the concessional cap increasing to $27,500, the non-concessional cap will increase to $110,000.

Your total superannuation balance (TSB) determines your eligibility to make non-concessional contributions and relates to the general TBC.

With the TBC increasing to $1.7 million from July 1, it means that if your TSB on June 30, 2021 is less than $1.7 million you may be able to make non-concessional contributions of at least $110,000 next financial year (i.e., in 2021-22). Without indexation of the TBC, you would have been unable to contribute if you had between $1.6 million and $1.7 million in super.

Your TSB also determines your entitlement to use the non-concessional bring-forward rule to get more into super. There are some complicated calculations to understand your bring forward rule, particularly if your individual balance is more than $1.48m as at 30 June 2021.

Salary-Sacrifice and Personal Contribution Rules

Your eligibility to contribute to super is reliant on your age. Anyone under 67 may contribute, but if you are 67-74, you must meet the work test (40 hours of gainful employment in 30 days) or work test exemption to contribute.

The work test exemption may be used to contribute to super – provided you have not used it before – where you had no more than $300,000 in super at the previous June 30 and you met the work test in the last financial year.

You cannot contribute after 28 days after the end of the month in which you turn 75. Only employer-mandated award and SG contributions can be made.

While the age to make super contributions without meeting the work test or work test exemption has been extended to people aged 65 and 66, the extension of the non-concessional contribution bring-forward rule for people in this age group has not – yet.

Note that the age restriction, work test and TSB test do not apply to downsizer contributions.

The long-awaited indexation of the contribution caps and the transfer balance cap is a much-needed relief for the superannuation system. It was wished that it would have occurred last year – but it did not. So, it is wonderful news it is finally happening this year.

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Does high income always translate into higher wealth creation? Let’s learn together!

Research shows that the top 5% of high-income earners often express feelings of discontentment with their current level of wealth creation. There is, however, a strong desire to do something about it. The absence of a formal wealth-building strategy and heavy reliance on a company share plan to accumulate personal wealth can be partially responsible for causing this feeling.

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Directors and Executives of companies are appointed to increase returns for the shareholders of the company they work for. They are well remunerated and rarely work less than the 40 hours a week they are obligated to work. In fact, a Harvard study tracking CEOs found that most work 62 hours on average a week.

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Let’s take the example of an executive, Mrs. X, who earns $250k a year and a $50k bonus as part of her long-term incentive plan. Mrs. X has a partner who has not gone back to work in the last five years since they had kids together, and both their children are at school.

The Salary looks great on paper, so how is the money actually spent?

Time poor = high rate of spending

With limited available time, we tend to spend more money to ensure we enjoy the most of it. We may eat out more often and may book more fancy restaurants that offers the finest steak along with an exotic bottle of red. “Of course we do that, because all the people we socialise with do that too.” The entertainment often runs at $1k a week which equates to a family meal out, a few nicer lunches during the week, a nice meal out once a week, and the innumerable coffees and breakfasts along the way. It adds up real quick.

Being time poor also equates the number of jobs we outsource; cleaning the house, cleaning the cars, gardening, the personal training sessions, the pool guy. We know it’s true.

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Holidaying becomes syonymous with business class tickets and luxurious high-end resorts. A $20k holiday a year and a few $5k local getaways during the year are an ordinary affair. When travelling for work is done in style, your personal travel tends to elevate to that level too. And once it goes up, it rarely goes back.

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When we work hard, so the attitude towards spending is often ‘you deserve it’. Most people let their spending and lifestyle be defined by their income and once the lifestyle is inflated, it’s almost impossible to go back.

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When it comes to the family home, the more you earn, the more debt you can afford. It is hard to resist the temptation to be in the ‘right’ location, with a nice big house with all the amentities and peripherals. Setting aside $5k a month for mortgage repayments is commonplace. A nice car in the garage is also a must, with generally one car leased at $1k per month. With the location, comes schooling. Having the kids at private school can cost $20k per child per annum depending on the school.

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In this example we have just spent the whole of Mrs. X’s annual salary excluding her bonus prior to the basic living expenses. We have not yet paid for the household running costs, food, car running costs, health bills and any other of the fixed expenditure that comes with a family.

Mrs. X is in the top 5% of income earners in Australia. But with a geared-up lifestyle, there is only small, if any, increases in ‘wealth’ each year – usually only super payments, the long-term incentive plan when received and any principal component of the monthly mortgage when not redrawn to pay school fees.

Building wealth isn’t easy. Especially when your focus is your work and you are working 62 hours a week. Add the time you are thinking about work and that doesn’t leave you with a lot of ‘free’ time. Then you need to prioritise the family, your physical health, mental health, other household chores – it is astounding to note that prioritising wealth building doesn’t rank number one on this list. It probably doesn’t even rank in the top ten.

At PrimeAdvisory, we are passionate about understanding where you are on your journey, being clear on your goals, partnering with you to create the right strategy and keeping you on track with regular catchups along the way.

We understand we might be only helping you in a small capacity at the moment, be it via helping you file your annual ITRs or overseeing your Self-Managed Super Fund (SMSF). However, it is always our intention, and even more so our mission in 2021 to be invested in understanding your overall strategic goals for life and implementing proactive strategies today so we can help you materialise all your dreams in 5 or 10 years from now, i.e., own a home; be debt-free, make the most of your tax benefits, structure a geared property, start an investment portfolio, consider a family trust and manage employee shares, etc.

With Prime 2.0, we hope to take our relationship to another level, make it seem less transactional, more transformational. Contact your senior advisor today. Let’s make this journey exciting and memorable for you.

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