Over the past week I've made three presentations to separate retiree groups, and from the questions being asked, it's obvious many are still confused about superannuation. So here's a brief overview, incorporating answers to many of their questions.
Contributing to super
First the good news: there is no limit on the amount your superannuation can grow to. There are, however, limits on contributions both by amount and by age.
Anybody may contribute to superannuation until age 67, but after that the contributor must pass a work test, which involves working for 40 hours over 30 consecutive days in the year the contribution is made.
The May 2021 budget proposed to abolish the work test for non-concessional contributions, effective from July 1, 2022. Once you reach 75 no more contributions are allowed except mandated employer contributions.
Tax-deductible contributions are limited to $25,000 a year, rising to $27,500 on 1 July due to indexation. These "concessional contributions" include contributions from all sources, including the employer compulsory contribution.
There is a 15 per cent tax on entry on these contributions, which rises to 30 per cent for anyone whose adjusted taxable income (including salary sacrificed contributions) is over $250,000.
Non-deductible or "non-concessional" contributions come from after-tax dollars, and are limited to $100,000 a year now, rising to $110,000 on 1 July.
There is no entry tax on these contributions, but no non-concessional contributions can be made if your superannuation balance at 30 June last year was in excess of $1.6 million ($1.7 million from 1 July).
Depending on your age, previous contributions, and your total super balance, it may be possible to contribute up to $330,000 in one lump sum by using the "bring forward" rules.
Transfer balance cap
The biggest confusion revealed by my seminar audiences was about the transfer balance cap. This restricts the amount you can transfer to pension mode from accumulation mode.
The cap is currently $1.6 million, rising to $1.7 million on 1 July. Once you have used your transfer balance cap, no more money can be transferred to pension mode. But once the money is in pension mode, there is no limit on what it can grow to.
For example, if you transferred $1.6 million to pension mode and the fund had a 20 per cent year, you could find yourself with $1,920,000 in pension mode.
Once you are in pension mode, you are required to draw a minimum pension amount each year - this increases as you get older. For example, it's 4 per cent if you are under 65 and 9 per cent if you are aged between 85 and 89.
These numbers have been temporarily halved because of COVID-19 and its effects on the market - so the minimum requirement will be 2 per cent and 4.5 per cent for the next financial year.
Centrelink treatment of superannuation confuses many people. Basically, your superannuation is not assessed for pension eligibility until you reach pensionable age.
It's quite common for a person of pensionable age to have a younger partner, in which case it may be possible for the older partner to maximise their Centrelink eligibility by having as much superannuation as possible in the name of the younger partner.
The exception is when the fund is converted to pension mode - it is then assessed immediately. So, if you have a younger partner it may be better to keep the family superannuation in that person's name and let them make lump sum withdrawals as necessary once they reach preservation age.
Capital Gains Tax
Superannuation can also be a great tool for reducing capital gains tax (CGT). This is because CGT is assessed by adding the gain to your taxable income in the year of sale.
A tax-deductible contribution into your super of up to $27,500 may reduce your taxable income to a lower tax-bracket, where the CGT would be much less. There are also carry forward provisions which may be possible to use (conditions apply). Just make sure you take advice in this area. It's easy to get it wrong.
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Noel answers your money questions
I have shares in a number of companies listed on the Australian Stock Exchange. The board of one of these is calling for a fresh issue of shares in order to finance a project that should be quite good.
If I were to do nothing, and ignoring the outcome of the deal, will it be that my shares will automatically be reduced in value purely by the fact that my share holding percentage will be less? I'm hopeful that you can shed some light on this, please. Also, could you explain the differences between institutional, professional and sophisticated investors.
If the company increases the shares on issue, and you did not take up your entitlement, the shares you own would be a lesser proportion of the company's issued capital.
New share issues are usually sold at a "discount" to the current share price (the discount can be anywhere between 5 per cent and 25 per cent or more below the current price, depending on how desperate the company is for cash), so people taking up the offer are getting a 'free ride' at the expense of the existing shareholders.
However, if you think the prospects are good it would make sense to take the issue up.
An institutional investor is a large fund such as an industry or retail superannuation fund and a professional Investor is a person who has or controls gross (personal) assets of at least $10 million, or holds an Australian Financial Services licence. To be considered a sophisticated investor your accountant needs to certify that you have earned an income of $250,000 or more per annum for the last two years or hold net assets of at least $2.5 million.
We were dismayed to find that DVA and Centrelink have different rules in regard to rental properties compared to the ATO. We received a letter from the DVA that stated that the loss on a rental property could not offset a profit on a second rental property. The loss making property counts as nil income only.
We have two investment properties, both highly geared. One made $20,000 the other lost $10,000 approx. Profit was counted but not the loss so we had $9000 taken out of our pension.
I don't think this is common knowledge nor is it fair or equitable. Not sure if you could put some light on it as someone needs to. I wrote to the ATO and didn't get a reply.
A spokesperson from the Department of Veterans' Affairs points out that our social security and taxation systems have different purposes and are covered under separate legislation. For DVA and social security purposes, rental property net income is treated broadly the same as taxable income, but with some exceptions.
One exception is that losses from one rental property cannot be offset against income from another property. If the net income from a property is a negative amount, the income for DVA and social security means testing purposes from that property is nil.
This is to ensure that the social security safety net, including DVA's service pension, is targeted to those who need it most. There are many other cases where taxable income does not mesh with Social Security. For example, if an age pensioner makes a taxable capital gain such gain would be subject to income tax but would not be counted by Centrelink for the income test.
My gross income is $60,000 and I am salary sacrificing into Super to reduce my taxable income to $37,000. If I also contribute $1000 after tax into my Super am I eligible for the Government Co-Contribution of $500?
Income eligibility for the co-contribution is based on adjusted taxable income which include salary sacrificed contributions. The cut-off point is $54,837 which is below your $60,000 gross salary - you would not be eligible for the co-contribution.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: firstname.lastname@example.org