The new financial year is upon us. With it comes a suite of changes to various superannuation caps and thresholds, which open the door to new strategic opportunities for your SMSF.
We give you the heads up on why you should be conducting a contributions check-up this financial year.
What changes are there to super contributions?
The first of July 2021 kickstarted an array of changes to the superannuation world, notably the indexation of contributions caps, transfer balance cap (TBC) and total super balance (TSB). In addition, the new financial year hailed an increase in the level of Superannuation Guarantee contributions and a repeal to the excess concessional contributions charge.
The changes are welcomed by SMSF owners, who are revelling in the opportunity to exercise a new strategic direction for their SMSF with the ability to contribute more towards their retirement balance.
What the contribution changes mean for SMSF owners
Let SMSF Loan Experts guide you through what the changes mean for you.
Indexation to Contributions Caps
The limit on how much you can contribute to super (either before or after tax) has been increased as of the start of the financial year.
Previously, the concessional contributions cap (before tax contributions such as Salary Sacrifice for Superannuation Guarantee contributions from an employer) sat at $25,000 per year; however, as of 1 July 2021, the concessional contributions cap has increased to $27,500 per year.
The new non-concessional contributions cap (after tax such as personal contributions) is now $110,000, up from $100,000 in previous financial years.
The ability to get more into your super account each and every year not only leads to a bigger nest egg at retirement, but could also mean repaying your SMSF Loan faster, further accelerating your retirement savings.
Increased Government Co-Contribution
The schedule for increases has been legislated for many years now, but the time has finally come for the Superannuation Guarantee Contribution (SGC) rate to be increased up to 10%. You may know these as the compulsory contributions that your employer is required to make into super on your behalf (provided you’re earning more than $450 before tax in a calendar month).
Recently, the Australian Treasury released its Intergenerational Report, which indicated a massive amount of Australians would be self-funded retirees in decades to come. The increase to the SG rate effectively means the Government is helping you out by giving you the best chance of a meaningful superannuation balance. More monies heading into your super before you have to pay income tax at your tax rate means not only slightly more tax savings each year, but a larger balance to go towards your SMSF investment strategy without needing to lift a finger.
SMSF Loan Experts can walk you through how the increased Superannuation Guarantee could assist in funding SMSF property investment.
Indexation to Transfer Balance Cap
Many SMSF owners are wary of the Transfer Balance Cap & Total Super Balance restrictions. Introduced in 2017, the transfer balance cap effectively puts a limit on how much money you can transfer into the retirement phase of your SMSF.
The new financial year marked indexation on the Transfer Balance Cap (TBC), which means an SMSF can now hold a transfer balance cap of up to $1.7 million, an increase of $100,000 from 2018’s limit of $1.6 million. Every individual holds their own transfer balance cap, which means if your SMSF is still in accumulation phase, it will now sit somewhere between $1.6M and $1.7M, depending on your circumstances.
The benefit here is fairly straightforward: bigger available balance = availability to have bigger super savings!
Indexation of Total Super Balance
The Total Superannuation Balance (TSB) was introduced back in June 2017 and is used to determine if you’re eligible for certain super measures. It’s a way to value all of your superannuation interests in your super fund at a particular date (which is usually the end of the financial year every year; 30 June).
Your Total Super Balance affects your eligibility for the below super measure:
- Non-concessional contributions cap
- The bring-forward of non-concessional contributions cap
- Your carry-forward concessional contributions
- Work test exemption
- Spouse tax offset
- Government co-contribution
- Segregated asset method for calculating exempt current pension income
The TSB affected individuals with a balance of $1.6M or more at 30 June of the previous year, by disallowing them to make non-concessional contributions. (You can still make concessional contributions provided you meet the work test).
By indexing the TSB up to $1.7M as at July 1 2021, those individuals are now able to make further non-concessional contributions into their superannuation fund that they previously haven’t been able to. What a great way to be able to inject more cash into super to potentially make repayments to your SMSF loan!
Repeal to the excess concessional contributions charge
Many people can gloss over any phrases that sound like a whole heap of financial or legal jargon. Still, the repeal to the excess concessional contributions charge (ECC) is worth wrapping your head around.
Historically, if you went over your concessional contribution cap (refresher: the limit on how much ‘before tax’ money you can put into super in one year), you would be charged a penalty, known as the concessional contributions excess charge. The penalty was on top of paying further tax on the excess amount. And if you didn’t pay in time, you’d also be lumped with a further penalty known as the General Interest Charge.
When you go over your concessional contributions cap, you have the option of withdrawing up to 85% of the excess contributions or leaving them in your super fund. But this is where it can get a bit tricky. The ATO needs you to pay the required tax on the excess contributions. If you withdraw the funds out, then this can go towards paying the required tax and contributions charge (and will be added to your assessable income). But if you keep them in your super fund, then the amount will go towards your non-concessional contributions limit, and you’ll need to pay the tax from your back pocket. The intent of the ECC is to acknowledge that the tax is collected later than standard income tax.
The repeal now means that if you choose to have any excess contributions included in your assessable income by withdrawing them, you’ll no longer be charged the excess contributions charge. This is fantastic news and can mean more available funds to put towards your superannuation balance in the next financial year instead of directing them to the taxation office!
Something else to keep in mind when performing a ‘contributions check-up’ on your SMSF
If you accessed your super under the COVID-19 early release provision, then you are now permitted to re-contribute an amount equal to the amount you withdrew up until June 30, 2030! Bonus: if you re-contribute these funds, then they won’t be counted towards your non-concessional cap limit.
What a great way to not only undo some of the potential impacts the COVID-19 super payment had on your final retirement balance, but to get up to $20,000 back into your super fund over the next nine years without needing to eat into your non-concessional contributions limit.
How the changes this financial year can help you with an SMSF Loan
After years of the government tightening the belt on how much we can put into super within a financial year, the increases, indexations, and relaxations we’ve seen with the dawn of the new financial year open up many opportunities for SMSF owners.
The ability to utilise provisions such as carry forward, bring forward, spouse contributions, and various tax offsets are an ideal pathway to supporting your SMSF’s growth using property investment via an SMSF loan.
While reassessing your contributions, it could be a great time to reassess your investment strategy regarding your SMSF investment property. For example, the ability to contribute additional funds into your SMSF could possibly provide the cash flow necessary for a negatively geared property.
The ability to contribute more into super means that your capacity to repay a loan increases. This is great news if you’re looking to borrow larger amounts to invest in property!
If you’d like your current loan and repayments reassessed, we’d love to help! With the changes to contributions, it might be the right time to think about refinancing your SMSF loan.
With a correctly optimised loan, self-managed super fund structure and property type, your fund could be hundreds of thousands of dollars larger when you retire. SMSF Loan Experts help the trustees of self managed super funds optimise their loan and lending structure to get the best possible outcome. Enquire now for a no-obligation, no strings attached chat.
