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Meg Heffron talks about some of the contributions changes happening from July 2022, and where there may be opportunities for SMSF trustees.
Transcript
What are the main upcoming changes to super contributions that SMSF trustees should be aware of?
There are a couple, but probably the two main ones that I think trustees probably should focus on. Come next year, 1 July 2022 will have a much much longer period over which trustees can make contributions, because basically the work test, which used to be a thing that stopped you contributing once you’d retired, if you were over a certain age, that goes for all except personal contributions that people want to claim a tax deduction for.
So whereas in the past it might have been really common for a retiree to be unable to put money into super after about 65, or more recently, 67. In future it’s going to be all the way up to 75. So I think that’s huge and will really change the way people think about planning their super savings. They don’t have a hard deadline at 65 or 67 anymore. They’ve got until 75.
And the other thing is the special rule that’s been in for the last couple of years about downsizer contributions. So those unique contributions you can put in when you sell your home. Historically, they’ve only been able to happen after 65, but that will shift down to 60 next year. So we’ll have a whole new cohort of people who sell their home and could seriously think about making a downsizer contribution. There are actually others, but I think they’re probably my two top ticket items.
I saw someone referred to as ten year magic window.
Oh that’s a great term. Do you know why they call it the magic window, though? Because it really is magic. So you have total flexibility with your super in that window from 65 to 75 in that you are both at a phase where you can keep putting money in if you want, but you can also take it out.
Whereas you think about the rest of us under 65, unless you’re above a certain age and retired, you can’t get it out. You can put it in, but you can’t get it out. Historically, you’ve been able to get it out at older ages but not put it in. We’ve now got this great long window of ten years where you can do both.
So is everyone going to be Googling recontribution strategy?
Totally. Of course they will, yes. So a lot of your readers probably already know what that is. But for those who don’t, it’s taking money out, putting it back in. Sounds like a very pointless circular exercise, but it’s a massive benefit for, say, adult children who inherit.
Are there any potential traps to watch out for?
Yeah. Look, I think there probably are a couple of traps. The very fact that you’ve got a ten year window where you can be multitasking and doing two things at once, I think sometimes people will just miss some of the slight nuances of taking money out of an account that they are also putting money into. And I’ll just give you, there are a couple of ways in which that might come up. But just one example.
If you put money in and your intention is to claim a tax deduction for it at the end of the year, that tax deduction will get scaled back if you take money out again during the year. So there will be these nuances that are not new. They’ve always been around. But we haven’t been in that multitasking phase for so long. So I think they’ll catch us.
We need some smart calculators.
We do. Yes. Or even just reminders, even just if you’re about to take money out, here’s the checklist of five things you should think about before you do.
We talked about there being a ten year magic window, which is totally true. I think with the changes to contributions and downsizer contributions, there’s also a 15 year danger zone. So it’s great to be able to both take money out and put money back in. It’s also great to be able to make downsizer contributions early while you’re still able to make other types of contributions, like non-concessional contributions. The real trap with these contributions is if you make a downsizer contribution and then later discover that you weren’t eligible to make it, it’s treated like a different type of contribution. It’s treated like a non-concessional personal contribution.
Now, in the past, that hasn’t really been a big deal, because if you made one and you weren’t allowed because you were too old, the rules of super allowed you to just take the money back out again. Nowadays you’ll be making these things if you’re under 75, you’re allowed to make them. So the rules work differently then if you’re allowed to make it. But you wish you hadn’t, because now you’ve created a big tax bill by contributing too much.
Now the rules will force you to go through a different process, which will end up with a tax bill rather than just being allowed to take the money back out. We didn’t have that problem in the past because once you got to sort of 67, unless you’re working, you weren’t allowed to make those non-concessional contributions. So if you made a mistake on your downsizer, ended up the money just came back out again. Now if you make a mistake on your downsizer up until 75, you might instead create a tax bill.
Are the any contributions strategies that you think are often overlooked by SMSF trustees?
Yes. So maybe that recontribution idea is one. I also think a lot of trustees will effectively have felt like I’ve got to a point in my superannuation life where I can’t put money in anymore. And the classic will be those who you can’t put personal contributions that you don’t claim a tax deduction for in once you get above a certain threshold. And it used to be $1.6 million.
From this year, so not even waiting until next year, it’s $1.7 million. And I think it’s really tempting when you know you’re above a threshold to think right, well, that opportunity is closed to me move on without realising that when you’re in that phase where you’re also taking money out, your balance may dip lower but also the thresholds are going up. So there’s a possibility somebody kind of thought they were out of contention for making new contributions to super only to find a couple of years later they’re back in.
Meg Heffron is a Director of Heffron – a firm that specialises in SMSFs.
This interview took place at the 2022 SMSF Association conference where SuperGuide were guests of the SMSF Association.
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