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Having too much when it comes to your retirement savings is a problem many people would like to have.
But if your account balance has almost reached the $1.6 million total super balance (TSB) threshold, it can create real problems when it comes to making further contributions.
So, what are some ways you can reduce your TSB without breaking the super rules? SuperGuide has found four strategies for you to consider.
What is your total super balance (TSB)?
While super fund members all have different balances in their super accounts, everyone has the same $1.6 million cap on the amount they can accumulate within the super system.
This total superannuation balance (TSB) cap was introduced to limit the tax benefits Australians received through the super system. Without it, wealthier savers could accumulate large amounts within the super system while paying a lower tax rate.
Once your TSB goes over the threshold, you are not permitted to make any further non-concessional (after-tax) contributions into your super account until your TSB falls below $1.6 million (as measured at the start of each financial year).
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Concessional (before-tax) contributions, however, can still be made into your account regardless of your TSB. These include employer contributions and personal contributions for which you claim a tax deduction.
How is your TSB calculated?
Your current TSB is calculated using the value of all your super accounts, plus any related assets such as super pensions or retirement savings accounts.
In general terms, your TSB is calculated by adding the:
- Value of your accumulation phase super interests (total benefits payable if you voluntarily ceased the interest at that time)
- Value of your retirement phase super interests
- Amount of your roll-over super benefits
- Outstanding balance of any SMSF limited recourse borrowing arrangement entered into from 1 July 2018 (in certain circumstances)
… less any personal injury or structured settlement contributions paid into your super accounts.
For more about your TSB, read SuperGuide article What is included in my Total Superannuation Balance, and when does it apply?
4 strategies to manage your TSB
Need to know
Always seek professional advice from an independent tax or financial adviser before implementing any strategy in relation to your TSB, as contributions in this area involve complex tax calculations and eligibility rules.
The information in this article is of a general nature only and cannot be considered financial advice.
If you are close to the $1.6 million cap, there are four strategies you may be able to consider to help moderate your total super balance:
Strategy 1 – Adopt tax effect accounting
Tax effective accounting is a way of reflecting the true balance of a member’s super interest and is commonly used by large funds.
SMSFs, however, usually only recognise the tax liabilities associated with unrealised capital gains when they are incurred. This means a member’s current account balance is usually based on the market value of the fund’s assets, not their after-tax value.
Although the ATO uses the member account balance listed in your SMSF’s annual return to calculate your TSB, this is not identical to the actual value of your super interests. Your actual withdrawal benefit amount is broadly the net realisable value of your interests taking into account tax payable and possible future costs associated with realising assets to pay out your super interests.
Introducing tax effective accounting means the SMSF starts recognising future tax liabilities and costs, so asset values do not overstate their likely after-tax position.
This potentially reduces the value of the fund’s assets – and the individual member’s interest. This may allow you to make further contributions while still staying until your $1.6 million cap.
Note: Tax effective accounting must be used on a consistent basis by an SMSF, not as a one-off.
Before implementing any strategies in relation to your TSB, it’s important to remember there are strong anti-tax avoidance provisions.
If you enter into a transaction with the sole or dominant purpose of enjoying a tax benefit, the ATO can deny the benefit received. The Part IVA provision in the Income Tax Assessment Act 1936 can be triggered if the ATO considers a tax benefit arose from a scheme that was tax driven.
ALWAYS seek expert advice from a qualified tax adviser before taking any action.
Strategy 2 – Pay arm’s length expenses
Paying expenses can also reduce the total value of the SMSF and the account balances of members – in turn reducing their TSB.
Common SMSF expenses include the SMSF supervisory levy, audit and actuarial fees, operating expenses (such as management and administration fees), investment-related expenses (such as brokerage and bank fees), and accounting fees to prepare and lodge the fund’s annual return.
For this strategy to be appropriate, any expenses paid by the SMSF must meet the requirements of the sole purpose test and must not provide financial assistance to members or relatives. The expenses also need to meet the arm’s length rules and be distributed in a fair and reasonable manner between all fund members.
For more on SMSF expenses, read SuperGuide articles:
- What SMSF trustees need to know about non-arm’s length expenditure (NALE)
- What expenses can an SMSF deduct?
Strategy 3 – Split contributions with your spouse
Contributions splitting is another strategy you can use to reduce your TSB.
Many couples have very different amounts in super, with one partner having a much higher account balance than their spouse. To avoid problems with your TSB, the partner with the highest amount in super can ‘split’ his or her super contributions with their partner.
If you have a higher TSB than your partner, this can be a simple way to reduce your TSB and balance out the amount you both have in your super accounts.
Under the splitting rules, each financial year you can allocate the lesser of:
- 85% of the concessional (before-tax) contributions made into your account during a financial year, or
- 85% of the concessional contributions cap ($25,000 in 2019/20).
For more about splitting, see SuperGuide article Contribution splitting: How to boost your spouse’s super.
Making a downsizer contribution
You can still make a downsizer contribution into your super account if you are nearing your TSB cap.
Downsizer contributions are not treated as non-concessional contributions, so they do not count towards your non-concessional cap when you make the contribution. However, your downsizer contributions will count towards your TSB when it is recalculated at the end of the financial year on 30 June.
If you move your accumulated super into the retirement (or pension) phase, downsizer contributions are subject to the transfer balance cap ($1.6 million in 2019/20).
For more information, read SuperGuide article Making downsizer super contributions: 10 things you need to know.
Strategy 4 – Make pension or lump sum payments
Applying for payment of a pension or lump sum amount can also be a way to reduce your TSB.
Generally, if you meet a relevant condition of release (such as reaching your preservation age), you are eligible to receive a payment from your super fund.
Starting an account-based pension and receiving pension payments, partially or fully commuting an account-based pension, or receiving a lump sum from your accumulation account, automatically reduces your TSB.
For more information, read SuperGuide articles:
- When can I access my super? All conditions of release explained
- Taking a super lump sum
- Over 60? A simple tax guide to accessing your super benefits
Hit the TSB limit? What else can you do?
Once you reach your $1.6 million TSB cap, you will need to consider other tax effective investment structures outside the super system if you plan to continue building your wealth. Strategies to discuss with your financial adviser could include:
1. Investment bonds
Investment bonds offer valuable tax advantages for higher income earners. Investment earnings on these bonds are taxed at a maximum rate of 30%, which can be a lower tax rate than normally paid by high income earners.
Investment earnings from investment bonds are not included in your taxable income as the tax is paid within the bond structure.
2. Family trusts
Although they are complex, family trusts can be useful as a tax effective vehicle for investing. They offer tax benefits and allow capital gains to be distributed among members of the trust.
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