Reading time: 5 minutes
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 $1.7 million total super balance (TSB) threshold (in 2021–22), 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 five strategies 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 $1.7 million cap (in 2021–22) on the amount they can accumulate within the super system.
Compare super funds
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 in super 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 $1.7 million (as measured at the start of each financial year).
Your TSB includes all your super interests and is not for each super account. It may be different from your super fund account balance as it includes amounts that are not part of your account balance.
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 rollover 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.
5 strategies to manage your TSB
If you are close to the $1.7 million cap (in 2021–22), there are five strategies to consider that may help moderate your total super balance:
Strategy 1: Split contributions with your spouse
Contributions splitting is a simple strategy you can use to reduce your TSB and boost your partner’s retirement savings at the same time.
Many couples have very different amounts in super, with one partner having a much higher account balance than their spouse. To avoid problems with the TSB, the partner with the highest amount in super can ‘split’ some of 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.
Compare super funds
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 ($27,500 in 2021–22).
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 general transfer balance cap ($1.7 million in 2021–22).
Strategy 2: Make pension or lump sum payments
Applying for withdrawal of a pension or lump sum amount before 30 June can also be a way to reduce your TSB below the threshold and this may allow you to make an additional super contribution.
Compare super funds
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.
Strategy 3: Use a withdrawal and recontribution strategy
If you meet a condition of release and your spouse has a smaller super account, it may be worthwhile considering withdrawing some of your super and recontributing it into your spouse’s super account to increase their balance. While this will help equalise your account balances, it also reduces your TSB.
This strategy works best if you are over age 60, as your withdrawal from your super account will generally be tax free. Your spouse must be eligible to make a contribution into their super account and must not have exceeded their annual non-concessional contributions cap.
Strategy 4: Adopt tax effective accounting
Tax effective accounting is a way of reflecting the true balance of a member’s super interest and is commonly used by large super 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 under your $1.7 million cap (in 2021–22)
Note: Tax effective accounting must be used on a consistent basis by an SMSF, not as a one-off.
Strategy 5: Pay arm’s-length expenses
Paying expenses can also reduce the total value of an SMSF and the account balances of its members – in turn reducing their TSBs.
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.
Hit the TSB limit? What else can you do?
Once you reach the $1.7 million TSB cap (in 2021–22), 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.
Your independent expert to help you plan your retirement
Including how much super you need, how long you are likely to live for, whether you could be eligible for the Age Pension, the implications of retiring at different ages, how to prepare for retirement and much more.
Plus super and pension fund performance rankings, the latest super changes, tips and strategies, checklists and how-to guides, calculators, case studies, quizzes and a monthly newsletter.