15 June 2020
As 30 June 2020 approaches rapidly, it is important to ensure that your superannuation arrangements are addressed, including consideration of any new superannuation rules, particularly in light of the Government’s COVID-19 economic response.
In summary, considerations include:
- Maximising tax-deductible superannuation contributions, including ensuring there is sufficient time for any contributions to clear in the Fund’s bank account prior to 30 June;
- Maximising superannuation balances by making after tax contributions, including consideration of whether a withdrawal and recontribution strategy is appropriate given asset valuations;
- Ensuring minimum pension payments have been made out of the Fund prior to 30 June to maintain the tax exemption on pension assets;
- Where eligible for the COVID-19 early access concession, consider the appropriateness of making a claim;
- Consider whether any COVID-19 super compliance issues apply to your fund.
To read more, please click on the links below:
- Contributions before 30 June
- Minimum Pension Payments
- COVID-19 Early Release of Superannuation
- Asset Valuations
- COVID-19 Rent Relief and Superannuation
- COVID-19 and other superannuation compliance considerations.
1. Contributions before 30 June
Concessional contributions include employer contributions, salary sacrifice contributions, and personal deductible contributions:
- The current limit for concessional contributions for the 2019/2020 financial year is $25,000. This limit remains unchanged for the 2020/2021 financial year;
- Where the member is aged 64 or younger, an individual can make concessional contributions without satisfying the work test (40 hours gainful employment in 30 consecutive days). Restrictions apply to those aged 65 and above;
- From 1 July 2020, an individual will be able to make concessional contributions while they are aged 65 and 66 without the requirement to satisfy the work test.
Carry Forward Unused Concessional Cap
Since the 2018/2019 financial year, an individual can carry forward any unused concessional cap from the previous financial year, for a maximum of five years.
The individual can contribute these unused amounts to superannuation, provided they have a total superannuation balance (TSB) of less than $500,000 at the commencement of the financial year in which the contribution in made.
For example: John (42) had $440,000 in superannuation at 30 June 2019. He is self-employed, and made no contributions to superannuation in 2018/2019, and hasn’t contributed anything in 2019/2020. As part of his tax planning, John’s expected profit in his business will be substantial, and he wants to manage his tax position, as well as build up assets for his retirement. As John didn’t make any contribution in 2018/2019 and 2019/2020 he is able to contribute $50,000 in the lead up to 30 June under the carry-forward concession.
Non-concessional contributions include any after-tax voluntary contributions made by individuals:
- The current limit for the non-concessional contributions for the 2019/2020 financial year is $100,000. This remains unchanged for the 2020/2021 financial year.
- Where an individual’s total superannuation balance (TSB) is above $1.6 million on 30 June of the previous financial year, they are not eligible to make further non-concessional contributions to superannuation in the current financial year without having excess contributions.
- Where an individual is aged 64 or younger, they can make non-concessional contributions without satisfying the work test, subject to their TSB. They are also able to bring forward up to two future years’ worth of contributions. This “bring-forward” provision allows an individual to make a one-off non-concessional contribution of up to $300,000 in a financial year. This is subject to a phased in approach, depending on their TSB, as follows:
New PROPOSED Non-Concessional Contributions Rules – FROM 1 July 2020
If passed, proposed legislation will allow an individual aged 65 and 66 to make non-concessional contributions to superannuation and access the bring forward provisions to make non-concessional contributions of up to $300,000 in a financial year (subject to TSB). Changes to the work test have already been implemented to facilitate this.
Where you would like to consider making additional non-concessional contributions in the years leading up to age 65 to 67, please contact us so we can advise you on the most appropriate strategy to maximise your superannuation. This is particularly the case where asset valuations may have come off due to COVID-19, and there is an opportunity for you to undertake a withdrawal and recontribution strategy to optimise the taxation components within your account for the benefit of your children in the longer-term.
Pre 30 June 2020 considerations:
In order to maximise your contributions to superannuation prior to 30 June 2020, consider the following:
- Are you able to make concessional contributions up to your cap? This might include the ability to salary sacrifice an amount from your employer, or perhaps make a personal contribution and claim a deduction in your personal tax return (please note, eligibility criteria apply to personal deductible contributions);
- Do you have the capacity and available funds to make non-concessional contributions into superannuation?
- Where you intend to make contributions electronically, ensure that you have left sufficient time for the contribution to be cleared into the fund’s bank account. It is the time that the superannuation fund receives the contribution that is the relevant date for the fund, not the time that it leaves your bank account.
2. Ensuring Minimum Pension Payments are Made
Under the government stimulus package in connection to the COVID-19 situation, the default minimum rates for pension payments have been halved for the financial years commencing 1 July 2019 and 1 July 2020. As a result, the minimum pension withdrawal required for the relevant years are decreased. The new rates are as follows;
To satisfy the 2019/2020 annual pension requirements, all pension payments must be withdrawn from the superannuation fund and transferred to your personal bank account by 30 June 2020.
Failing to the meet the minimum pension requirements could lead to the fund losing the tax exemption with respect to the income and realised capital gains generated by the assets supporting the pension, and as a result all of the fund’s income will be subject to tax.
Pre 30 June 2020 considerations:
- Ensure you have paid the minimum pension amount prior to 30 June 2020. In this regard, where you intend to pay electronically, ensure that you leave plenty of time to provide instructions to your bank or investment adviser if required, to realise assets in order to pay out the pension in cash;
- Individuals that have already paid more than the adjusted minimum pension amount (due to halving of the minimum pension rates) may consider stopping making further pension payments for the remaining period until 30 June 2020. This is to ensure that the superannuation fund is maximising its pension tax exemptions;
- Individuals that have Transition to Retirement Pensions in place are subject to a 10% maximum drawdown of the pension balance at 30 June 2019 or the date the pension commenced.
3. COVID-19 Early Access to Super
Under the government stimulus package in connection to the COVID-19 situation, eligible individuals may have early access to some of their superannuation benefits. The amount withdrawn is 100% tax-free with no withholding obligations.
Eligible individuals may have access to a maximum of:
- $10,000 of their super for the remaining period until 30 June 2020;
- A second $10,000 of their super for the period 1 July 2020 to 24 September 2020.
For individuals who are citizens or permanent residents of Australia or New Zealand, they must satisfy one of the following eligibility requirements:
- Eligible for either jobseeker payment, youth allowance for jobseekers, parenting payment, special benefit or farm household allowance; or
- On or after 1 January 2020, either:
- Individual is made redundant;
- Individual’s working hours was reduced by 20% or more;
- Individual is a sole trader and the business was suspended or there was a reduction in turnover of 20% or more.
Pre 30 June 2020 considerations:
- If you are eligible and planning to apply for the early release of your superannuation benefits for the 2019/2020 financial year (that is, for the remaining period until 30 June 2020), the application must be made by 30 June 2020. Applications for the 2020/2021 financial year must be made by 24 September 2020.
4. Asset Valuations – Property and Unlisted Assets
Where a superannuation fund has unlisted assets (such as direct property, unlisted shares, and units in unlisted trusts), the Trustee is required to value the fund’s investments at market value as at 30 June each year.
The economic implications of COVID-19, have been significant for 2019/2020. The Trustee should review the specific impact on the fund when considering year end valuations of investments.
30 June 2020 considerations:
- Consideration should be given to whether a market appraisal/valuation is required to be obtained for the assets and whether the services of an independent valuer is required. In particular, where the superannuation fund holds property which has been subject to a decrease in rental income, resulting from COVID-19;
- Ensure the required lease payments are made prior to 30 June and that lease payments are based on a market rate. Where the market rate has changed, this may need to be reflected from 1 July 2019 and in accordance with the lease agreement.
- Review any rent relief as a result of the COVID-19 situation (refer below);
- As a result of the current economic situation due to COVID-19, Trustees should review the investment strategy of the superannuation fund to ensure it remains current and that investment allocations are updated as required.
5. COVID-19 Rent Relief
As part of the Government’s COVID-19 support packages, landlords are required to provide temporary rent relief to their tenants in the form a rent reduction, waiver or deferral where the tenant has suffered financial hardship due to COVID-19. This applies to superannuation funds that are landlords.
Generally, superannuation funds that provide rent relief to their tenants (particularly related party tenants) would normally give rise to ATO compliance issues (such as non-arm’s length, in-house asset, financial assistance). However, the ATO’s approach for the COVID-19 rent relief is that the ATO will not take any compliance action against the superannuation funds for the 2019/2020 and 2020/2021 financial years.
30 June 2020 considerations:
- Where rent relief is provided to the tenant, particularly related-party tenants, negotiations between the superannuation fund and the tenant are required to be properly documented. Such documentation would likely include:
- Letter from the tenant to the Trustee of the superannuation fund requesting for the rent relief;
- Evidence by the tenant to support the need of rent relief;
- Where the tenant is a related party, ensure the rent relief provided is consistent with that being provided by landlords/tenants in a similar situation;
- Trustee resolution; and
- Acceptance letter from the Trustee of the superannuation fund to the tenant.
6. COVID-19 Superannuation Compliance
Limited Recourse Borrowing Arrangements
Where a superannuation fund has a limited recourse borrowing arrangement (LRBA) in place, the Trustee should ensure any obligations under the loan terms are complied.
Where, as a result of COVID-19, a superannuation fund is unable to meet all or part of the loan repayments required under the LRBA, the superannuation fund may be able to reduce or defer their loan repayments.
Where the lender is a bank or third-party lender, all such negotiations and outcomes should be documented.
Where the lender is a related party, please contact us where this is an issue for the superannuation fund to ensure such relief is provided in accordance with the ATO’s guidelines and appropriately documented.
Where a superannuation fund has an investment or loan with a related party that is captured under the in-house asset (IHA) rules, the Trustee needs to ensure the arrangement complies with the relevant provisions.
The COVID-19 situation may cause the value of the assets of the superannuation fund to decrease substantially at 30 June and leading to a possible breach of the IHA allowable limit of 5%.
30 June 2020 considerations:
- Where an SMSF has IHA that exceeded the allowable limit of 5% at 30 June 2019, the excess over 5% may be required to be disposed of prior to 30 June 2020;
- Where an SMSF has IHA that exceeded the allowable limit of 5% from 1 July 2019, consideration should be given to reduce the IHA to less than 5% prior to 30 June 2020;
- Where an SMSF has IHA that exceeded the allowable limit of 5% at 30 June 2020, the SMSF has 12 months to put in place and execute a written plan to dispose of the IHA to ensure that the IHA is within the allowable limit of 5%.
- In the case of COVID-19, the ATO has indicated that they will not take any compliance action where the rectification plan was unable to be executed because the market had not yet recovered, or that it was unnecessary to implement the plan as the market had recovered. The reasons as to why the rectification plan was not undertaken must be documented.
The Next Steps
If you would like further details or assistance with respect to any of the above strategies, superannuation in general, or wish to have your position reviewed, please contact Jemma Sanderson or your engagement team on 08 6311 6900.