The nuance of 30 June 2021

Changes to the law and threshold adjustments have given certain standard year-end strategies new dimensions for the 2021 financial year, Meg Heffron, managing director of Heffron, writes.

The end of the financial year inevitably brings a flurry of activity and planning. And let’s be honest, it is particularly difficult to find time for this in 2021 when most SMSF practitioners are still dealing with the fallout from 2020.

So what are the headline items that should be exercising our minds as 2020/21 winds down?

First some of the obvious things – make sure minimum pensions are paid and get contributions in.

But what are the particular quirks this year?

Pensions

When it comes to pensions, remember the rule allowing pension payments to be reduced to 50 per cent of the normal level is still in place for 2020/21. However, bear in mind that:

• the way the calculation is done is that the normal drawdown rates are halved (that is, 4 per cent becomes 2 per cent, 5 per cent becomes 2.5 per cent and so on). It’s not the normal minimum payments themselves that are halved. This appears esoteric until the way in which rounding works for pensions means the two calculations don’t produce the same answer. And no one wants to underpay their minimum pension.

• the halving rule doesn’t apply to defined benefit pensions (complying lifetime, life expectancy or flexi pensions). Make sure these are paid at the normal levels (and indexed if required).

• it also doesn’t apply to maximum payments from a transition-to-retirement income stream – these can remain at the normal 10 per cent.

Once upon a time it was common to see a flurry of pensions starting on 1 June each year for obvious reasons – the minimum payment required is $nil, but the tax exemption on investment income (exempt current pension income or ECPI) starts immediately.

This year the environment is different. As has been flagged in many articles recently, the general transfer balance cap increases to $1.7 million from 1 July 2021, but not everyone benefits from the full $100,000 increase. People who have ever used some or all of their transfer balance cap in the past get less – and in fact someone who has ever used the full $1.6 million cap will get no indexation at all.

Hence, there is a very real prospect that starting a pension now, before or during June, won’t make sense for at least some clients. They will need to weigh up:

• the tax exemption available on their fund’s investment income if they commence a pension now (a one-off benefit) versus

• waiting until 1 July 2021 to commence a pension to get the full $100,000 indexation (rather than just some or none of this increase). How valuable will it be to have an extra amount in a super pension for the rest of their days (probably a smaller but more long-term benefit)?

For some, the answer will be straightforward whereas for others it will not.

Contributions

The usual rules about making contributions before the deadline apply – remembering that contributions aren’t made until they are received by the fund. For cash, this will often mean actually appearing on the fund’s bank statement. Those who leave it too late might need to dust off the fund’s cheque book. The one advantage of good old-fashioned cheques these days is that a contribution made by cheque is made as soon as it’s physically in the hands of the trustee as long as it is presented and cleared promptly and the contributor had enough to cover it in their bank account at the time.

But there are some extra decisions to make this year when it comes to contributions.

These are particularly acute for those around the 65 to 67 age bracket.

A great example is those turning (or who’ve already turned) 65 in 2020/21.

Traditionally, 65 was the year of thinking carefully about bring-forward rules for non-concessional contributions because it was the last year in which this tool to get large amounts into super could be used. And under current law that’s still the case as the rules to move this age up to 67 are still stalled in parliament and may not make it through before 30 June 2021.

Funnily enough, the 65 year olds can actually be a little relaxed about that legislation.

Thankfully, they can now contribute up until their 67th birthday without needing to meet a work test. That means someone turning 65 in 2020/21 has both 2021/22 and 2022/23 to make more non-concessional contributions. If they can’t meet a work test (or make work test exempt contributions), they will need to make the 2022/23 contribution before their 67th birthday. But the fact they now have until 67 means the decision to use the bring-forward provisions in 2020/21 isn’t quite so important, even if it does turn out to be their final chance to do so. They could still contribute $100,000 in 2020/21, $110,000 in 2021/22 and $110,000 in 2022/23. That’s $320,000 in as little as 15 months (April 2021 to July 2022). In a lot of ways that’s actually better than diving into a three-year bring-forward this year as doing so would lock them into only $300,000 over those three years, and rule them out of any further bring forwards in the event the new rules do eventually come in as expected.

The important caveat is that to make each of those contributions in 2021/22 and 2022/23, their total super balance at 30 June 2021 and 30 June 2022 will need to be less than the new threshold of $1.7 million.

But as long as their balance is low enough, the uncertainty about bringforward rules is not actually much of a concern for them.

What about those who turn 66 in 2020/21?

In some ways their lives are even simpler. Under current laws they are not allowed to use the bring-forward rules this year. But they can contribute $100,000 as long as their total super balance was less than $1.6 million at 30 June 2020 and they were not already in the middle of a bring-forward period. They don’t need to worry about a work test until next year when they turn 67.

If the rules are changed to allow bring forwards up until the year in which they turn 67, they would probably look to do this next year in any case to maximise their contributions, with the classic pattern being $100,000 now and $330,000 in 2021/22. The key for them will be making sure that at 30 June 2021 their total super balance is less than $1.48 million, the new threshold for those looking to make three years’ worth of non-concessional contributions at once. And if the rules don’t change as expected? This won’t matter as they can still contribute $100,000 this year and $110,000 in 2021/22 before their 67th birthday if they can’t meet a work test or make work test exempt contributions. That’s certainly a better result than it used to be.

The only group who really are in a bit of a bind are those turning 67 this year who can’t meet a work test next year. Whether or not the new bring-forward rules come in will make the difference between a $300,000 contribution in 2020/21 or being limited to $100,000. For them, we just have to wait and see with fingers crossed.

Doubling up

One point on contributions worth singling out is the particular quirks in 2020/21 for those who are using a particular strategy often referred to as the double deduction strategy. This is where an individual uses their normal concessional contributions cap throughout the year, but then makes an extra concessional contribution in June. The SMSF rules allow that contribution to be held in the fund, but not allocated to the member until the following financial year (any time up to 28 July 2021). The beauty of it is that the contribution is tax deductible in 2020/21 (when it is made), but not checked against the concessional contributions cap until 2021/22 (when it is allocated).

For years, we’ve talked about this as being $25,000 throughout the year plus an extra $25,000 in June, resulting in a $50,000 deduction in total. This year, however, the extra amount in June can be $27,500. This is because the cap it will use is next year’s concessional contributions cap, which is increasing to $27,500 from 1 July 2021.

The rule also works for non-concessional contributions. And the considerations get even more nuanced for those contributions.

Again the principle is simple: an individual can make non-concessional contributions of $100,000 throughout 2020/21 and an extra amount in June, which is not allocated until July 2021. The extra amount will be checked against the 2021/22 non-concessional cap of $110,000. But there are a few more twists to consider when doubling up on nonconcessional contributions in 2020/21.

As usual, the cap of $110,000 only applies for those with a total super balance of less than the relevant threshold at 30 June 2021. This will be $1.7 million, being the new general transfer balance cap after indexation has been applied, for everyone, even those who are not entitled to the full $100,000 indexation when it comes to their pensions.

The fly in the ointment is the $110,000 contribution in June 2021 will be counted in the total super balance amount at 30 June 2021, even though the member hasn’t actually received it in their account at the time.

For example, Jim is 68 and met the work test this year. He won’t meet it next year. At 30 June 2020, his total super balance was $1.55 million and he made a $100,000 nonconcessional contribution in August 2020. His balance today is around $1.68 million, including this $100,000 contribution, some earnings and less some pension payments. He’s thinking of using this strategy to put an extra $110,000 into his SMSF while he can because he won’t be able to contribute next year. If he does, however, his total super balance at 30 June 2021 will be around $1.79 million, the balance now plus this extra $110,000. That means his non-concessional contributions cap next year is actually $nil. The contribution will be excessive even though Jim feels like his balance is only $1.68 million at 30 June 2021.

Conclusion

Planning for 30 June 2021, like any year, is important and requires attention now. In some ways the issues are familiar ones – get pension payments out and contributions in. However, the changing thresholds for both the general transfer balance cap and contribution limits do introduce some unique nuances this year.