Superannuation, Contributions & The New Year

Regarding retirement, you want to ensure that your super is performing at its most optimal level when accruing funds.

Your super is probably going to be a primary income source for you during your retirement – that’s why it’s something that you want to ensure is performing optimally and accruing funds regularly.

You can assist in this process by making voluntary contributions. Making an extra contribution of as little as $20 per week for over 30 years could end up doubling what might otherwise be a $30,000 contribution through compound interest.

If you choose to contribute voluntarily to your super, you need to be aware of the difference between non-concessional and concessional contributions. Non-concessional contributions cover the payments that your employer makes on your behalf from your after-tax income, whereas concessional contributions can include salary sacrificing and personal deductible contributions.

If you are looking for a way to increase your super, you can opt-in to sacrifice some of your salary (often recommended to those with high or stable income) to your super as a voluntary contribution. Essentially, you dedicate more of your pay to your super, reducing what you pocket from that time period.

You can speak with us to find out whether or not salary sacrificing could be helpful to or suit your situation specifically.

You can also make personal deductible contributions if you are self-employed or a retiree, of up to $27,500 per year in concessional super contributions.

Choosing to make voluntary contributions to your super can be the difference between having your super fund perform and having it perform well. If you’d like to know more about options for your superannuation, you can speak with us to find out what you can do for your particular situation.

How Does Superannuation & Contracting Work?

Contractors who run their own business and sell their services to others have different obligations to their super than what employees in a business may usually have.

A contractor (also known as an independent contractor, a subcontractor, or a subbie) who is paid wholly or principally for their labour is considered to be an employee for super purposes, and may be entitled to super guarantee contributions under the same rules as other employees.

A contract may be considered ‘wholly or principally for labour’ if:

  • You’re paid wholly or principally for your personal labour and skills
  • You perform the contract work personally
  • You’re paid for hours worked, rather than to achieve a result

If hiring a contractor to perform solely their labour for a fee, the employer may also have to pay super contributions on their behalf.

In this sense, if you are a contractor who is being contracted to an outside business than your own to perform your usual work or labour, your employer must contribute to your super the same way they would any other employee.

This could be seen in an example of an electrician who runs their own small business, or is employed by a small business who has been hired by another business to supplement their workforce and perform a specific role that they can fit to.

Take, for example, an electrician who runs their own business and has been subcontracted by a larger business.

They are performing labour but also providing materials (ie, themselves plus a toolbox plus a van full of powerpoints and wiring etc), they would be seen as a contractor and not an employee for super purposes. They must pay themselves super, in this case.

However if they are sub-contracted to perform labour only then the company that has sub contracted them may be liable to pay super on the amount that they pay to their contractor.  This would be the case where the electrician just turns up with their tool box and everything else is provided by the “employer”.

If they are in an employment-like relationship with the person that they entered their contract into, they may need to have their super paid to them by their contract employer. In order for super to be applied from what you earn, the contract must be directly between you and your employer. It cannot be through another person or through a company, trust or partnership.

It is important that both parties in the process are aware of their super obligations during the contracted period. There can be significant penalties for employers who use contractors if they fail to correctly pay super. Each case regarding contractors and super needs to be assessed independently to ensure that you are doing the right thing. There is no definitive black and white line between a contractor and a contractor in an employment-like relationship that can be obviously seen after all.

If you’re unsure about whether or not you’re meeting your obligations as an employer, or are a contractor looking to make sure their super is being correctly paid into, speak with us.

Compensation, Disability & Life Payments – This Super Contribution Could Make A Difference.

Disasters, be they natural or man-made, can happen to anyone. It could be a car accident, a tree crashing through the roof, or a bushfire hitting your residence. In any case, an event that causes significant harm or impact that affects someone’s everyday life in an adverse way is never pleasant.

Thankfully, in Australian society, there are laws that provide compensation to people who experience these accidents as a result of someone else’s actions and are significantly impacted. If someone were to be (potentially) disabled for life due to such an incident, there may be a substantial compensation payout.

The idea of this compensation is not only to compensate for economic loss, but to also provide a capital amount for the person’s living costs for the rest of their lives. Often that compensation will run to millions of dollars. Sounds like a lot, right?

If you receive compensation for becoming totally and permanently disabled, investing this lump sum should make it last far longer. This action will require careful planning and professional advice. Consulting with a professional on this financial decision may be in your best interest.

One effective strategy that can be used here is to make what is known as a Structured Settlement Contribution to superannuation.  You can then use your superannuation to pay you a pension.  If done correctly, all the money that your investment earns in super should be tax-free and all of the money that you draw out of super should also be tax-free. Removing tax from the equation when it comes to the money that you can draw out of your super will have a massive impact on your ability to have that money last your lifetime.

However, you need to make sure you comply with all of the rules around making a structured settlement superannuation contribution. These rules include:

  1. You will usually have to be under 67 at the time of making the contribution
  2. The contribution needs to be made within 90 days of getting the money
  3. Two doctors need to certify that you are totally and permanently disabled
  4. The payment must be compensation for personal injury where someone else was at fault or for workers compensation
  5. You must notify your super fund that it is a structured settlement contribution

The contribution will also have no impact on your pension transfer balance limit.  This means that if you make a structured settlement contribution of $2 million then you will now be able to transfer $3.7 million into a pension instead of the usual $1.7 million.

The payments are usually received after a lengthy legal process and it is probably not something that will be top of mind for the 90 days following receipt of the funds but the decision to contribute the amount to superannuation can have a lasting positive impact on your after tax income.

Consulting with a registered professional about your options regarding contributions, withdrawals and general options can give a better understanding of what you might be in a position to do.

Funding The Retirement Adventure By Downsizing Your Property

Downsizing during retirement can help you reduce costs and put some more money in your pocket so that you feel more secure about your finances during retirement.

Downsizing by selling your property has advantages and disadvantages, which you should evaluate before making this decision.

Advantages

  • Increased cash flow: Downsizing should reduce your mortgage payments and free up extra money to invest or spend. This will give you more flexibility with your money in your retirement years.
  • Easier to maintain: A smaller house takes less effort and is easier to clean and maintain.  Approaching retirement, you may want to reduce the amount of time you have to spend cleaning your house so that you can participate in other activities.
  • More convenient: A new house will mean that you can choose a layout, fittings, locations and services that are more suited to your updated needs. While your old house might be close to schools, you may want to opt for a house that is closer to a recreational centre or the city centre (for accessibility to shops and services.
  • Lower insurance and utility bills: A smaller home generally costs less. Both in terms of insurance and also in terms of upkeep and maintenance (such as heating and cooling).

Disadvantages

  • Less space: A small house means that you have less storage for things. You might have to make some difficult decisions about letting go of your possessions. Alternatively, you could consider leasing a storage space – although this would cost extra money.
  • Less flexibility: There may be less privacy due to fewer or no guest rooms or less space for entertainment. If you regularly have many guests coming over, this might make downsizing unideal.
  • New neighbourhood: Getting comfortable in your new suburb might be difficult. You might have to check out your neighbourhood before and after moving into the new place.
  • Emotional connection: A family home is full of memories, and there is a strong connection with it. This can make it difficult to let go.

Eligibility 

From 1 July 2022, eligible individuals aged 60 years or older can choose to make a downsizer contribution into their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home.

For downsizer contributions made before 1 July 2022, eligible individuals must still be aged 65 years or older at the time of making their contribution

On 3 August 2022, the Treasury Laws Amendment (2022 Measures No. 2) Bill 2022 was introduced into Parliament. In this, the Government has proposed that the downsizer eligibility age be further reduced to 55 years. This measure is not yet law.

Downsizing has financial benefits, but it does come with emotional costs and is a fairly significant decision to make. It may not be a solution for everyone, but it is one that you should consider carefully.

It is important to discuss the implications with your advisor and, perhaps also, your family members before determining how you will proceed.

How Does A Binding Financial Agreement Protect My Assets?

A Binding Financial Agreement (BFA) is the Australian equivalent of a prenup, covering financial settlement, spousal maintenance and any other incidental issues.

BFAs are used to agree in advance on how a couple’s property and other assets would be distributed should their marriage or de facto relationship break down. They can be entered into at any stage of a relationship, i.e. before, during or after a marriage or de facto relationship. Couples may consider entering into a BFA if one party has more property, assets or is expected to receive an inheritance at a later stage.

Some benefits of entering a Binding Financial Agreement include:

  •     Establishing a level of reassurance if one or both partners has been through a separation or divorce before.
  •     Protecting some or all of the assets from each party.
  •     Being able to specify the ground rules regarding how the couple will acquire property, who will pay the bills, and where weekly wages or income will be saved.
  •     Preserve family or other businesses for future generations.

Properly drafted and executed BFAs are particularly beneficial for those who want to establish a level of reassurance that there would be a harmonious division of property and assets in separation or divorce without the need for stressful court action. A BFA can also make both parties feel secure knowing that any property or assets accumulated before their relationship or marriage is safe.

Couples should also be aware, however, that there can be some risks and downsides to entering a BFA. They include:

  •     Legal fees for drafting the agreement.
  •     Content of the agreement may be complicated.
  •     Use of the agreement could be unfair to one-half of the couple.

Couples also need to ensure that the BFA is, in fact, binding. Both parties must sign the BFA and receive independent legal and financial advice before doing so. It is also worthwhile to evaluate the potential effects of the BFA on the relationship, especially if it is considered unfair to one-half of the couple.

This financial agreement can be made before, during and after the marriage or de facto relationship. But for it to be legally binding, both parties must sign it and have acquired legal advice before doing so. The legal advisor should inform the parties of the advantages and disadvantages of such an agreement and sign a certificate that states that advice was provided to the parties.

The agreement can cover the division of property and finances, financial support, maintenance of one party after the breakdown of the relationship, and any incidental issues.

The most common reason to enter such a financial agreement is to protect assets an individual owned before getting into the relationship. This allows a distinction between personal and jointly owned assets. Such an agreement also allows parties to protect future income that they may receive through inheritances or investments.

Any allocation of debts such as loans or mortgages can also be made under this agreement, preventing shared liability for a personally owned asset. A comprehensive agreement will reduce costly court proceedings by minimising conflict if the relationship fails. It may be difficult to discuss such an agreement, especially at the start of a marital or de facto relationship. Still, it is ideal for partners who prefer to keep ownership and responsibilities of their assets separated.

Consulting with a professional advisor before entering into any binding financial agreements is highly recommended.

Maternity Leave, Unemployment, Single-Income Families – Why Spousal Contributions Might Be On The Cards

Depending on your relationship, you may have discussed with your partner the prospect of marriage. Or you might be more comfortable remaining in a long-term de facto relationship (especially since many de facto relationships have similar rights as those of a marriage).

You might share a lot of things with your partner (such as a mortgage, a family, or a car), but did you know that you might be able to boost their super for them?

Specifically, if you (or your partner) were unable to work for a length of time, such as during maternity/paternity leave, unemployment or are a single income household, the super fund of the non-working part of the pair might not be increasing. As a result, the retirement savings held in super for one member of these households may not be increasing as exponentially fast as the working member.

The good news is that when in a relationship, a spouse can boost their non-working partner’s super fund with their own contributions. The best part? It could be a tax write-off for the working spouse.

Under Australian superannuation law, a spouse can be a legally married partner with whom you live or your de facto partner. That gives additional benefits to those in de facto relationships, who can choose (if one member of the relationship isn’t working or earns less) to boost their partner’s super fund. A spouse must also be younger than 75 years old when you make the contribution.

One of the primary losses of super gains that can occur is a result of maternal or paternal leave. If you and your spouse are thinking about starting a family and may have to take time off work during the pregnancy, spousal contributions can be a great way to continuously inject funds into super so that the gap from the pause in employment can be mitigated.

If you are looking to help your spouse’s super grow, there are two ways that you can go about it.

  • Making a Spouse Contribution to their super account
  • Arranging for Contribution Splitting (also known as Super Splitting)

Spouse superannuation contributions can now be made for spouses earning up to $40,000 per year. If a spouse earns less than $37,000, the maximum tax offset of $540 can be claimed when contributing a minimum of $3,000 to their super. Anything contributed that is more than $3 000 will not receive the spouse contribution tax offset.

You will not be able to claim the tax offset if:

  • A spouse has exceeded their non-concessional contributions cap for the financial year or,
  • Their super balance is $1.6 million (for 2020/21) or more on 30 June of the previous financial year in which the contribution was made.

Another way to inject funds into your spouse’s super is to choose to have some of your own super contributions put into their super account. This is fine as long as they have not reached their preservation age yet, or are between their preservation age and 65 years and not retired.

Super contributions can only be split in the financial year immediately after the year in which the contributions were made or in the same financial year as the contributions were made. This is only if your entire benefit is being withdrawn before the end of that financial year as a rollover, transfer, lump sum or benefit.

Contributions can be split in two different ways.

  • Employer contributions – the most common form of super contributions to split
  • Personal tax-deductible contributions – money that you deposit into your super and claimed a tax deduction.

Spouse contributions are generally treated differently to contributions your spouse splits with you.

If your spouse makes a contribution for you, it counts towards your non-concessional contributions cap – not your spouse’s contribution caps. If you are currently employed by your spouse, any contributions that they may have made in this role are reported as employer contributions (not spouse). They may also include amounts transferred from your spouse’s or ex-spouse’s FHSA under a family law obligation.

If you are looking into spousal contributions into super, it is best to seek the advice of your financial advisor or superannuation provider, to best determine what path you should take.

Your Super Funds Might Need A Checkup – Do You Know Where To Look?

When it comes to your retirement funds, you want to ensure that you have an amount in your superannuation fund that will allow you to live comfortably. That’s why you may want to examine it closely and make sure that you aren’t losing out on money that could be going towards your retirement. Checking it regularly can help to prevent this – but so can consolidating your super and ensuring that you aren’t paying extra fees on multiple accounts.

If you have ever changed your name, address or job, your fund or the ATO may not have your current details, which can result in your super becoming ‘lost’ or unclaimed. It might also lead to having multiple super accounts, which could result in additional fees being paid for those super funds.

With the introduction of stapled accounts coming into play later this month, this may not be of such concern to those entering the workforce. But for those who may have been in the workforce for a while, superannuation is something that you should be closely examining.

This process does not have to start when you’re about to retire. If anything, keeping track of your super and catching where it might be losing money is far better to do sooner rather than later.

You may find additional superannuation funds in:

  • ATO-held super
  • “Lost” super
  • Unclaimed super
  • Unmatched super
  • Multiple accounts that you may possess.

One of the reasons for the introduction of stapling of super funds to new entrants to the workforce is to ensure that you are attributed to one super fund and that it follows you throughout your career. This will reduce the likelihood of multiple super accounts being opened in your name, reducing the fees that you may have to pay and generally ensuring that your funds will be in the one place.

Superannuation can be a tricky subject. Make sure that you speak with your superannuation provider about any queries that you may have. You might be able to speak with us if you are looking to plan out your retirement, or for additional financial help.

SMSFs – What Do You Need To Know About This Approach To Super?

The initial set-up of a self-managed super fund is perhaps the simplest step in the process. Establishing a super fund that delivers superior returns from your investments is a far more difficult task to do.

To invest successfully involves determining precise goals and selecting investments that can effectively achieve those goals. One of the key advantages to an SMSF is that a portfolio can be built which reflects your short-term and long-term goals in response to fluctuations and changing market conditions.

When it comes to an SMSF, your investment options can include:

  • Australian and international shares (in both listed and unlisted forms)
  • Residential or commercial property
  • Cash and term deposits
  • Fixed income products
  • Physical commodities
  • Collectibles

Diversification

Before you begin investing, you need to consider what might be the best way to diversify your portfolio. How you portion your investments will depend on your funds, the market, and your goals.

Regardless of what your plan is, diversification should be a priority.  Diversification of the portfolio can result in less risk to the overall investment, as the investment is split across multiple markets and can potentially produce more returns on the investments.

If you choose an SMSF over an industry or retail super fund, you may be provided with more flexibility but also far more responsibility. If you want the best performance from your SMSF, you will need to do your own research prior to investing.

Record Keeping

Record-keeping is one of the most critical aspects of your finances that you want to get right, and never more so than when dealing with your self-managed super fund.

You want to ensure as one of your fund’s trustees that you are meeting all of the reporting obligations for your SMSF.  Good and timely record-keeping can assist you in this process while maintaining your compliance with super laws.

Accurate and well-kept records will also promote good governance for your SMSF. Keeping your records up to date will ensure that you are able to provide any information required to your approved SMSF auditor or to the Australian Tax Office at short notice.

Are you concerned about how well your super is performing or thinking about getting involved in an SMSF? You can speak with us or to your super fund provider for further information and advice.

Asking For Forgiveness Rather Than Permission Doesn’t Work With SMSF Breaches

There is a proverb that says that it is better to ask for forgiveness than to ask permission.

Generally speaking, the idea behind this saying is that if you ask for permission and you do not receive it, then the punishment will be a lot harsher than if you do the thing that you asked to do and get caught afterwards.

For example, if your children were to ask you if they could go to the local pool, and you deny them that request, the chances are that they would be in more trouble than if they simply circumvented you, and went anyway. It may also be said that you may never get caught doing the wrong thing, but asking for permission to do the act could have someone keeping watch over you.

The same cannot be said for Self Managed Superannuation Funds.

It is never a good idea to break the rules and then ask for forgiveness in that instance (or at least not intentionally). SMSF laws are complex. Breaking the rules could be thought of as being quite easy, but is not an excuse.

The Australian Taxation Office (ATO) makes each and every person appointed as a trustee sign a declaration that they are aware of the rules and enforce that that declaration must be witnessed.

Then, after signing a declaration that you are aware and know the rules, they also force you to appoint an independent auditor to thoroughly check everything you have done and to make sure that you have not breached any of the rules.

If they find out that you have breached the rules then that auditor must then report the breach to the Tax Office.

Once it has been reported, this breach must be addressed as quickly as possible. It is even better if you rectify the breach before the auditor reports the breach. Your attitude towards rectifying the breach has a lot of impact on the action that the Tax Office will take against you as a trustee.

Where you can show that this was an inadvertent breach and you fixed it immediately upon realising you made the breach then most likely you will not receive any type of punishment.

Conversely, where the breach was made knowingly and you show hesitancy in rectifying it you should expect to feel the full wrath of the regulator. The ATO does not take lightly to a person not administering their super to the letter of the law.

What Punishments Can The ATO Give You?

There are a number of sticks the ATO has to punish wayward SMSF trustees. The most common punishment used is a direction to do something. For example, you might have acquired an asset off a member that was against the rules. In this case, the ATO would direct you to sell that asset back to the members.

Further on the next level of punishment would be education directives. The ATO has the authority to force you to do some formal SMSF Trustee training. There are a number of providers of these training courses.

That is the extent of the punishments that do not incur monetary penalties. However, the next level of punishment is significant fines for each individual trustee or director of the corporate trustee. These fines can be up to $10,000 per person.

The biggest punishment that can occur is to classify the SMSF as “non-complying,” where the cost of this will be 47% of the accumulated taxable component of the whole fund.

Essentially, that’s half of your super taken from you.

That’s why we always recommend complying with the rules. When you are unsure of the rules, then you should seek further clarification from an expert (and keep off of the ATO’s naughty list while you’re at it).

What Happens To Your Super When You Die?

Building up your super is one of the ways that you can finance your eventual retirement. But what will happen to your super if something were to happen to you prior to that?

Much like how a will dictates what will happen to your physical assets, death benefit nominations ensure that superannuation benefits are properly dealt with in the event that a member dies. Generally, this means that the super provider pays the remaining super to their nominated beneficiary (if the rules of the provider allow you to nominate a beneficiary). This nomination may be non-binding or binding.

Binding Nomination

In the event that a binding nomination is allowed, you can nominate one or more dependents, or your legal personal representative to receive your super. In the event that the deceased does not make a nomination, the trustee of the provider may be able to:

  • Use their discretion to decide which dependant or dependants the death benefit is paid to.
  • Make a payment to the deceased’s executor of the deceased estate for distribution according to the instructions in the deceased’s will.

Non-Binding Nomination

In the event that the nomination made by the deceased is non-binding, the trustee of the provider may:

  • Use their discretion to pay in accordance with the non-binding nomination.
  • Use their discretion to decide which dependant or dependants the death benefit is paid to.
  • Make a payment to the deceased’s legal personal representative (executor of the estate) for distribution according to the instructions in the deceased’s will.

Superannuation death benefits do not automatically form part of the deceased’s estate and are generally not covered by the person’s will. Preparing a death benefit nomination should be done in conjunction with the member’s will so that all financial aspects of the estate are dealt with consistently.

How Often Should a Death Benefit Nomination Be Made? 

Superannuation death benefit nominations are not a compulsory requirement but can give those who survive you financial certainty in how to handle your super in the event of your death.

Depending on a member’s circumstance, personal events in their life should trigger a review of existing nominations just as they would trigger a review of a person’s will. Additionally, when the member statements are provided, presuming they contain the nomination data (based on the technology being used), it is also a good time to see if anyone is missing from the existing nominated dependents or if the proportion needs to be changed.

If you believe you’re the beneficiary of a deceased person’s super or are the trustee of a person’s estate, you should contact their super provider to make them aware that they are deceased, and to release their super.