Insights from Class show downsizer contributions are on the rise, while underutilised strategies include super splitting.
Class operations general manager Kate Anderson tells Professional Planner downsizer contributions inside SMSFs have risen.
She points to the Class ‘2023 Annual Benchmark Report’, which shows the average downsizer contribution reached a new record high of $281,500 in the 2023 financial year.
“Our data at Class shows that the downsizer contributions statistic where people sell their homes and make a contribution [of up to $300,000] into super, has increased substantially over the last couple of years,” she says.
According to Anderson, another useful strategy where advisers can add value is superannuation contribution splitting. The measure, which came into effect in 2006, allows people to split up to 85 per cent of their before-tax contributions each financial year with their spouses.
Anderson says a lot of people don’t use this strategy, but it can help couples, especially if a spouse has taken time out of the workforce and there’s a significant difference in a couple’s super balances.
For example, if one is maximizing concessional contributions but is nearing his or her transfer balance cap, he or she can then split the 85 per cent into the other spouse’s account. The couple then has two transfer balance caps and two amounts towards retirement in that concessional tax environment.
Anderson adds that a recontribution strategy can be useful for estate planning purposes.
It involves a member withdrawing a super benefit and then re-contributing it back as a non-concessional contribution. The purpose of this strategy is to reduce tax paid on death, should the members’ super balance be paid as a death benefit to a non-dependent.
“If a client has a significant taxable component in their super, they can take that money out after age 60 tax-free and then put it back so that when they die, their children are going to receive all their inheritance from super tax-free rather than paying 15 per cent plus Medicare,” Anderson says.
“You are effectively swapping a taxable component for a tax-free component in the member’s super,” she says.
Silver super
Anderson says the contributions landscape has changed considerably over the past 25 years.
“It has certainly kept the industry on its toes, but it has also put advisers in a great position to continue that engagement piece with their clients because it’s forever changing,” Anderson says.
“Advisers need to be on top of it and get their clients to take advantage of the changes.”
Anderson says the contributions landscape has moved a long way from members being able to contribute as much as they wanted into super through the “un-deducted” contributions.
Things changed when reasonable benefit limits (RBLs) were introduced on 1 July 1990 detailing the maximum amount of super that could be held at concessional or before-tax rates.
RBLs, however, were abolished on 1 July 2007 when concessional and non-concessional (after-tax) contribution caps came into effect.
Anderson cites the removal of the work tests for people under the age of 74 as one of the biggest changes. It started on 1 July 2022 and opened up the contribution landscape considerably by removing the work tests for people under the age of 74.
“Previously, if you were over the age of 65, you had to work 40 hours or more in 30 consecutive days on a full-time or part-time basis to be able to put money into super,” she says.
“But even though the government gave people more opportunity to contribute to super, it has also been putting limits on the amount they could contribute to super by introducing requirements around the total super balance and then the transfer balance cap.”
The total super balance is the total of one’s super interests in both the accumulation and retirement phases. The transfer balance cap is the limit on the total amount of super that can be transferred into the retirement phase, currently $1.9 million.
Anderson says other moves to incentivise super contributions have included the carry forward and catch-up contributions which allow clients to make up for unused past concessional contributions below the cap.
