Financial Planning
Silver Lining to Negative Investment Results for 2022 Financial Year
The 2022 Financial Year proved to be one of the most difficult to navigate from an investment perspective, leading to most superannuation funds producing negative results through to 30 June 2022.
As unpleasant as it may be to review your superannuation statement at year end only to find a loss result, hence a lower superannuation balance than you may have been hoping for, this lower than anticipated balance may in fact provide an opportunity in the 2023 financial year.
There are a number of strategies where eligibility is based on an individual’s total superannuation balance being below a certain threshold. In addition, the indexation of the Centrelink assets test combined with declining superannuation and investment balances may see a number of individuals eligible for Centrelink support for the first time.
Unused Concessional Contributions
If your total superannuation balance is below $500,000 at 30 June, you may be eligible to catch up on any unused concessional contribution cap space from the 2019, 2020, 2021 and 2022 financial years.
You can catch up on any unused amounts by increasing salary sacrificed contributions, or making personal concessional contributions across the 2023 financial year. This strategy can produce significant tax benefits if implemented effectively. Note that from 1 July 2022, the work test that did determine if those over the age of 67 could contribute to superannuation, will instead determine if an individual is eligible to claim a tax deduction for their contribution i.e. make a concessional contribution, however, see below for an exemption to that rule.
Work Test Exemption
The work test exemption has been in place for a number of years now, and with the removal of the work test referred to above, we may instinctively think that this exemption is no longer relevant. However, the exemption may prove invaluable for a group of individuals.
If your balance is less than $300,000 at 30 June, than you may eligible to utilise this exemption, which would allow you to claim a tax deduction for personal superannuation contributions even if you do not pass the work test in the year in which the contribution is made. The following are the eligibility requirements
The individual met the work test in the financial year immediately prior to the year of the contribution, and
The member has a total super balance of less than $300,000 at the end of the previous financial year, and
The member has not previously used the work test exemption in a previous financial year to make a contribution to any regulated super fund.
The work test exemption may be particularly powerful for those individuals who will have a “one-off” tax event in the financial year after they cease working. This might for example be from the sale of a property that realises a large gain, or a dividend that is declared from a private company in which they have operated a business. The benefits could be magnified when the exemption is used in conjunction with the unused concessional contribution rules outlined above.
Non Concessional Contributions
If your total superannuation balance is below $1,700,000 at 30 June, you may be eligible to make a non concessional contribution in the 2023 financial year. The negative 2022 returns, combined with the removal of the work test from 1 July 2022 may see a number of individuals become eligible to top up their superannuation when they would otherwise be unable to do so.
For those with total super balances below $1.48 million, there may be an opportunity to utilise the $330,000 bring forward limit.
Impact on Pension Commencements
Along with eligibility for the above-mentioned contribution strategies declining superannuation balances can give rise to opportunities for those looking to commence an Account Based Pension. Given the $1.7 million cap on Retirement Phase Pension commencements, some individuals found themselves in a situation whereby the could not place all of their superannuation balance into pension phase. With a reduction in balance it may be possible to put a greater proportion, or even the entire balance into pension phase. As investment markets recover and pension balances experience growth, there is no requirement to return money back to accumulation phase if the $1.7 million limit is exceeded.
In addition, negative investment earnings have an impact on the taxable component of a superannuation balance, which in turn increases the exempt percentage of a superannuation balance. The commencement of a pension (whether it be a Retirement Phase Pension or Transition to Retirement Pension) locks in those tax components.
To illustrate, we consider the below example.
Ian is 66 years of age. At 30 June 2021 his accumulation balance was $1.88 million with a taxable component of $940,000, representing 50% of his balance. Ian had the opportunity to commence a pension, but opted not to as he did not require the income as he had cash reserves to draw from.
After a tumultuous 2022 financial year, Ian’s superannuation balance suffered a 12% loss, reducing his balance to $1,654,400 at 30 June 2022. The negative earnings of $225,600 are attributed entirely to his taxable component, reducing it to $714,000, or 43% of his balance.
At 1 July 2022, Ian commences an Account Based Pension with his full balance. This action means that the 43% taxable component is “locked in”, and he is able to hold 100% of his superannuation balance in a retirement phase pension. Ian of course hopes to see his pension account grow in time, and if it does so and returns to the $1.88 million, he can continue to hold the entire balance in retirement phase (tax free earnings to the fund), and his taxable component will remain capped at 43% of the balance ($808,400 of $1.88 million instead of $940,000).
Centrelink Eligibility
Declining asset bases combined with the indexation of thresholds can lead to increased Centrelink support, or, eligibility for Centrelink support for the first time.
Below are the Centrelink Assets Test Thresholds for full pension eligibility
Below are the Centrelink Assets Test Thresholds for part pension eligibility
Although we are of course hoping the 2023 financial year yields strong results for superannuation funds there may be an opportunity to make the best of a difficult situation and enhance other aspects of your financial situation.
Please contact us to discuss if you believe any of the above may apply to you.
PR Financial Services Pty Ltd
Business Address
13 Forsyth Street WAGGA WAGGA NSW 2650
Postal Address
PO Box 675 WAGGA WAGGA NSW 2650
Contact Details
T: (02) 6921 4566
