The imminent increase in the contribution caps from 1 July this year may sound like great news for most of us. The standard concessional contributions (CC) cap will go from $25,000 to $30,000 and for anyone who turns 50 or older during the next financial year, their CC cap will be $35,000. At least this goes that little bit further in attaining an adequate amount for retirement.
With the adjustment to the CC cap hand in hand comes the increase in the non-concessional contributions (NCC) cap. The amount of that cap, irrespective of a person’s age, is six times the standard CC cap of $30,000. From 1 July this year, the standard NCC will increase to $180,000. If the fund member is under 65, a bring-forward rule operates to allow up to three times the NCC cap ($540,000 from 1 July 2014) over a fixed three-year period where the total NCCs in the first year of that period are greater than $180,000.
While the increase sounds great, there are a few trips and traps to be wary of, especially for those who have already triggered the bring-forward rule or will trigger it in the lead-up to 30 June this year. In the majority of cases the bring-forward rule is triggered intentionally as fund members may wish to maximise their non-concessional contributions over a short period.
For example, just prior to reaching the age of 65, triggering the bring-forward rule can allow up to $450,000 to be made as non-concessional contributions in the lead-up to retirement. In some cases, the bring-forward rule can be triggered in error and create a number of difficulties with excess non-concessional contributions being taxed at 46.5 per cent.
Once the bring-forward rule is in operation, the NCC cap is fixed for the three-year period based on the standard NCC cap in the first year in which the trigger occurs. If this has taken place in 2012/13 or 2013/14, the maximum aggregate amount that can be contributed for those financial years and the two subsequent years is $450,000.
With the increase in the contribution caps from 1 July 2014, it will mean access to the higher non-concessional cap will not be available until the fixed three-year period is exhausted. The danger with this is that fund members and their advisers may be under the impression the increased cap also applies where the bring-forward rule has been triggered prior to 1 July 2014. If NCCs are made on the basis of the increased cap or an excess occurs for any reason, the excess will be calculated on the basis of the fixed cap applying. This can be illustrated as follows below.
In February 2014, Christine, who turns 65 in December 2014, decided to make an NCC of $170,000 to her superannuation fund. This meant the bring-forward rule would operate and she would have access to a higher non-concessional cap of $450,000 for 2013/14, 2014/15 and 2015/16. However, as she will not be working once she reaches the age of 65, she can only make contributions to her fund until that time. If she had only made NCCs of $150,000 in February 2014 and delayed the additional contributions until 1 July 2014, she could have accessed the increased caps.
Rather than having access to the NCC cap of $450,000 that applied to 30 June 2014, she could have had access to the cap of $540,000 due to the indexation of the cap. In other words, the maximum NCCs for the 2014 and 2015 financial years, up to the time she reached the age of 65, could have been $690,000 ($150,000 + $540,000) rather than $450,000 by triggering the bring-forward rule in the earlier year.
In the example above, Christine intentionally made the additional contribution. However, for members that have excess CCs counted against their NCC cap prior to the increase from 1 July 2014, care needs to be taken to ensure they understand how the bring-forward rule impacts on any contributions made in 2014/15 or 2015/16.