The ability for an individual to make non-concessional contributions will be determined by a general transfer balance cap under the new superannuation laws. Julie Hartley examines how the cap works and its effect on the ability to bring forward non-concessional contributions in the future.
The recently introduced Fair and Sustainable Superannuation legislation has added another layer of complexity to a member’s ability to make non-concessional contributions (NCC).
The legislation imposes a general transfer balance cap (GTBC), being $1.6 million for 2017/18 subject to indexation, to determine a member’s eligibility to make NCCs in a financial year. While the figure is the same, this cap is different from the pension transfer balance cap, which was also created by the new legislation.
The GTBC, which will apply from 1 July 2017, is an addition to, not in substitution of, all of the other requirements a member has to meet before being able to make an NCC into their super fund. Contrary to what was originally proposed, the work test will continue to apply for people between the age of 65 and 74.
A member’s eligibility is determined by looking at their total superannuation balance as at 30 June before the start of each financial year during which the member wishes to make an NCC. If a member’s total superannuation balance is below the GTBC at that time, and they meet all other NCC requirements, they will be able to contribute up to the annual NCC cap (and not just the difference between their balance and the GTBC) or use the bring-forward strategy if eligible.
The cap will apply on a taxpayer by taxpayer basis in respect of all of their superannuation accounts.
What if a member’s balance is over the cap?
If, for example, a member’s total superannuation balance is over the GTBC as at 30 June 2018, they are not eligible to access the NCC cap or receive government co-contributions in the 2019 financial year. They are, however, still able to make concessional contributions. Their total superannuation balance will then be reassessed in the next financial year. If their total superannuation balance has then reduced below the GTBC as at 30 June 2019, the member can once again contribute up to the NCC cap in that financial year.
What this means is that being over the cap one year does not permanently prohibit the member from making NCCs ever again, it simply prevents them from doing so each financial year that their total superannuation balance as at 30 June equals or exceeds the GTBC.
It is important to keep in mind that the relevant time to assess the member’s total superannuation balance is 30 June of the previous financial year, and not at the day the member wishes to make a contribution. This may cause some practical issues as member balances are not known until the accounts are finalised, which often takes a few months after the end of the financial year. In the meantime, the member will be uncertain of their ability to contribute.
Table 1
Case study 1: Jenny – 55 years old – able to contribute in year two – has not previously triggered bring-forward strategy
Case study 2: Jeff – 63 years old – unable to contribute in year 2 – has not previously triggered bring-forward strategy
Case study 3: Natasha – triggered bring-forward strategy in 2015/16
Case study 4: Elle – triggered bring-forward strategy in 2016/17
What’s counted towards a member’s total superannuation balance?
For the purposes of calculating a member’s total superannuation balance, the following three components are added up:
- the accumulation-phase value of their superannuation interests (that is, the total amount of benefit that would be payable to the member if they terminated their membership),
- the adjusted balance for their transfer balance account (that is, the current value of the transfer balance account – cannot be less than nil), and
- any in-transit rollovers (that is, superannuation benefits paid at or before 30 June, but not yet received as at 30 June, and not reflected in the member’s accumulation-phase value),
- less any structured settlement contributions (however, capital gains tax (CGT) contributions are not deducted).
How will the GTBC interact with CGT contributions?
The legislation has maintained the separate cap for CGT contributions ($1,415,000 – 2016/17 indexed value).However, if a member is considering making both ordinary NCC and CGT contributions in two consecutive financial years, the timing of making these contributions will need to be carefully considered. In fact, while the GTBC has no relevance to a member’s ability to make CGT contributions, the amount a member transfers in as a CGT contribution is counted towards the member’s total superannuation balance for the purposes of the GTBC. This effectively means that making the CGT contribution first may take the member’s total superannuation balance over the GTBC, thereby taking away their ability to put in the intended NCC.
Members should consider making the smaller contribution in the first instance (this would generally be the NCC), provided that doing so would not bring their balance over the GTBC, or make both types of contribution in the same financial year.
How will the bring-forward strategy apply?
The rules around using the bring-forward strategy will significantly change from 1 July 2017. Firstly, the annual NCC cap will decrease to $100,000. In addition, a member must also meet five new eligibility criteria, being:
- the amount being contributed must exceed the annual NCC cap,
- the member’s total superannuation balance at 30 June of the previous financial year must be under the GTBC,
- the member must be under the age of 65 at any time during that financial year,
- the bring-forward must not have been triggered in the last two financial years, and
- the difference between the GTBC and the member’s total superannuation balance is greater than the annual NCC cap.
If the member satisfies all of the above, they then have to ascertain what their bring-forward cap and their bring-forward period are.
A member will no longer be able to automatically bring forward up to three years’ worth of NCCs in one year. Instead, the maximum amount will either be two or three times the annual NCC cap, depending on the member’s total superannuation balance at 30 June immediately before the relevant financial year (being the year during which the member intends to use the strategy). Table 1 provides a summary.
If the member does not fully use their bring-forward cap in year one, their cap for year two will be the unused portion of their cap from year one, provided their total superannuation balance as at 30 June before the start of year two is below the GTBC and they have not exhausted their cap from year one (see case study 1).
A similar approach will be adopted in year three. For that year, the cap will be the unused portion of the bring-forward cap from year two or year one, depending on whether the member was able to contribute in year three (see case study 2).
What if a member triggered the bring-forward strategy before 1 July 2017?
Transitional arrangements will apply in the above circumstances, which are illustrated in case studies 3 and 4. What if a member has not yet triggered the bring-forward strategy or not fully used their cap by 30 June 2017?
In these circumstances, the 2017 financial year is the last year during which members can make NCCs of up to $540,000 (including in-specie contributions), so, if possible, they should look at maximising their contributions to
use any unused portion of their current cap. Couples could combine their cap to transfer up to $1.08 million into their super fund by 30 June 2017.
