The ability to make non-concessional contributions is now inextricably linked to a member’s total super balance. Tim Miller explains how it all works.
One of the most understated changes from 1 July 2017 is that there are no more fund-capped contribution regulations. This effectively places less of a regulatory onus on SMSF trustees to assess whether an individual contribution can be accepted or not. It’s likely in some instances trustees never even knew they had this obligation prior to 1 July 2017.
What this does is expose SMSF members to the possibility of exceeding the non-concessional contribution cap because this cap, and the ability to use it, are now linked to a member’s total superannuation balance at the preceding 30 June. Before advising clients to make non-concessional contributions, it’s important to understand how the rules apply, and not just the new rules.
At 1 July 2017, the non-concessional contribution limit was reset to $100,000. This represents four times the new annual concessional contribution cap of $25,000. The sum of all this is that there is a new bring-forward limit of $300,000. It would seem simple enough.The problem is we now have to deal with the issue of transitioning clients from the old cap to the new cap, especially those who have previously triggered their bring-forward amount. In addition, we are monitoring whether clients can even access the new cap and/or bring-forward amounts due to the introduction of the transfer balance cap and the total superannuation balance rules.
Application of the non-concessional contributions cap
The non-concessional contributions cap will generally apply to:
• all personal member contributions for which no tax deduction is claimed,
• any spouse contributions, and
• any non-taxable portion of a benefit transferred from an overseas superannuation fund.
Amounts that are specifically excluded from the non-concessional contributions cap include:
• government co-contributions,
• capital gains tax (CGT) small business concession contributions (that is, eligible proceeds using the 15-year exemption and $500,000 of gains under the retirement exemption) up to a lifetime limit, currently $1.455 million for 2017/18, known as the CGT cap,
• structured settlement contributions.
It is important to note rollover superannuation benefits do not count towards the non-concessional contributions cap, regardless of their components.
Transfer balance cap and total superannuation balance
Since 1 July 2017, a member’s ability to contribute non-concessional contributions is subject to their total superannuation balance account being less than the general transfer balance cap. Their ability to use the bring-forward provisions will be subject to how much their total superannuation balance is below the general transfer balance cap.For simplicity, consider the total superannuation balance as the sum of the member’s accumulation and pension interests. Of course, there are variables, but if we are dealing exclusively with an SMSF, then this is a realistic observation.
The bring-forward rules now require an assessment of the member’s total superannuation balance to be made at the preceding 30 June and then will be determined as follows:
• if less than $1.4 million – bring forward $200,000, maximum contribution = $300,000,
• if between $1.4 million and $1.5 million – bring forward $100,000, maximum contribution = $200,000,
• if between $1.5 million and $1.6 million – bring forward $0, maximum contribution = $100,000.
Thankfully the ability to make non-concessional contributions and use the bring-forward provisions are not proportionate based on how much an individual is under the limits. This means an individual with $1,599,999 at 30 June can contribute $100,000 the following year, assuming they are under 65 or meeting the work test requirements.
The trap for anyone considering contributing in the future is that if the entire bring-forward amount is not used in the first year, then any unused amount will be subject to the total superannuation balance test in subsequent years. If in those subsequent years the balance has put the fund over the $1.6 million threshold, then the remainder of the contribution is unavailable.
The 2017 transitional bring-forward trap
Members, and by association trustees, and by further association those who advise on contributions, need to be mindful that the bring-forward provision is triggered in the first year a contribution exceeds the standard cap and is then fixed for the following two financial years. Previously this meant if someone triggered the $540,000 in either 2015/16 or 2016/17, then they could have contributed up to that amount over the following two years. This is no longer the case.It’s important to understand that to have used the entire $540,000, regardless of which year the member pulled the trigger, the full amount must have been in the fund by 30 June 2017.
Why is this so? Well the transitional rules that apply to the bring-forward provisions state for contributions made post-1 July 2017 the following three-year limit applies:
2015/16 trigger = $460,000 ($180,000 + $180,000 + $100,000),
2016/17 trigger – $380,000 ($180,000 + $100,000 + $100,000).
So in effect, a client aged 60 who contributed $400,000 during 2016/17 will be unable to contribute further non-concessional contributions until the 2020 financial year.
Contributing in future years
The ability to contribute in future years will come down to a continual assessment of the member’s total superannuation balance. Let’s take the above scenario of the client who contributed $400,000 prior to 30 June 2017. In 2019/20, the client may wish to make further non-concessional contributions. If we assume indexation has not occurred and the cap is still $100,000, then the member’s ability to contribute is based on two things: the value of their total superannuation balance and the age-based contribution rules. If the member, now 63, has a total superannuation balance in excess of $1.6 million, then their non-concessional contribution limit is nil ($0).
Age is a factor
Age is another factor that complicates the bring-forward provision. A member who is aged between 65 and 74 on 1 July can only use the standard non-concessional cap of $100,000, subject to meeting the work test, but there are also some quirks if the member has triggered the bring-forward rules prior to turning 65.
Example: application of the bring-forward provisions – 64 on 1 July – single contribution
Jock, born on 1 February 1953, has recently received a significant amount of money following the sale of an investment property.He is planning to retire in July 2018 and would like to know the maximum amount of personal superannuation contributions he can make in 2017/18. Jock has not made any personal contributions in previous years.
If Jock satisfied the work test, being gainfully employed for at least 40 hours in 30 consecutive days, and assuming his total superannuation balance as at 30 June 2017 was less than $1.4 million, he may make non-concessional contributions of up to $300,000 at any time in 2017/18, even if he has turned 65 by the time he makes the contribution.
A common misunderstanding with the above scenario centres on the timing of the contribution. Jock only needs to meet the work test if he is making any contributions after turning 65. Therefore, as Jock turns 65 on 1 February 2018, he can contribute up to $300,000 any time prior to 1 February without having worked. It is only if he wants to contribute after that date that the trustee must be satisfied he has met the gainful employment requirement, that is, the work test.
It is not a requirement for the member to have met the work test requirements after turning 65; it is a financial year test so even if Jock only satisfied the requirement for a couple of months at the start of the financial year, he can contribute the $300,000 at any time up until 30 June 2018. Additionally, the work test conditions should be prospective, meaning at the time of the contribution the trustee must be satisfied the member has met the test prior to accepting the contribution.
Contributing in future years
What if Jock only has the capacity to contribute $110,000 in 2017/18? When he makes the $110,000 contribution, he triggers the bring-forward provision, giving him the ability to contribute a further $190,000 over the following two financial years, subject to his total superannuation balance. On 1 July 2018, Jock is already 65. Early in 2018/19, he receives a significant amount of money from the distribution of his mother’s estate.
Jock has $190,000 remaining of his bring-forward amount. He now has to satisfy the work test in order to use the remainder of the bring-forward limit.
Prior to 1 July 2017, the fund could not accept an amount that exceeded the fund-capped contribution limit, which for someone over the age of 65 was the single-year non-concessional cap. This meant that prior to 1 July, Jock could not contribute $190,000 in a single contribution, but rather would have to split the amount into separate transactions. However, from 1 July 2017, this impediment has been removed, ensuring Jock can contribute the full remainder of the bring-forward amount, subject to the work test and the total superannuation balance at the preceding 30 June.
Fund-capped contributions removed
Fund-capped contributions was a measure targeted at trustees previously set within the contribution standards of the Superannuation Industry Supervisions (SIS) Regulations. The purpose was to limit the amount a trustee could accept in a single contribution for a member to minimise the likelihood of the member exceeding the cap. With non-concessional contributions now being measured against the member’s total superannuation balance, the fund-capped contribution rules were removed, effective 1 July 2017.This simplifies the process for accepting contributions, but it can also lead to unintended consequences, such as excess contribution tax liabilities.
Where a client may get caught out is when they make a concessional contribution as these are not linked to total superannuation balances. If a member makes a personal contribution, and claims a tax deduction and the deduction is denied, then the amount will be considered non-concessional. Similarly if the member exceeds their concessional cap and elects not to refund the excess, it will be deemed non-concessional. If their balance is greater than $1.6 million, then they would have exceeded their non-concessional cap, which would now be nil.
Excess contributions bring a fund to the attention of the ATO. Excess non-concessional contributions will result in a release authority for the excess amount plus 85 per cent of the associated earnings. There is no legal requirement to release an amount from the member’s tax-free component,resulting in an opportunity to skew the benefit towards releasing a greater proportion from the taxable component. The ATO has indicated, as part of its Super Scheme Smart program, it will be targeting funds where the non-concessional cap has been deliberately exceeded to manipulate benefit components.Old rules, new rules, transitional rules, current caps, previous balances all must be contemplated when considering non-concessional contributions. It’s lucky our system isn’t complicated.