Proper use of the non-concessional contributions caps can boost one’s retirement savings. Tim Miller explores the complexities in maximising the effectiveness of these types of contributions.
Prior to the introduction of the non-concessional contributions cap, large lump sum (non-deductible) contributions were commonly used to increase savings prior to retirement and/or facilitate certain asset acquisitions, such as direct property.
Accordingly, the non-concessional contributions cap has had a significant impact on the way in which SMSF savings are accumulated over time.
The standard annual $180,000 limit, which represents six times the annual concessional contribution cap, applies to the total amount of non-concessional contributions that can be made in respect of an individual in any financial year, on or after 1 July 2014.
A higher limit of up to $540,000 may apply to individuals, aged 64 or under on 1 July of the financial year in which the contributions are made, who exercise an opportunity to ‘bring forward’ up to two future years’ entitlements to the standard annual limit.
In practice, the standard annual cap of $180,000 will apply unless the amount of the non-concessional contributions actually exceeds this amount – triggering the requirement to bring forward the three-year entitlement. Once triggered, the future two years’ entitlements are not indexed.
Example – Triggering the bring-forward rules
Robert, aged 57, receives advice to transfer a parcel of shares from his personal holding to his SMSF during the 2015 financial year. At the time, Robert receives the advice the market value of the shares is $175,000. When Robert completes the off-market transfer (fully executed), the value of the shares has increased to $185,000, which now represents the value of the contribution.
As this amount is in excess of the standard non-concessional cap and as Robert is under 65, this triggers the bring-forward requirement. Robert’s non-concessional cap is now fixed at $540,000 for the period 1 July 2014 until 30 June 2017, therefore he can only contribute a further $355,000 for the remainder of this period.
The bring-forward indexation trap
Indexation of the non-concessional contributions cap was a foreign concept up until 1 July 2014, with the amount being fixed at $150,000 since 1 July 2007. Members, and by association trustees, need to be mindful that the bring-forward provision is triggered in the first year that a contribution exceeds the standard cap and is then fixed for the following two financial years.
In the 2015 financial year, anyone contemplating using the bring-forward provision to contribute up to $540,000 needs to be mindful of what they contributed in not only 2013/14, but also 2012/13.
We again look at Robert’s situation, but in this instance he transferred $185,000 worth of shares in 2012/13. He is locked into the $450,000 bring-forward limit during 2014/15 and does not get access to the higher indexed amount until after the three-year period has ended. This is compounded further for those who triggered the bring-forward provision in the last financial year, 2013/14, as they will have to wait two more years to apply the higher limit.
Fund-capped contributions
It should be noted that when the contributions caps were introduced, the government also introduced excess contributions tax as a disincentive to people exceeding these caps, but they also introduced fund-capped contribution limits. This was a measure targeted at trustees, set within the contribution standards of the Superannuation Industry (Supervision) (SIS) Regulations, to limit the amount they could accept in a single contribution for a member to minimise the likelihood of members exceeding the cap. The fund-capped contribution limit served a purpose for those who only made a singular contribution to one fund, but were less effective if a member made multiple contributions to one or more funds, as the rules didn’t provide for contribution aggregation.
If a fund receives a member contribution in excess of the fund-capped contribution limit, and an accompanying notice of intention to claim a tax deduction does not follow within 30 days, the excess amount must be returned, ideally within 30 days.
Age is a factor
In addition to the fund-capped contribution limits, 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 $180,000, subject to meeting the work test, but there are also some quirks if the member has triggered the bring-forward rules prior to their 65th birthday.
Example – Application of the bring-forward provisions – 64 on 1 July – single contribution
Jane, born on 1 February 1950, has recently received a significant amount of money following the sale of an investment property.
She planned to retire in July 2014 and would like to know the maximum amount of personal superannuation contributions she can make in 2014/15. Jane has not made any personal contributions in previous years.
If Jane satisfied the work test, gainfully employed for at least 40 hours in 30 consecutive days, she may make non-concessional contributions of up to $540,000 at any time in 2014/15:
- even if she has turned 65 by the time she makes the contribution, and
- even though she will not meet a contribution standard in either of the following years for which future cap entitlements have been brought forward.
A common misunderstanding with the above scenario centres on the timing of the contribution. In the example above, Jane only needs to meet the work test if she is making any contributions after turning 65. Therefore, as she turns 65 on 1 February 2015, Jane can contribute up to $540,000 any time prior to 1 February without having worked. It is only if she wants to contribute after that date that the trustee (Jane in her capacity as trustee) must be satisfied she has met the gainful employment requirement, that is, the work test.
Additionally, it should be noted the work test conditions are prospective, meaning that at the time of the contribution, assuming Jane doesn’t make the contribution until after her 65th birthday, the trustee must be satisfied the member has met the test prior to the contribution being made. It doesn’t provide for the member meeting the test at a future point of time in the year. Lastly, 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 Jane only worked in the month of July and satisfied the 40-hour requirement, then she can contribute the $540,000 at any time up until 30 June 2015.
Contributing in future years
Now let’s take the bring-forward rules one step further. As stated above, if Jane uses the bring-forward provision in the year of her 65th birthday, subject to her not being born on 1 July, then she can contribute up to $540,000 in that year without consideration of meeting the work test in future years.
The rules can create confusion in the event that Jane triggers her bring forward, but doesn’t use the entire amount in the first year.
Example – Application of the bring-forward provisions – 64 on 1 July – multiple contributions over multiple years
Jane, born on 1 February 1950, planned to retire in July 2014, but only has the capacity to contribute $200,000 in 2014/15. When Jane makes the $200,000 contribution, she triggers the bring-forward provision, giving her the ability to contribute a further $340,000 over the following two financial years.
On 1 July 2015, Jane is already 65. Early in 2015/16, Jane receives a significant amount of money following the sale of an investment property.
Jane has $340,000 remaining of her bring-forward amount. She now has to satisfy two requirements in order to use the remainder of the bring-forward limit. Firstly, Jane must satisfy the work test, as she is 65 or older on 1 July.
Secondly, Jane, in her capacity as trustee of her SMSF, cannot accept an amount that exceeds the fund capped contribution limit, which in this instance is $180,000. This means Jane cannot contribute $340,000 in a single contribution, but the rules around the bring-forward provision do allow her to make a contribution up to the fund-capped contribution limit and another contribution for the balance of the bring-forward amount. In this instance, Jane can contribute $180,000 and a further $160,000 as neither exceed the fund-capped contribution limit and combined she doesn’t exceed the bring-forward amount.
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 of $1.36 million for 2014/15, known as the CGT cap, and
- the proceeds from a settlement for personal injury under permanent disablement that are contributed to super. This relates to workers’ compensation claims or certain court-ordered claims.
It is important to note that ‘rollover superannuation benefits’ do not count towards the non-concessional contributions cap, regardless of their components.
Exceeding the non-concessional contributions limit
A taxation penalty applies for all non-concessional contributions made prior to
1 July 2013 that result in the member exceeding their non-concessional contribution cap. The tax penalty for excessive non-concessional contributions is calculated as 46.5 per cent of the excess. The member will be required to nominate a superannuation fund to release sufficient money to pay the excess tax bill. An excess non-concessional tax assessment is a compulsory cashing requirement, meaning individuals are unable to meet this tax bill from ordinary personal savings, leaving the benefits in their SMSF.
In the 2014/15 federal budget, the government announced that from 1 July 2013 members who exceed their non-concessional contribution cap will be eligible to refund the excess contribution rather than pay the excess tax liability. Members who elect not to refund the excess will still be liable for excess contributions tax.
The original budget announcement proposed any member who elects to refund the excessive amount will be taxed on the earnings on that contribution. An alternative approach that has been suggested by a number of industry sources is that taxing the earnings may prove difficult and the government may be better suited to introduce an excess contribution charge similar to excessive concessional contributions. This measure is currently under consultation with industry representatives.
If the measure to refund excess non-concessional contributions does come to fruition, it will provide relief to those who misinterpret the bring-forward rules. Just be sure you don’t refund any excess contributions until there is legislative certainty.
