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Cap indexation contains anomaly

The indexation rules being applied to the concessional contributions caps from 1 July under the new superannuation legislation may end up causing confusion for high-income earners in the years to come.

At the start of the new financial year, the concessional contributions cap for most individuals will be $25,000 a year, with indexation on this amount being applied in line with average weekly ordinary time earnings in increments of $2500.

However, the machinations of the super guarantee (SG) yearly cap for high-income earners may complicate how this limit and the concessional contributions cap operate in conjunction with one another in future years, according to PricewaterhouseCoopers director Liz Westover.

“For high-income earners there is a maximum contributions rate on super guarantee contributions and at the moment it’s just shy of $20,000,” Westover said at a Super Central Bacon, Super and Eggs seminar held in Sydney today.

“That cap is actually indexed differently to the way [the concessional contributions] cap is, so in actual fact it is conceivable that at some point down the track that maximum contributions base is going to be higher than the concessional contributions cap.

“So just be aware of that one.”

She pointed out there was a resolution to that situation.

“The good news is that should that ever occur, the new maximum contributions base will be deemed to be the concessional contributions cap,” she said.

The measure means high-income earners will not be regarded as having breached the concessional contributions cap simply because the maximum contribution base for the SG is higher as a result of the incompatible indexation process, she noted.

In addition, she suggested now was a good time to review client situations to avoid breaches of the lower concessional contributions caps that will apply in July.

“I spoke to a friend of mine on the weekend who had salary sacrifice arrangements in place and if she does not go to her employer and change her salary sacrifice arrangements from 1 July, she will be in breach of the new caps,” she said.

“So please talk to your clients around salary sacrifice arrangements. It’s a great way of engaging with clients, and not just your SMSF clients, it’s going to impact your high net wealth clients or anyone on a high income.”

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