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Cap indexation likely in 2021

concessional contributions cap indexation

The process of indexation is likely to be applied to the concessional contributions cap from 1 July 2021 due to the effect of COVID-19, a sector specialist has said.

The effect of the coronavirus pandemic on the level of employment across the country could trigger an indexation adjustment to the concessional contributions cap effective from 1 July 2021, a technical expert has said.

SuperGuardian education manager Tim Miller made the prediction during his firm’s adviser webinar held today based on the components of the indexation formula imbedded in the retirement savings framework.

Whether the indexation process is applied to the concessional contributions cap is determined by dividing the average weekly ordinary time earnings (AWOTE) from the December quarter immediately prior to the relevant financial year by the base AWOTE figure for the quarter immediately prior to these rules coming into effect on 1 July 2017 – in this case December 2016.

Further, if this formula produces a result of 1.100, the concessional contributions cap will be indexed accordingly, resulting in an amended yearly cap of $27,500, being $25,000 multiplied by 1.100.

“What we’re looking at is a base factor of 1533.40 and what we need to target to be able to get an indexation of the concessional contributions cap is 1686.00,” Miller noted.

“What is significant here from an indexation point of view is that the June 2020 AWOTE figure was 1713.90. [This means] we’re well and truly above the 1686.00 and the concessional cap on those sorts of numbers is going to be indexed from next year.

“When you do your research into that, the numbers are highly relevant based on low-income earners actually dropping out of the workforce and as a direct result of COVID-19 a lot of people on lower incomes have dropped out of the workforce.

“Therefore [the coronavirus] has overinflated what the weekly ordinary time earnings is. So come December [2020], and November is really the month that we’re interested in seeing, if there is not a significant uplift in say employment levels between now and then, I think that there will be indexation of the concessional contributions cap.

“So it’s going to be one of those interesting areas where [COVID-19] might actually speed up the process of the concessional cap being indexed.”

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