Indexation should not be considered in an isolated manner when deciding on SMSF contribution strategies as many other influential factors can also easily play a part, a technical manager has said.
“Do we hold out [contribution strategy considerations] for indexation? Do we say ‘I might be better off, rather than triggering the [non-concessional cap] bring-forward rule this year and locking myself into a $300,000 limit, waiting until next year when I can put in $330,000’ or whatever it might be?” SuperConcepts SMSF specialist Anthony Cullen asked delegates at the recent SMSF Professionals Day Digital 2020 jointly hosted by selfmanagedsuper and SuperConcepts.
“It sounds like a good idea, but at the same time you also have to be very mindful of future budget announcements or changes to legislation.
“What happens if the government changes the rules and all of a sudden what you thought you were going to be able to do, you can’t do anymore and you potentially miss that opportunity?”
According to Cullen, legislative change is only one additional element advisers and their clients must factor in when assessing whether to make contributions before or after indexation has been invoked.
“The other thing that might come up is market movements may actually work against you,” he noted.
“You might think your [client’s total super balance] will be around the $1.4 million mark and all of a sudden the property [the fund holds] is in a hot area and it has shot up in value and next thing you know [they’re] over that $1.4 million mark.”
This would have the effect of rendering the client ineligible to bring forward three years’ worth of non-concessional contributions and perhaps restricting them to bringing forward only non-concessional contributions for this year and the next.
“So it’s all well and good to hold off [contributions] to try and maximise benefits, but you also have to watch what’s going on to make sure [postponing the strategy] doesn’t create a bigger problem and an opportunity lost,” he said.
The economic effect of the COVID-19 pandemic has made indexation of the contributions caps highly likely at 1 July 2021.