The confirmed increases in the concessional contributions cap from 1 July will have a number of knock-on effects for SMSF clients, a technical expert has said.
Heffron managing director Meg Heffron pointed out the timing of large non-concessional contributions (NCC), bring-forward periods and double-deduction strategies would be affected by the concessional contributions cap increasing from $25,000 to $27,500 for the 2022 financial year.
“There are a number of important flow-on impacts for clients,” Heffron said in blog post on the firm’s website.
“Those considering large NCCs will need to think carefully about whether they do that in 2020/21 or 2021/22.”
Making a large NCC now would mean locking in the 2020/21 non-concessional cap of $100,000 for the next three years, even though the NCC cap is set to increase to $110,000 from 1 July as a result of the confirmed rise in the concessional contributions cap, she noted.
She also urged advisers to be wary of “unexpected impacts” the increased caps would have on the bring-forward rules.
“We all like to think that bring-forward periods are carefully considered and happen exactly when the client meant to use these rules to maximise their non-concessional contributions,” she said.
“In fact, remember that they are triggered automatically whenever the annual non-concessional cap is exceeded. The contributor has no choice about the period of the bring forward.”
In particular, she highlighted small contribution amounts, such as personal contributions to industry funds to maintain insurance cover and SMSF expenses paid personally that were not reimbursed, that might be overlooked, but would cause a member to exceed the cap.
“A strategy sometimes employed by those who need a large tax deduction in one year but not the next is the double-deduction strategy,” she added.
“If that strategy is being adopted for 2020/21, don’t forget that the second contribution in June 2021 can be $27,500. This is because it’s being tested against the 2021/22 concessional contributions cap – and by then, the cap will be $27,500.”
The increase in the contribution caps is the first since 1 July 2017 when the concessional contributions cap was $25,000.
The cap is indexed in line with average weekly ordinary time earnings (AWOTE), in increments of $2500, with the current increase driven by the release of AWOTE data for November 2020.
In November, SuperGuardian senior client manager Jason Poser said SMSF advice practitioners advising trustees to make use of bring-forward contributions measures should ensure they had not forgotten any contributions in the previous three years to avoid triggering a contribution excess.
