The law and common sense have never been the greatest of friends and the superannuation rules in all their versions fall clearly into that category. One example is the operation of the bring-forward rule for non-concessional contributions (NCC). At first glance it all seems to fit together, but if you don’t read and understand the detail, you may end up with something you think is common sense but doesn’t seem to fit in with the law. But that’s the way it is, you say.
Let’s look at the situation where a person may have breached their NCC cap in one year and whether a reduction in their total super balance (TSB) in any of the next two subsequent years allows them to trigger the bring-forward rule.
The simple common-sense answer is that any excess should be disregarded in determining whether the bring-forward rule is triggered. However, how is this explained in terms of the legislation is interesting because the total amount of these contributions, including any excess contributions, is included in the NCCs of the member for that financial year.
Case study
Sue Wilson is 62 and is a member of the Sue and Steve Wilson Superannuation Fund. As at 30 June 2021, her TSB was $1.62 million. During the 2022 financial year she made NCCs of $160,000. As Sue’s TSB was between $1.59 million and $1.7 million, her NCCs for the 2022 financial year are limited to no more than the general NCC cap of $110,000, meaning she has an excess of $50,000.
At some stage the ATO will issue an excess NCC determination for the $50,000 and provide Sue with the option of leaving the amount in the fund to be taxed at 47 per cent or withdrawing the excess tax-free and paying tax on the interest component. The main lesson for clients prior to receiving the determination is not to withdraw any excess from the fund as the relevant condition of release has not been met under Schedule 1 of the Superannuation Industry (Supervision) (SIS) Act.
As we can see, Sue has made NCCs in the 2022 financial year in excess of the general NCC cap. The question is, do those contributions trigger the bring-forward rule in that financial year and impact on any NCC made in the immediate future years when her TSB may be less than $1.59 million?
In terms of the Income Tax Assessment Act 1997 (ITAA), when an NCC is made to superannuation for income tax purposes, it is subject to the provisions of subdivision 292-C. They provide a standard NCC, which is $110,000 for the 2022 financial year, which is determined under the provisions of section 292-85. However, it is possible to bring forward up to two years of NCCs, which are determined by:
- the amount of NCC made in respect of the member in a financial year,
- the member’s TSB on 30 June in the financial year prior to contributions in excess of the standard NCC being made to the fund, and
- whether the member is under age 67 at the commencement of the financial year in which NCCs greater than the standard NCCs are first made to the fund.
Sue’s TSB on 30 June 2021 was $1.62 million, which is in excess of the $1.59 million threshold that limits the maximum amount of NCCs that can be made to the fund without penalty to no more than $110,000. As Sue made NCCs of more than $110,000, the question is whether in the 2023 or 2024 financial years she can access the bring-forward rule if her TSB is less than $1.59 million. By making NCCs in excess of $110,000, is the bring-forward rule triggered and therefore the amount of NCCs that can be made in the subsequent two financial years restricted?
Sub-section 292-90(1) of the ITAA defines a person’s NCC for a financial year to include a contribution made in respect of the person that is not included in the fund’s assessable income (sub-section 292-90(2)). Paragraph 292-90(1)(b) includes any excess NCC for that financial year. The definition excludes certain contributions that would ordinarily meet the definition but are excluded under sub-section 292-90(2)(c), such as co-contributions, structured settlement payments, some capital gains tax-related payments and so on.
As a general rule, section 292-85 limits the NCC that can be made by a person to the general cap of $110,000. However, if a person makes a non-concessional contribution of greater than $110,000, they have triggered the bring-forward rule if they meet the following conditions:
- the person’s TSB for the year (in Sue’s case $1.62 million as at 30 June 2021) does not exceed the general transfer balance cap (TBC), which is $1.7 million for the 2022 financial year,
- the person is under age 67 at the commencement of the first year in which the NCC greater than the cap was made,
- an NCC of greater than the general NCC cap ($110,000 for the 2022 financial year), and
- that the bring-forward rule is not already in operation for the year in which contributions in excess of the NCC cap have been made.
In Sue’s situation, while she may meet all the qualifying criteria for 2021/22, it is necessary to determine her bring-forward cap and the bring-forward period that applies. These are determined by the difference between the general TBC and the person’s TSB in the first year.
If a person has a TSB greater than $1.7 million in 2021/22, they are not eligible to access the bring-forward NCC provisions because they fail paragraph 292.85(3)(e) and do not have sufficient “first-year cap space”. That is, if a person has a TSB of at least $1.7 million and the general TBC is $1.7 million, there is no cap space to be able to access the bring-forward rule.
Where a person’s TSB for a financial year, $1.62 million in Sue’s case, is not greater than the general TBC, the general NCC cap of $110,000 under section 292.85(2) applies and not paragraph 292.85(3)(e). As a result, the person’s NCC cap cannot be determined under sub-section (3) as it defaults to sub-section (2) where the general NCC cap applies. They can only make $110,000 of NCCs in 2021/22 and are not eligible for the bring-forward allowance. This aligns with the policy intention that the bring-forward rule is only available to those with under $1.59 million in super (in 2021/22).
As Sue was not eligible to bring forward any future NCC cap, she may then access the annual cap or a new bring-forward cap if eligible in the 2023 financial year and so on. In other words, the 2023 financial year could be considered the ‘first year’ in determining how much future NCC cap they can bring forward and would be considered as the commencement of any bring-forward period.
Graeme Colley is SMSF technical and private wealth executive manager at SuperConcepts.