With a need to constantly revisit total super balances and the impact of market returns and cap indexation, things have just got a little (or perhaps a lot) more complicated when it comes to managing non-concessional contributions.
The operation of the 3 year bring forward rule for non-concessional contributions post 1 July 2017 is no longer as simple as 3 x $100,000. In this article, we look at how the bring forward rule works in a new super world and provide a simple to follow process to help you determine what your clients are (or are not) eligible to contribute.
Let’s start at the very beginning
It’s a very good place to start (as a wise person once said), and when it comes to the bring forward provision, it’s a question about whether or not a client qualifies to use it or not.
The rules for determining a client’s non-concessional cap are contained in Section 292-85 of the Income Tax Assessment Act 1997, with subsection 292-85(2)(a) confirming that your general non-concessional cap for a year is four times your concessional contributions cap for that year. With the concessional contributions cap having been reset to $25,000 for everyone (irrespective of age), the general non-concessional cap becomes $100,000. It’s worth noting that the concessional cap will now increase in increments of $2,500 going forward (not $5,000), so the non-concessional cap will increase in increments of $10,000 (not $30,000 as under pre 1 July 20-17 rules).
However it’s also important to note that if your client has a total superannuation balance immediately before the start of the current year that is equal to or exceeding the general transfer balance cap (currently $1.6M) for the current year, then your non-concessional cap for the current financial year is nil. Note that it refers to equal to as well as exceeding. Whilst it’s unlikely someone will have exactly $1.6M as their total super balance, if they do, their cap is nil. But if they have 1 cent less, their non-concessional cap would be still be the full $100,000 – not the amount required to bring them to $1.6M.
When does the bring-forward rule kick in?
As has always been the case, the ability to use the bring-forward rule for non-concessional contributions is not something that your client needs to (or even can) elect to commence operation. The circumstances of your client and the amount they contribute will simply determine whether the bring-forward rule applies or not.
Subsection 292-85(3) sets out the criteria which, if satisfied, will automatically invoke the bring forward rule. Those criteria are that:
- Your client has non-concessional contributions in the first year that exceed the general non-concessional cap for that year (currently $100,000);
- Your client didn’t have a total super balance immediately before the start of the first year that exceeded the general transfer balance cap (currently $1.6M) for the first year;
- Your client was under 65 at any time in the first year;
- The current year is not a year within a previous operation of the bring forward provisions; and
- The difference between the general transfer balance cap and your client’s total super balance before the start of the first year exceeds the general non-concessional contributions cap.
The first, third and fourth criteria above are similar to rules that applied prior to 1 July 2017, in that you had to exceed the annual cap in a year you were under age 65 for the rules to apply, and you couldn’t have invoked the bring forward within the last two years. The second and fifth criteria, however, provided alignment to the new super regime and the annual restrictions.
In the same way that an annual non-concessional contribution of up to $100,000 would not be permitted if your client already had more than $1.6M in super, you cannot use the bring forward provisions to contribute in the same circumstances.
And the fifth criteria ensures that if you are within $100,000 of the general transfer balance cap, then you are only able to use the single year limit, rather than the bring forward provisions. What is important here is that the bring forward cap is only available if the difference between a client’s total super and the general transfer balance cap exceeds the annual limit of $100,000. So if you had a client with exactly $1.5M of total super, the gap is $100,000 exactly. As it is not more than the annual cap, the bring forward provisions are not available.
This is an important planning point as if this client does contribute the full $100,000 in this financial year, and assuming their account doesn’t suffer any negative growth, then at the end of the year they would have at least $1.6M in total super and not be able to make further non-concessional contributions. If however they contributed less than the full $100,000 and allowed for market growth, they may have the ability to make an extra $100,000 of non-concessional contributions the next year.
So what is the amount that can be contributed under the bring forward provisions?
The new rules operate by introducing a separate calculation for each year covered by the bring forward period, and you need to calculate each year’s limit at the beginning of the relevant year – not all at the beginning.
The first year cap
Unfortunately (but perhaps importantly), the answer for the first year is not as simple as being 3 x the annual cap for the first year (or 3 x $100,000).
The actual amount is determined by calculating the gap between a client’s total super balance immediately before the start of the first year and the general transfer balance cap for the first year. If the gap does not exceed an amount equal to twice the annual cap, then the first year cap is twice the annual cap. If it does exceed, then it is three times the annual cap.
Using Joan as a hypothetical example, if her total super just before the start of the year was $1.48M, her gap is $120,000 and because this does not exceed twice the annual cap (ie $200,000 or 2 x $100,000), her first year cap is $200,000.
As another hypothetical example, George has a total super balance at the same time of $1.38M, resulting in a gap of $220,000. As a result, his first year cap would be $300,000.
The reasoning for this cap calculation is obvious when you look at how much could have been contributed if approached only on an annual basis (ie no single year non-concessional contribution exceeded $100,000) and ignoring potential growth within the super account. If that was the case, Joan could have made annual non-concessional contributions of up to $100,000 for this year and the next only, and would have been ineligible in the third year. George however would have been able to do it for this and the next two years.
The second year cap
You need to calculate the second year cap at the start of the second year. Logically, your cap for the second year would be the amount left-over from the first year cap. Continuing with Joan, if she had contributed $110,000 in the first year (out of an available cap of $200,000), then logic would say she has $90,000 left for year two.
And whilst that is logical, and a possible answer, there is a different test then needs to be applies. This logical answer only applies where:
a) The client (eg Joan) has a total super balance immediately before the start of the second year less than the general transfer balance cap for the second year, and
b) The non-concessional contributions in the first year fall short of the first year cap.
If this is not the case, then the cap for the second year is nil.
So the two consequences out of this (using Joan as an example) is that if she had contributed $120,000 as a non-concessional contribution in the first year, even though she contributed $80,000 below what she could have contributed that year, her total super balance would now be $1.6M (ignoring any market movements) and she would now be ineligible to contribute more non-concessional contribution in year two.
Alternatively, if she had contributed only the $110,000 but her account had grown by at least $10,000 based on market returns in the first year, she would again be ineligible to make further non-concessional contributions.
However, if the general transfer balance cap had indexed to $1.7M for the second year, she would be eligible.
The third year cap
Calculation of the third year cap follows a similar methodology, but there are actually three alternatives.
The first option again requires total super just before the start of year three to be below the general transfer balance cap for the third year. If this is the case, and the non-concessional contributions for the second year fall short of the cap calculated for the second year, the cap for the third year is the amount of that shortfall in year two.
But it’s important to note that if your cap for year two was calculated as $nil, for example because the client had exceeded the general transfer balance cap, then this option does not apply as making no contributions in the second year is equal to the cap for the second year – not short of that amount.
The second option address this situation. Again, your total super balance needs to be below the general transfer balance cap for the third year, but if your applicable cap for the second year was assessed as nil, but you had had remaining cap space form the first year, in the third year you can make up that difference.
Importantly, this allows for a situation where the general transfer balance cap has indexed in third year or where a client may have experienced negative market movements. Using George as an example, assuming he had contributed $210,000 in year one, and assuming his account grew an extra $20,000 from market movements that year, his balance at the end of year one would have been $1.61M and his available cap for year two would have been nil.
If during the second year his super balance fell by more than $10,000 simply due to market movements and he received no concessional contributions, his total super balance at the end of year two would be under $1.6M, meaning he would have the ability to now contribute the remaining $90,000 of non-concessional contributions in year three.
Of course, if you don’t qualify under either of the first two options above, your answer for the third year is nil.
The bring forward may only operate for a two year period
Another important difference under the new rules compared to those that operated previously is that your bring forward period may only be applicable for a two year period.
Using Joan as the example above, we determined that at the start of the first year, her gap to the general transfer balance cap was $120,000 and therefore her first year cap was calculated as only $200,000 (ie two year’s worth of contributions).
Subsection 292-85(4) of the new legislation states that in this example, you do not calculate a cap for the third year using the new rules, and that in fact, you go back to the general rules and the third year actually can become a new first year.
In Joan’s situation, if she contributed $110,000 in year one and her account grew by $20,000 she would have been ineligible to contribute any more non-concessional contributions in year two. However, if her account fell by at least $10,000 in year two (and she received no other contributions in that year), her total super account balance would be below $1.6M at the start of the third year and she would qualify to contribute an additional $100,000 as non-concessional contributions as her bring forward period had ended (as only being a two year period). Further, if the general transfer balance cap had indexed to $1.7M, she could actually contribute up to $200,000 by triggering a new bring forward period.
Focus is the key
The new rules for calculating the bring forward provisions for non-concessional contributions are far more complex than in the past. It requires assessment of balances each year, but also consideration of the timing and level of contributions as getting these wrong could prevent your client from making further non-concessional contributions simply as the result of market movements.
A continued focus on these items however can help you help your client to boost their super balances and contribute to a better outcome.
This communication has been prepared for use by advisers only. It must not be made available to any retail client and any information in it must not be communicated to any retail client or attributed to BT. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. The scenarios provided are only hypothetical and are not based on real life examples. BT annot give tax advice. Any tax considerations outlined in this article are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. The tax implications of superannuation contributions can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser. Information current as at 12 March 2018. This publication has been prepared by BT - Part of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian Credit Licence 233714.