Making after-tax contributions, or non-concessional contributions, to superannuation will get significantly more complicated for the next several years, at least if the government can legislate draft super laws released last week.
I hope by the end of this article your head isn’t spinning, as the rules are far too complex.
After June 2017 your total super balance will be important.
If you have total super assets of at least $1.6m from 1 July 2017 onwards then you will not be permitted to make non-concessional contributions.
You total super balance will be based on the value of your super at the end of each June for the next financial year.
The Tax Office is fast becoming the collator of most super fund member data, so presumably this information will be available from it once super funds have passed their data on.
It can easily be envisaged that some taxpayers unaware of this requirement will make innocent mistakes and not check the balance of their super funds and make a non-concessional contribution anyway.
This total super balance number doesn’t appear to include money that has been taken out of the super system as pension or lump sum payments. That is, it’s the value of your super investments at 30 June. However, it does include the account balance or notional account balance in pensions and annuities at 30 June each year.
The key issue here is if you have a super fund balance higher than $1.6m – or expect to have after June 2017 – and wish to make additional after-tax contributions then it may be best, where possible, for you to make those contributions before July 2017.
The three-year bring forward rule
The three-year bring forward rule allows you to make three years of non-concessional contributions at any stage over that three financial years. Many people use this rule sometime in the first year of a three-year period.
One point that has to be determined carefully is the year in which a three-year rule actually commences.
In theory, it commences for the first year you make non-concessional contributions (NCCs) above that financial year’s NCC cap.
At a practical level, once you have started a year period you have to make sure that you really understand at what point you are at for that particular three-year bring forward period and what NCCs you have made and what contributions you’re entitled to make before the end of that three-year period.
NCC cap reduced by gap between $1.6m cap and total super balance
Before we discuss the actual caps and how they’ll work after June 2017 it is essential to point out that your NCC cap is only the amount that will permit your super balance to exceed the $1.6m total super balance allowance.
This is an annual test and after June 2017 it applies to a three-year bring forward rule each year.
Also from July 2017 onwards, if the gap between $1.6m and your total super assets is greater than one times the NCC cap but less than two times the NCC cap then your bring forward cap is two times the annual NCC cap. This effectively means that that in these situations you can’t have a three-year bring forward period and are only entitled to a two-year bring forward rule.
If the gap between $1.6m and your total super assets is less than one times the NCC cap, then you have no bring forward period but may be entitled to make up to one NCC cap contribution.
Excess non-concessional contributions cap
This cap has changed over the years:
(At some point it will increase to $110,000 after the Concessional Contribution cap has been indexed from $25,000 to $27,500.)
Some examples for the three-year bring forward rule:
- First exceeded NCC cap in 2014/2015 year:
- NCC cap for 2014/2015, 2015/2016 and 2016/2017 year is $540,000.
- Subject to lower NCC cap for the 2017/2018 financial year and following years depending on the gap between $1.6m and your total super balance
- Exceeded NCC cap for first time in 2015/2016:
- Your three-year period is 2015/2016, 2016/2017 and 2017/2018
- If all the NCCs are made before June 2017 then your NCC cap is $540,000 – that is three times the $180,000 NCC cap.
- If you want to contribute any NCC-money in 2017/2018 then your NCC cap for that three-year period is $460,000 – that is, $180,000 for two years and $100,000 for 2016/2017. However, contributions can’t be made unless your super assets don’t exceed $1.6m.
- New two or three-year bring forward period potentially commences in July 2018
- If you have made more than $460,000 in the 15/16 year but less than $540,000 then you are over the $460,000 cap and can’t make any further NCCs until after June 2018
- Exceeded NCC cap for first time in 2016/2017:
- Your three-year period is 2016/2017, 2017/2018 and 2018/2019.
- If all the NCCs are made before June 2017 then your NCC cap is $540,000 – that is three times the $180,000 NCC cap.
- If you want to contribute any NCC-money in 2017/2018 or 2018/2019 then your NCC cap for that three-year period is $380,000 – that is, $180,000 for one year and $100,000 for 2017/2018 and 2018/2019. However contributions can’t be made unless your super assets don’t exceed $1.6m.
- New two- or three-year period potentially commences in July 2019.
NCC cap bring forward age eligibility rules
To access the first year of a NCC cap bring forward period, you must be under 65 at the start of that first financial year. In these situations your ability to make further contributions in the second or third years of a bring forward period depends on your ability to satisfy a work test (which we will not look at here).
Special rules for those with structured settlements
A structured settlement is a financial compensation payment to a person because they have suffered some physically or mental ill-health. It is typically paid for medical malpractice, motor vehicle injuries or workplace accidents. There are no limits to the amount of contributions that you can make under this rule but there are strict time limits once the proceeds have been put into super.
Restriction on receiving the Government contribution
This is not directly related to the above rules but I thought it a good idea to mention another change.
If you’re a low to middle income earner, the government will match part of your after-tax super contributions. The maximum they will pay is the greater of 50 cents for every dollar made or $500.
From 1 July 2017, they will not pay this contribution if your total super balance is more than $1.6m at 30 June in the previous financial year.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.