The increase in superannuation contribution caps from 1 July 2014 means a couple can put more than $1 million into super on one day for the first time since the 'transitional cap' arrangements of 2007. It dilutes the argument that it is no longer possible to build a large superannuation balance, as a couple may be able to place up to $1,150,000 into super next year.
The imminent increase in super contribution caps is great news for many. The general concessional contributions (CC) cap will rise from $25,000 to $30,000 and for anyone who turns 50 or older during the next financial year their CC cap will be $35,000 (this higher cap previously only applied to those 60 and over). It all goes that bit further in attaining an adequate amount for retirement. For the over-50s, a one-off $5,000 compounded at 7% per annum gives about $14,000 in a member’s retirement benefit at the end of 15 years.
Watch for early trigger of ‘bring-forward’ rule
The non-concessional contributions (NCC) cap also increases because, irrespective of age, it is six times the general CC cap. From 1 July 2014 the NCC cap will increase from $150,000 to $180,000. The ‘bring forward’ rule is unchanged, where a fund member under the age of 65 is allowed up to three times the NCC cap ($540,000 from 1 July 2014) over a fixed three year period where the total NCCs in the first year of that period are greater than $180,000. That gives $1,080,000 in NCC caps per couple. Add to this the $70,000 of CCs gives $1,150,000. In fact, a couple both aged over 60 could also invest up to $370,000 by 30 June 2014 ($300,000 NCC, $70,000 CC), or $1,520,000 in a few months.
While this sounds great there are a few trips and traps, especially for those who have already triggered the ‘bring forward’ rule or will trigger it in the lead up to 30 June. In the majority of cases the ‘bring forward’ rule is triggered intentionally to maximise NCCs over a short period in the lead up to retirement. But when the ‘bring forward’ rule is triggered unwittingly it can create a number of difficulties with excess NCCs being taxed at 46.5%. Unfortunately, the relatively new rules relating to the refunding of excess contributions apply only to CCs and not NCCs.
Once the ‘bring forward’ rule is triggered the NCC cap is fixed for the three year period based on the NCC cap applicable in the first year. If this has taken place on or before 30 June 2014, the maximum aggregate amount that can be contributed over the three years covered by the ‘bring forward’ rule is $450,000. Access to the higher NCC cap will not be available until the fixed three year period has been exhausted. If NCCs are made based on the increased cap or if an excess occurs for any reason the excess will be calculated from the current fixed cap.
This can be illustrated as follows: Christine will turn 65 in December 2014 and plans to retire. In February 2014 she makes a NCC of $170,000 to her superannuation fund. The ‘bring forward’ rule is automatically triggered so she now has access to a higher NCC cap of $450,000 for the 2013/14, 2014/15 and 2015/16 financial years. However, as she can only make contributions to her fund until retirement she has just $280,000 left under the now fixed NCC cap. If she had only made NCCs of $150,000 in February 2014 and delayed the additional contributions until 1 July 2014 she could have invoked the ‘bring forward’ rule under the increased NCC cap. Instead of $450,000 she could have accessed a NCC cap of $540,000 starting in the 2014/15 financial year plus the $150,000 cap in the 2013/14 financial year. This differential of $240,000 would make a massive difference if Christine wanted to contribute more to her super prior to retiring.
Complex rules relating to excess contributions
Another factor impacting on the NCC caps are the rules relating to excess CCs that have applied since 1 July 2013. Excess CCs are automatically included in a person’s assessable income and taxed at their marginal tax rate less a 15% tax offset (for tax paid by the super fund) plus an excess CC charge (similar to the ATO’s shortfall interest charge). The ATO will allow a person to decide whether they elect to receive a refund of up to 85% of any excess CC to assist in paying the associated tax debt. The refunded amount is then removed from the NCC calculation for that year. However, if no election is made the excess counts towards the NCC cap and if this leads to the NCC cap being exceeded an additional tax of 46.5% will apply to the excess. If the highest marginal tax rate applies, this would result in excess CCs being taxed at 93% plus the excess CC charge.
This is illustrated in the following example. Maurice is nearing retirement and turned 60 on 1 January 2014. As he has just sold a property, he decides to make a NCC of $150,000 and increases his salary-sacrificed amount to $35,000. However, in line with his employment agreement Maurice’s employer pays a premium of $5,000 for a superannuation-based insurance policy. This had not impacted Maurice in the past as he did not salary sacrifice the maximum amount.
During the 2013/14 financial year Maurice has excess CCs of $5,000 which will be taxed at his marginal tax rate (46.5% including the Medicare levy) plus the excess CC charge. If he chooses not to receive a refund of the excess CC the resulting NCC excess will trigger the ‘bring forward’ rule and he will not be able to access the higher caps that apply from 1 July 2014. If over the next two years Maurice continued to make NCCs of $150,000 per year, the original CC excess of $5,000 would be taxed an additional 46.5%, making a total of 93% tax, or $4,650.
However, if he elects to receive a full refund of the excess it will not be counted against his NCC cap (the 85% refund is grossed up to take into account the 15% tax paid by the fund, so the NCC cap would not be breached). This would allow Maurice to access the increased NCC cap in the 2014/15 and subsequent years of up to $540,000 if the ‘bring forward’ rule operates.
Using the ‘bring forward’ rule before 30 June 2014 will mean missing out on the benefits of the indexation of the NCC cap and could result in high rates of tax if an excess NCC is made. Superannuants should ensure the most favourable options are taken, and the numbers add up nicely in the right circumstance.
Graeme Colley is the Director, Technical & Professional Standards at SPAA, the SMSF Professionals’ Association of Australia.