Friday 19 May 2017 by Tony Negline Education (advanced)

Last chance for super contributions if you exceed the $1.6m cap – Part five

The amount you can contribute to superannuation changes from 1 July 2017. This note explains the after tax, non concessional contributions you can make in the 2016/17 financial year and the future allowance. This is important for many high net worth individuals because this may be the last chance they can contribute up to $540,000 per person before the end of the financial year

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The amount you can contribute to superannuation falls from 1 July 2017 $180,000 to $100,000 each year. This note explains the after tax, non concessional contributions you can make in the 2016/17 financial year and the future allowance.

This is important for many high net worth individuals because this is the last chance they can contribute up to $540,000 per person before the end of the financial year.

If your after tax non concessional contributions are below your non concessional contribution cap (see below) then they go into super tax free and can be withdrawn either as a lump sum or pension tax free.

There are five key elements to making non concessional contributions:

  1. Under the super laws am I allowed to make a super contribution?
  2. What dollar value of non concessional contributions can I make to super?
  3. What happens if I exceed my non concessional contribution cap?
  4. If I leave my excess non concessional contributions in super what tax rate will apply to those contributions?
  5. What tax rate will apply to my non concessional contributions if I elect to take them out of super?

At the end of this article I mention a common trap - that many make - which is particularly important to avoid this financial year.

1.   Can I make a personal contribution to super?

To determine if you can get money into superannuation, there are rules around your age. The question of how much is separate and one I’ll discuss later on.

If you are:

  • Aged less than 65 – contributions can be made without worrying about your work status
  • Aged at least 65 but under 75 – contributions can only be made if you satisfy a work test (see below)
  • Aged at least 75 – contributions can only be made if you satisfy a work test (see below) and the contributions are made within 28 days after the end of the month in which you had your 75th birthday

Work Test

This says that you have done some bona fide work and received some remuneration – that is, some physical or mental work for an economic reward that would be seen by the community as a legitimate activity – for at least 10 hours per week in less than 31 days.

Does the work test need to be satisfied before the contribution is made?

If you wish to make contributions to a non SMSF, such as a retail or industry super fund, then the answer is yes.

If you wish to use a SMSF then the answer is no, as long as, the work test is completed at some point during a financial year.  If you elect to do this, then the danger is that for whatever reason – for example illness – you don’t satisfy the work test after you have made the contribution.

2.   What dollar value of non concessional contributions can be made?

This is unnecessarily complicated.  To work out what you can contribute and when, you need access to your contribution history. 

This information can be gathered from the ATO or from your accountant, financial adviser or super fund administrator (be careful as all of these people may not have access to all your past contribution data).

If you’re aged at least 65 at the start of a financial year then each year that you’re allowed to contribute because of the work test mentioned above, the maximum you can make before tax penalties apply is the annual non concessional cap.

Aged less than 65 at the start of a financial year

If you’re aged less than 65 at the start of a financial year then you can also only contribute the annual non concessional contribution cap.

However you might also be allowed to use what is sometimes referred to as the “three year bring forward rule”.  This allows you to make three years of non concessional contributions at anytime during a three year period.  For example you could make three years of non concessional contributions at the start of a financial year and then not make any further contributions until that three year period has ceased.

You commence a three year bring forward period by making more than the annual non concessional contribution cap in a financial year.

If you’re aged under 65 on 30 June 2017 then what can you contribute? 

We need to split this information into distinct time periods:

  • In the 2015/16 financial year you made non concessional contributions of at least $460,000 but less than $540,000:
    • Your three year bring forward period is 2015/16, 2016/17 and 2017/18
    • The maximum you can contribute until 30 June 2017 is the difference between $540,000 and the amount you have already contributed
    • Your next three year bring forward period begins on 1 July 2018
  • In the 2015/16 financial year you made non concessional contributions of at least $180,000 but less than $460,000:
    • Your three year bring forward period is 2015/16, 2016/17 and 2017/18
    • The maximum you can contribute until 30 June 2017 is the difference between $460,000 and what you have already contributed
    • Your next potential three year bring forward period begins on 1 July 2018
  • In the 2016/17 financial year you made non concessional contributions of more than $380,000 but less than $540,000:
    • Your three year bring forward period is 2016/17, 2017/18 and 2018/19
    • The maximum you can contribute until 30 June 2017 is $540,000 in total
    • Your next three year bring forward period begins on 1 July 2019
  • In the 2016/17 financial year you made non concessional contributions of more $180,00 but less than $380,000:
    • Your three year bring forward period is 2016/17, 2017/18 and 2018/19
    • The maximum you can contribute until 30 June 2019 is the difference $380,000 and the amount you have already contributed
    • Your next three year bring forward period begins on 1 July 2019

See Table 1 for a summary of these positions. Existing rules allow you to make non concessional contributions of $180,000 per year until 30 June 2017, when the amount decreases to $100,000 per year.

Just to be very clear here – if you’re aged at least 65 at the start of a financial year, and if eligible, you can commence in later financial years.  However any contributions made in the next two years cannot:

  • Cause you to exceed the three year bring forward total calculated when you first commenced the bring forward period
  • Exceed the annual contribution cap for a particular year

Limitations on making non concessional contributions from 1 July 2017

There is a new set of limitations that will apply:

  • The annual non concessional contribution cap reduces from $180,000 to $100,000
  • If your Total Superannuation Balance (See the article published 2 MayExternal link - opens in a new window for further details on how this is calculated and when) is less than $1.4 million then the maximum bring forward after-tax contributions that can be made remains at three times the annual non concessional contribution cap – that is, $300,000
  • If your TSB is at least $1.4 million and less than $1.5 million then the maximum bring forward after-tax contributions you can make is two times the annual non concessional contribution cap over two years – that is, $200,000
  • If your TSB is at least $1.5 million but less than $1.6 million then no bring forward after-tax contributions will be permitted but annual non concessional cap are allowed
  • If your TSB is at least $1.6 million then no bring forward after-tax contributions will be permitted

3.   What happens if I exceed my non concessional contribution cap?

Each year your super fund sends the ATO data about the contributions you have made so it can work out if you have exceeded the relevant contribution cap.

If it detects that you have contributed more than a contribution cap it will write to you and offer two choices – it will allow you to leave the money in the fund or to take the money out.

4.   What tax rate applies if you exceed your non concessional contribution cap and you leave the money in your super fund?

The tax rate is the highest marginal tax rate plus the Medicare Levy.  That is, 49% in 16/17 or 47% in 17/18 assuming the Temporary Budget Repair Levy ceases on 30 June ’17.

Given non concessional contributions are made with after tax money this is a significant disincentive.

5.   What tax rate applies if you exceed your non concessional contribution cap and you elect to remove the excess amount from your super fund?

The excess amount is taken out tax free but a notional amount of earnings will be added to your tax return and taxed at your marginal tax rate.

Beware the common trap

If you plan to make non concessional contributions this financial year (for example because you have a Total Super Balance above $1.6 million and you know that next financial year you cannot contribute) then make sure your super fund receives these contributions this year.

If you are contributing money via electronic funds transfer then remember that sometimes this can take a few days to complete.  Effectively, this means that the contributions must be in your fund’s bank account by 30 June which this year occurs on a Friday.

If you’re contributing using a cheque then make sure you can prove that the trustee received the money before 30 June.

 

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