By Tim Miller
Miller Super Solutions – assisting SMSF professionals and trustees
Prior to the introduction of the non-concessional contributions cap, large lump sum (undeducted) contributions were commonly used to increase savings prior to retirement and/or facilitate certain asset acquisitions, such as direct property.
Accordingly, the non-concessional contributions cap has had a significant impact on the way in which SMSF savings are accumulated over time.
The standard annual $180,000 limit, which represents six times the annual concessional contribution cap, applies to the total amount of non-concessional contributions that can be made in respect of an individual in any financial year, on or after 1 July 2014.
A higher limit of up to $540,000 may apply to individuals, aged 64 or less on 1 July of the financial year in which the contributions are made, who exercise an opportunity to ‘bring forward’ up to two future years entitlements to the standard annual limit.
In practice, the standard annual cap of $180,000 will apply unless the amount of the non-concessional contributions actually exceeds this amount – triggering the requirement to bring forward the 3 year entitlement. Once triggered, the future 2 years’ entitlements are not indexed.
The bring forward indexation trap
Members, and by association trustees, need to be mindful that the bring forward provision is triggered in the first year that a contribution exceeds the standard cap and is then fixed for the following two financial years.
In the 2015/16 Financial year anyone contemplating using the bring forward provision to contribute up to $540,000 needs to be mindful of what they contribute now as it will affect how much they contribute in the 2016/17 year but also the 2017/18 year.
If a client contributes $185,000 this year they are locked in to the $540,000 bring forward limit for the next two financial years and won’t be able to access any indexation that occurs during that time until the completion of the three year cycle.
Fund capped contributions
It should be noted that when the contribution caps were introduced the Government also introduced excess contributions tax as a disincentive to people exceeding these caps but they also introduced “Fund Capped Contribution limits”. This was a measure to limit the amount a fund could accept in a single contribution for a member to minimise the likelihood of member exceeding the cap. The Fund Capped Contribution limit served a purpose for those that only made singular contribution to one fund but were less effective if a member made multiple contributions to one or more funds as the rules didn’t provide for contribution aggregation.
If a fund receives a member contribution in excess of the fund capped contribution limit, and an accompanying notice of intention to claim a tax deduction does not follow within 30 days the excess amount must be returned, ideally within 30 days.
Age is a factor
In addition to the fund capped contribution limits, age is another factor that complicates the bring forward provision. A member who is aged between 65 and 74 on 1 July can only utilise the standard non-concessional cap of $180,000, subject to meeting the work test, but there are also some quirks if the member has triggered the bring forward rules prior to their 65th birthday.
Example – Application of the ‘bring forward’ provisions – 64 on 1 July – single contribution
Jane, born on 1 April 1951, has recently received a significant amount of money following the sale of an investment property.
She would like to know the maximum amount of personal superannuation contributions she can make in the 2015/16 year. Jane has not made any personal contributions in previous years.
If Jane satisfied the work test, gainfully employed for at least 40 hours in 30 consecutive days, Jane may make non-concessional contributions of up to $540,000 at any time in the 2015/16 year:
even if she has turned 65 by the time she makes the contribution; and
even though she will not meet a contribution standard in either of the following years for which future cap entitlements have been brought forward.
A common misunderstanding with the above scenario centres on the timing of the contribution. In the example above, Jane only needs to meet the work test if she is making any contributions after turning age 65. Therefore, as Jane turns 65 on 1 April 2016 she can contribute up to $540,000 any time prior to 1 April without having worked. It is only if she wants to contribute after that date that the Trustee (Jane in her capacity as Trustee) must be satisfied that she has met the gainful employment requirement i.e. the work test.
Additionally it should be noted that the work test conditions are best read as being prospective meaning that at the time of the contribution, assuming Jane doesn’t make the contribution until after her 65th birthday, the trustee must be satisfied that the member has met the test prior to the contribution being made, it doesn’t provide for the member meeting the test at a future point of time in the year, as there is a chance the work will never get done resulting in the contribution being in excess of the fund capped contribution limit. Lastly it is not a requirement for the member to have met the work test requirements after turning 65, it is a financial year test so even if Jane only worked in the month of July and satisfied the 40 hour requirement then she can contribute the $540,000 at any time up until 30 June 2016.
Contributing in future years
Now let’s take the bring forward rules one step further. As stated above, if Jane utilises the bring forward provision in the year of her 65th birthday, subject to her not being born on the 1st of July, then she can contribute up to $540,000 in that year without consideration of meeting the work test in future years.
The rules can create confusion in the event that Jane triggers her bring forward but doesn’t utilise the entire amount in the first year. If Jane makes a $200,000 contribution in the first year she triggers the bring forward provision giving her the ability to contribute a further $340,000 over the following two financial years. On 1 July 2016 Jane will be 65. Early in the 2016/17 year Jane receives a significant amount of money following the sale of an investment property.
Jane has $340,000 remaining of her bring forward amount. She now has to satisfy two requirements in order to utilise the remainder of the bring forward limit. Firstly Jane must satisfy the work test, as she is 65 or older on 1 July.
Secondly Jane, in her capacity as Trustee of her SMSF, cannot accept an amount that exceeds the fund capped contribution limit which in this instance is $180,000. This means that Jane cannot contribute $340,000 in a single contribution but the rules around the bring forward provision do allow her to make a contribution up to the fund capped contribution limit and another contribution for the balance of the bring forward amount. In this instance Jane can contribute $180,000 and a further $160,000 as neither exceed the fund capped contribution limit and combined she doesn’t exceed the bring forward amount.
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General advice warning:
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
Miller Super Solutions is the SMSF education & training creation of Tim Miller, assisting SMSF professionals and trustees with the practices associated with establishing, running and ultimately closing down SMSF’s.