Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 55

Super contributions a $1 million opportunity

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.

 

5 Comments
Bruce Kluk
March 30, 2014

Planning to use super is an integral part of retirement planning.
Always have to ensure that the excess contributions are not triggered.

Greg Einfeld
March 30, 2014

Some excellent points in this article. The key is not to trigger the bring forward rule in the current year, especially in the last few months of the year. Much better to wait until July.

Graeme Colley
March 28, 2014

Margaret, the short answers are that NCCs and CCs can be accepted by the fund between age 65 and 75 providing the work tests are met. There are some very limited exceptions to this rule that do not require the work tests to be met where the contributions are made for purposes of the superannuation guarantee, under an industrial award or are contributions that relate to the first home owner’s scheme.

Let’s have a look at the rules for NCCs pre 65, straddling age 65 and for those older than age 65:

NCCs before reaching age 65:

Acceptance of contributions by the fund – there are no work tests on the fund accepting contributions prior to a person reaching age 65. The test of the person’s age is determined at the commencement of the financial year. (SIS Reg 7.01(1) and Reg 7.01(3)).

NCCs are governed by Subdivision 292-C of the Income Tax Assessment Act 1997 (ITAA 97) and defined in section 292-90. The general rule is that a person’s NCC for the relevant year is set out in section 292-85. For the 2013/14 financial year it is $150,000 and for the 2014/15 financial year it will be $180,000. There is an exception to the general rule in sub-sections 292-85(3) and 292-85(4) which permits a person who is under age 65 in a financial year where the aggregate NCC(s) of more than the standard cap have made, a person will have an NCC cap for a fixed three year period equal to 3 times the NCC under the general rule. If a person has exceeded their NCC in the 2013/14 financial year the cap will be 3 x $150,000 = $450,000 and for the 2014/15 financial year it will be 3 x $180,000 = $540,000.

NCCs where a person reaches age 65 during the 3 year fixed period

If a person exceeds the general NCC cap in a year in which they are under 65 they will have access to the higher NCC cap for the fixed three year period. As an example, let’s assume Margaret is 64 in the 2014/15 financial year and contributes $190,000 to superannuation as a NCC. As the general NCC cap is $180,000 for that year, as she has contributed more than her general NCC for that year she will have the opportunity to contribute NCC’s equal to 3 times the general NCC over the 2014/15, 2015/16 and 2016/17 financial years. The higher NCC will be $540,000 over that period.

However, it needs to be understood that there are a number of conditions applying to the NCC made to the fund once a person reaches age 65 if the fund is to accept contributions in terms of Reg 7 of the SIS Regulations. That is, once a person reaches age 65 NCCs can only be accepted by the fund if the person has been employed on a ‘part-time’ basis at any time during the year of income. If a person turns age 65 in the year of income then part-time work that has been undertaken during the financial year prior to reaching age 65 is taken to meet the work test. (part-time employment is defined in SIS Reg 7.01 and the contribution rules are covered in SIS Reg 7.04).

Another condition relates to the amount of the NCC that can be accepted by the fund during a financial year in which the member was age 65 or older on 1 July in that year. SIS Reg 7.04(3) states that the amount of an NCC that can be accepted in relation to a person who is age 65 but less than 75 on 1 July in a financial year is limited to the NCC cap. This does not prevent the fund from accepting more than one contribution to the fund during the relevant financial years, however, it means that if the person makes an NCC in excess of the standard cap of $180,000 (2014/15 financial year) any excess is required to be refunded within 30 days of receipt as provided in sub-reg 7.04(4).

James
March 28, 2014

Hi Margaret

Assuming people are aged 65 or more for the entire financial year and subject to satisfying the work test before the contribution is made they are eligable to make NCC ( i.e. FY14 $150k & FY15 $180k) to super.

Please note: they are unable to commence using the bring forward rule.

Margaret
March 28, 2014

Re Super Caps

Everyone seems to talk about NCC’s up to the age of 65 and the fact that the bring forward rule means that you are able from 1 July, 2014, to make a contribution of $540,000. What happens after the age of 65 when you are still working as a lot of people we know are? Can you still make a NCC contribution as well as the $35,000 CC?

Hope you can help as I have received several different answers from financial professionals.

 

Leave a Comment:

     

RELATED ARTICLES

What happens to your super when you die?

Should I pay off the mortgage or top up my superannuation?

Super performance test will destroy viability of some funds

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Investment strategies

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Economy

US election implications for investors and Australia

The return of Donald Trump to the US presidency brings the prospect of more US tax cuts and deregulation, but also more tariff hikes, trade wars and policy uncertainty. Here's what it means for markets going forward.

Retirement

The rising tension between housing debt and retirement balances

Australians are taking more mortgage debt into their 60s than ever before. Retirement planning assumptions haven’t adapted and could result in future income projections that ultimately disappoint retirees.

Investment strategies

Why megatrends can deliver big upside (and downside)

The magnitude and duration of society's most important trends are often underestimated. While these trends are usually touted as a tailwind, one in particular could have dark consequences for many assets.

Property

Fixing the construction industry house of cards

Australia needs to build new homes like never before but construction firms keep going belly up. Unless regulators act now, consumers will continue to carry the can.

Investment strategies

How investor portfolios have become riskier versus history

Risk in portfolios has dramatically increased as time horizons have shortened and investors have piled into equities. It's resulted in a growing disconnect between what investors need and what the financial industry is delivering.

Shares

The abacus, big data and a brief history of indexing

Equity indices have evolved over time, led by step-changes in our ability to manipulate data. Despite the rise of passive investing, they weren't initially meant to be investment tools.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.