Contributions caps indexation follows indexation of TBC | Accurium

Contribution caps indexation follows indexation of TBC

Hot on the heels of the confirmation that the general transfer balance cap (TBC) will be indexed to $1.7m on 1 July 2021 and the consequential complexities that a personal TBC will present, the release of the December 2020 quarter AWOTE1 confirms that the concessional contribution cap will be indexed to $27,500 from 1 July 2021 as well. The indexation of these two caps sets up a domino effect presenting a challenge to navigating the even more complex maze of contribution caps, which may require a revision and reset of contribution strategies.

What’s the change?

From 1 July 2021, applying for the 2021/22 income year:

  • the concessional contribution cap will be $27,500, increased from $25,000.
  • the non-concessional contribution cap will be $110,000, being 4 times the concessional contribution cap.

What’s the relevance of the indexation of the general TBC for contribution caps?

The non-concessional contribution cap in a given income year is subject to a member’s total superannuation balance at the previous 30 June. The total superannuation balance is benchmarked against the general TBC, which will increase from $1.6m to $1.7m on 1 July 2021.

Consequently, for the 2021/22 income year, generally, a person will have a non-concessional contribution cap of $110,000 where their total superannuation balance at 30 June 2021 is less than $1.7m. However, this is subject to whether they have previously triggered the bring forward rule for non-concessional contributions – see transitional bring forward rules below.

This provides an opportunity for those whose previous total superannuation balance was more than $1.6m, but less than $1.7m to be eligible to make a non-concessional contribution without having an excess amount.

Example:

Kayla, aged 57, had a total superannuation balance of $1,635,000 at 30 June 2020 and consequently her non-concessional contribution cap for the 2020/21 income year was zero. For the 2021/22 income year, provided Kayla’s total superannuation balance is less than $1.7m at 30 June 2021, she will have a non-concessional contribution cap of $110,000 for 2021/22.

What about the bring forward rule for non-concessional contributions?

The bring forward rule allows a person, who was under age 65 at any time in the income year2, to bring forward up to 2 years of the non-concessional contribution cap. To trigger the bring forward rule, a person must have non-concessional contributions in excess of the standard non-concessional contribution cap in the income year. Consequently, to trigger the bring forward rule in 2021/22, a person will need non-concessional contributions in excess of $110,000. The bring forward period is dependent upon the person’s total superannuation balance (TSB). Where it is triggered in the 2021/22 income year, the bring forward period is based on the following thresholds:

Total super balance at 30 June prior   Non-concessional cap-year 1  Bring forward period
 Under $1.48m  $330,000  2 years
 From $1.48m to <$1.59m  $220,000  1 year
 From 1.59m to < $1.7m  $110,000  No bring forward period
 From $1.7m  Nil  N/A

Example:

Cameron, aged 52, has a total superannuation balance at 30 June 2021 of $965,000 and has not triggered the bring forward rule in the previous 3 income years. He has recently received a large inheritance and wishes to contribute the maximum amount as a non-concessional contribution to his superannuation fund.

Given Cameron’s age and his total superannuation balance at 30 June 2021, Cameron can utilise the bring forward rule and make a maximum non-concessional contribution of $330,000 in 2021/22. Cameron’s non-concessional contribution cap will be zero for the following 2022/23 and 2023/24 income years.

What if the bring forward rule was triggered in either the 2019/20 or 2020/21 income year?

The bring forward period and amount is determined when the bring forward period is first triggered, year one of the two or three year period. Consequently, where the bring forward rule was triggered in either the 2019/20 or 2020/21 income year, the total bring forward amount will be based on the standard non-concessional contribution amount that applied at that time, being $100,000.

Example:

Lynnette triggered the bring forward rule when she made a non-concessional contribution in 2020/21 of $175,000. At the time she was age 51 and has a total superannuation balance of $750,000 at 30 June 2020.

Lynette’s bring forward period is two years, as her 30 June 2020 total superannuation balance was less than the lowest bring forward threshold of $1.4m3. At that time, the standard non-concessional contribution cap was $100,000 and consequently Lynette’s non-concessional contribution cap for the 3 year period 2020/21; 2021/22 and 2022/23 is $300,000.

Lynnette can make further non-concessional contributions of no more than $125,000 up to 30 June 2023. The increase in the standard non-concessional contribution cap to $110,000 on 1 July 2021 does not affect her maximum non-concessional cap during the bring forward period, which was triggered in the 2020/21 income year.

Whilst the increase to the standard non-concessional contribution cap on 1 July 2021 does not affect a person who triggered the bring forward rule prior to 1 July 2021, the increase in the general transfer balance cap can provide an opportunity to utilise any used bring forward cap amount.

As previously noted, the non-concessional contribution cap is subject to a member’s total superannuation balance at the previous 30 June. The total superannuation balance is benchmarked against the general TBC, which will increase from $1.6m to $1.7m on 1 July 2021.

Where a person triggers the bring forward rule and the non-concessional cap is determined for either the two or three year period, for each of the bring forward years, if the member’s prior 30 June total superannuation balance exceeds the general TBC, the non-concessional contribution cap for that income year is zero. This is so, despite the person having an unused bring forward cap amount.

Example:

Jennifer, aged 48, had a total superannuation balance of $1,390,000 on 30 June 2018. In the 2018/19 income year she made a non-concessional contribution of $180,000 and consequently triggered the bring forward rule. As her total superannuation balance at 30 June 2018 was under the lower bring forward threshold of $1.4m, her bring forward period is two years and consequently her bring forward non-concessional contribution cap for the three year period 2018/19; 2019/20 and 2020/21 was $300,000.

At 30 June 2019, Jennifer’s total superannuation balance was $1,615,000. In 2019/20, year two of the three year period, her non-concessional cap is zero, despite having an unused bring forward non-concessional cap of $120,000. This is due to the total superannuation balance test being an overriding rule where the person’s prior 30 June total superannuation balance exceeds the general TBC.

However, at 30 June 2020, Jennifer’s total superannuation balance has dropped to $1,525,000. The 2020/21 income year is the third year of the three year bring forward period and as Jennifer’s prior 30 June total superannuation balance has dropped below the general TBC of $1.6m, she can utilise the $120,000 balance of her three year bring forward non-concessional contribution cap in 2020/21.

The indexation of the general TBC from $1.6m to $1.7m on 1 July 2021 provides an opportunity for those who triggered the bring forward rule prior to 1 July 2021, the bring forward period includes the 2021/22 income year and their total superannuation balance was more than $1.6m, but under $1.7m

Example:

Let’s say that Jennifer, from the previous example, triggered the bring forward rule in 2019/20 by making a non-concessional contribution of $250,000 and her total superannuation balance at 30 June 2019 was $1,390,000. Her bring forward period is two years and consequently her non-concessional contribution cap for the three year period of 2019/20; 2020/21 and 2021/22 is $300,000.

On 30 June 2020, Jennifer’s total superannuation balance was $1,610,000 and consequently her non-concessional contribution cap for 2020/21 is zero, despite having an unused bring forward non-concessional contribution cap amount of $50,000.

On 30 June 2021, Jennifer’s total superannuation balance is $1,675,000. As the general TBC is increased to $1.7m on 1 July 2021, the total superannuation balance threshold for the 2021/22 income year is $1.7m and consequently Jennifer can utilise the $50,000 unused bring forward non-concessional contribution cap amount in 2021/22.

Does a member’s personal TBC affect the TSB for non-concessional contributions?

The indexation of the general TBC, the concepts of a personal transfer balance cap, the indexation of the concessional and non-concessional contribution caps and the intricacies of the bring forward rule can lead to some confusion on a person’s caps and entitlements. One such confusion is where a person who has fully utilised their TBC, which may be less than the $1.7m general TBC, can take advantage of the increase to the contribution caps and the TSB threshold test.

To clear the confusion, it’s important to look at the rules separately, the TBC applies to moving superannuation benefits into retirement phase, whereas the contribution caps applies to amount being contributed to superannuation. Yes, the general TBC amount is relevant to both, but must be applied in accordance with the applicable rules.

Example:

Sam, currently aged 65, retired and commenced an account-based pension for $1,440,000 back on 1 July 2018, being the total of his benefits held in his SMSF at the time. The SMSF reported this via the TBAR4 and the ATO raised a credit of $1,440,000 in Sam’s TBA5. This is the only transaction to Sam’s TBA up until 30 June 2021.

On 1 July 2021 the general TBC indexes to $1.7m.  As Sam’s highest balance of his TBA, prior to indexation of the general TBC, was less than $1.6m, he is entitled to proportional indexation. Consequently, Sam’s is entitled to 10%6 of the $100,000 indexation of the general TBC, being $10,000. Sam’s personal TBC will be $1,610,000 from 1 July 2021.

At 30 June 2021 Sam’s TSB, being the value of his account based pension, is $1,625,000. He wishes to make a non-concessional contribution in 2021/22 of $50,000 – can he?

Firstly, the trustee(s) of the superannuation fund can accept the contribution as Sam is under age 677. Secondly, Sam needs to consider the cap consequences of the trustees accepting the contribution.

Whilst Sam has a TSB at 30 June 2021 that exceeds his personal TBC, for the purpose of determining his non-concessional cap, the relevant test amount is the general TBC. As this is $1.7m for 2021/22, Sam has a non-concessional contribution cap of $110,000 and will therefore not have an excess non-concessional contribution amount for 2021/22.

After Sam makes the contribution of $50,000, he could transfer the amount into retirement phase by, for example, commencing a new account-based pension. Whilst the value of Sam’s account-based pension currently exceeds his personal TBC, it is the balance of his TBA that is relevant. The balance of his TBA is $1,440,000, being the credit that arose from the commencement of his account-based pension on 1 July 2018. As the only transactions on his account-based pension has been pension payments and earnings, there has been no events giving rise to a credit or debit to his TBA.

As Sam’s personal TBC is $1,610,000, he has a TBC space of $170,000, easily covering the $50,000 of superannuation benefits he transfers to retirement phase by commencing the new account-based pension.

Get ready for the change

The indexation of the general TBC and contribution caps will lead to confusion amongst many. Understanding how the rules apply is imperative to ensure that they are correctly applied to individual scenarios and circumstances. We will be conducting future webinars on these topics to assist our Accurium TechHub subscribers navigate these changes.

1. Average Weekly Ordinary Time Earnings as published by the Australian Bureau of Statistics
2. A draft Bill is currently before the Parliament to increase the age for triggering the non-concessional bring forward rule from under age 65 to under age 67, with effect from 1 July 2020. At the time of writing this Bill had not been passed.
3. This is the lower threshold for the bring forward rule that applied for 2020/21, being the general transfer balance cap applicable for the income year, less two time the standard non-concessional contribution cap ($1.6m – [2 x $100k]).
4. Transfer balance account report
5. Transfer balance account
6. Sam’s unused transfer balance cap percentage determined per s.294-40 ITAA 1997
7. Item 1A of table in SIS regulation 7.04(1)
 

 


Disclaimer

This information is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, legal advice or tax advice, and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. The information is provided in good faith and derived from sources believed to be accurate and current at the date of publication. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. We recommend that you seek appropriate professional advice before making any financial decisions.