By: Daniel Butler, Director, DBA Lawyers
On 15 September 2016 the Government, following four months of considerable adverse feedback on its $500,000 lifetime non-concessional contributions (‘NCCs’) cap proposal announced on 3 May 2016, has decided to drop this measure (which was retroactive to 1 July 2007) for a more palatable and prospective contributions limit that we outline below.
Revised NCCs cap
What is the revised change?
The new proposal provides for an annual NCCs cap of $100,000 per financial year (‘FY’) from 1 July 2017. The current $180,000 per FY NCCs cap will apply for FY2017.
The rule that allows individuals aged under 65 to be able to ‘bring forward’ three years’ worth of NCCs will continue to apply. However, since the annual NCCs cap will reduce to $100,000 per FY, the maximum amount of NCCs that can be brought forward will be reduced from $540,000 to $300,000 from 1 July 2017. (The ‘bring forward’ rule broadly applies to those under 65 years.)
Where an individual has not fully used their ‘bring forward’ NCCs cap before 1 July 2017, special transitional arrangements apply. These transitional arrangements are discussed below.
The new superannuation balance cap
Individuals will also no longer be eligible to make NCCs if their superannuation balance is more than $1.6 million from 1 July 2017. This $1.6 million threshold will be indexed in line with the $1.6 million balance cap (ie, the $1.6 million balance cap is the maximum amount on which the pension exemption will apply to pension assets in a member’s retirement phase account from1 July 2017). We will refer to the new limit that precludes further NCCs as the ‘superannuation balance cap’.
The table below summarises the NCCs caps that existed and that have been announced by the Government since 2 May 2016 (ie, the day before the Budged).
|Existing Law (2 May 2016)||Budget announced change (3 May 2016)||Revised change (15 September 2016)|
|Annual NCCs cap||$180,000||N/A||$100,000**|
|‘Bring forward’ three-year NCCs cap||$540,000||N/A||$300,000**|
|Lifetime NCCs cap||N/A||$500,000*||N/A|
|Superannuation balance cap||N/A||N/A||$1,600,000|
* The NCCs cap is subject to the lifetime NCCs cap of $500,000.
** The NCCs caps are subject to the superannuation balance cap of $1.6 million as indexed.
Who are the individuals primarily affected?
This revised proposal will allow more individuals to build a superannuation balance cap to attain their $1.6 million pension balance cap in their retirement phase. The $1.6 million balance cap (plus earnings and growth on that balance) will be the maximum amount of assets that can enjoy tax-free earnings subject to the special rule below where a member can exceed the $1.6 million threshold. However, from 1 July 2017, the superannuation balance cap for the prior 30 June will broadly include earnings and growth in measuring whether any further NCCs can be made.
The Government has announced that there will be transitional arrangements. Broadly, for those individuals who have not fully utilised their $540,000 ‘bring forward’ NCCs cap, there will be a reassessment of their remaining ‘bring forward’ amount where the ‘bring forward’ period spans 30 June 2017 to reflect the new annual caps. The transitional arrangements for those individuals who have not fully used their $540,000 ‘bring forward’ NCCs cap before 1 July 2017 are briefly summarised as follows:
‘Bring forward’ rule triggered pre-1 July 2017 and NCCs to be made in reliance on the ‘bring forward’ rule post-1 July 2017
- If the ‘bring forward’ rule was invoked in FY2016 and the individual intends to make further NCCs under the ‘bring forward’ rule in FY2018, then the remainder of their NCCs cap at 1 July 2017 is $460,000 less the amount of NCCs that they made in FY2016 and FY2017.
- If the ‘bring forward’ rule was invoked in FY2017 and the individual intends to make further NCCs under the ‘bring forward’ rule in FY2018 and/or FY2019, then the remainder of their NCCs cap at 1 July 2017 is $380,000 less the amount of NCCs that they made in FY2017.
‘Bring forward’ rule triggered pre-1 July 2017 and no further NCCs in reliance on the ‘bring forward’ rule post 1-July 2017
- If the ‘bring forward’ rule was invoked in FY2016 and the individual does not intend to make further NCCs under the ‘bring forward’ rule in FY 2018, then the individual is entitled to make NCCs of up to $540,000 prior to 1 July 2017. Where the individual has made NCCs amounting to $460,000 or more, then the remainder of their NCCs cap at 1 July 2017 will be reassessed to nil.
- If the ‘bring forward’ rule was invoked in FY2017 and the individual does not intend to make further NCCs under the ‘bring forward’ rule in FY2018 and/or FY2019, then the individual is entitled to make NCCS of up to $540,000 prior to 1 July 2017. Where the individual has made NCCs amounting to $380,000 or more, then the remainder of their NCCs cap at 1 July 2017 will be reassessed to nil.
Careful planning is therefore needed before making further contributions where the ‘bring forward’ NCCs cap has been invoked before 1 July 2017. For further reference, please refer to the flowchart prepared by DBA Lawyers: http://www.dbalawyers.com.au/wp-content/uploads/2016/09/2016-09-21-flowchart-re-transitional-rules.jpg
Given one of the subsidiary objectives of superannuation is an aim for simplicity, a much simpler alternative would have been for those who invoked the ‘bring forward’ three-year rule before 30 June 2017 to have the remaining balance of the $540,000 cap. However, unfortunately, this is not the case.
Practical application of the $1.6 million cap
The Government has stated in its Superannuation Fact Sheet:
The $1.6m eligibility threshold will be based on an individual’s balance as at 30 June the previous year. This means if the individual’s balance at the start of the financial year (the contribution year) is more than $1.6m they will not be able to make any further non-concessional contributions…
Thus it appears that a member can make additional NCCs if their superannuation balance falls below $1.6 million in subsequent years even if they have previously fully utilised their $1.6 million (pension) balance cap.
The Government has also stated in its revised Superannuation Fact Sheet 04 dated 20 September 2016 that where an individual’s balance is near $1.6 million, ‘they will only be able to make a contribution in that year and access the bring forward of future years contributions that would take their balance to $1.6 million’.
We have extracted a table from the Superannuation Fact Sheet 04 that indicates the amount of contribution and ‘bring forward’ available:
|Superannuation Balance||Contribution and bring forward available|
|Less than $1.3 million||3 years ($300,000)|
|$1.3 – <$1.4 million||3 years ($300,000)|
|$1.4 – <$1.5 million||2 years ($200,000)|
|$1.5 – <$1.6 million||1 year ($100,000)|
It appears from the above table that an individual can contribute and exceed their superannuation balance up to just under $1.7 million without breaching the new superannuation balance cap rule that is proposed.
Naturally, monitoring systems will need to carefully track balances and contributions especially where a member has accounts in several different funds where the complexity of the super system is likely to increase considerably.
Serena had an existing superannuation balance of $1.1 million as at 1 July 2017. Serena makes a $100,000 NCC during FY2018, bringing her superannuation balance to $1.2 million as at 30 June 2018. Serena then makes a $300,000 NCC in FY2019, relying on the ‘bring forward’ three-year NCCs cap. This brings her superannuation balance to $1.5 million as at 30 June 2019. The ‘bring forward’ three-year rule will continue to apply for Serena during both FY2020 and FY2021, precluding her from making further NCCs (unless she would like to run up an excess contribution), and her superannuation balance is $1.5 million as at 30 June 2021. From FY2022, the ‘bring forward’ three-year rule is reset for Serena. As her superannuation balance is less than $1.6 million, she can continue to make NCCs, and she makes an NCC of $99,999.
|Summary table of Example 1||Amount of NCCs placed in fund||Comments|
|FY2018||$100,000||Serena makes an NCC pursuant to the annual NCCs cap|
|FY2019||$300,000||Serena relies on the ‘bring forward’ three- year rule: FY2019 represents the 1st year|
|FY2020||–||This represents the 2nd year of the ‘bring forward’ three-year rule|
|FY2021||–||This represents the 3rd year of the ‘bring forward’ three-year rule|
|FY2022||$99,999||As Serena’s NCCs cap has reset and her superannuation balance is under $1.6 million, she chooses to make a further NCC|
Issues that remain in need of clarification: Carve outs
There has been no mention of express carve outs to the latest $1.6 million cap under the revised NCCs proposals released on 15 September 2016. Presumably, carve outs will still need to be provided for the revised NCCs cap in relation to:
- ensure pre-budget contracts entered into by superannuation funds can be funded without adverse NCCs cap implications;
- ensure SMSFs with limited recourse borrowing arrangements in place pre-budget can be funded without adverse NCCs cap implications up to 31 January 2017;
- personal injury settlement moneys;
- the CGT cap amount, which was expressly noted in the Budget; and
- foreign superannuation fund transfers.
We suspect the Government will need to address the above matters. Until these matters are expressly covered, there is uncertainty regarding whether the Government’s prior carve outs in respect of the $500,000 lifetime cap will prevail.
Continuing work test for those aged 65 to 74
What is the revised change?
It was previously announced in the 3 May 2016 Budget that the work test requirements (ie, gainful employment for at least 40 hours in 30 consecutive days before a contribution can be made) would cease to apply for members under age 75 and would harmonise the contribution rules for those aged under 75. On 15 September 2016, the Government announced that in order to ‘fully offset the cost of reverting to a reduced annual non-concessional cap’, it will not proceed with the harmonisation of contribution rules for those aged 65 to 74.
Deferred commencement of catch-up concessional contributions
What is the revised change?
It was previously announced in the 3 May 2016 Budget that individuals with a superannuation balance of less than $500,000 will be permitted to make additional concessional contributions where they have not reached their concessional contributions cap in the prior five FYs. This will effectively equate to a rolling five-year average concessional contribution cap of up to $125,000. On 15 September 2016, the Government announced that the commencement date of this proposal will be deferred to 1 July 2018 to ‘ensure the full cost of changes to non-concessional contribution arrangements are met over both the forward estimates and the medium term’.
From prior experience, the requirement for a member to be below a $500,000 amount before being entitled to ‘catch up’ concessional contributions will give rise to a range of practical difficulties and planning opportunities.
The revised NCCs cap is a welcome development. There are still many issues that remain in need for clarification. Many people will have to adjust their planning, and are best positioned to do so if they monitor and keep on top of the changes. Expert advice should be obtained as needed.
Finally, please note that there is still the possibility of these changes being revised, deferred or never being finalised as law.
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