Reforms to Non-Concessional Super Contributions
May 8, 3 years ago

Reforms to Non-Concessional Super Contributions

On 15 September 2016, the government announced new changes affecting the non-concessional contribution (‘NCC’) caps, which are to take effect from 1 July 2017.

In particular, it announced a reduction in the existing NCCs caps, with the $180,000 annual NCC cap to be reduced to $100,000 as from 1 July 2017.

Furthermore, the $540,000 cap under the ‘3-year bring forward rule’ (which is generally available to individuals under the age of 65) would be reduced to $300,000 accordingly (i.e., 3 times the proposed $100,000 annual cap), subject to transitional arrangements for individuals who had triggered the ‘3-year bring forward rule’ in the 2016 or 2017 income years but had not fully used their existing cap before 1 July 2017.

Where an individual’s total superannuation balance on the previous 30 June exceeds $1.6 million, they will no longer be eligible to make NCCs into their superannuation fund.

Based on the government’s announcement, the following potential tips and traps should be considered when making NCCs during the 2017 and 2018 income years:

Existing caps can be used for the 2017 income year — Individuals will be able to contribute up to $180,000 in NCCs during the 2017 income year, and individuals under the age of 65 at any time during the 2017 income year will be able to contribute up to $540,000 of NCCs under the ‘3-year bring forward rule’ (assuming this concession was not triggered in any of the two preceding years).

Furthermore, if an individual under the age of 65 had triggered the ‘3-year bring forward rule’ in any of the two preceding income years (i.e., in the 2015 or 2016 income years), they will generally be able to use up any of their remaining $540,000 3-year cap during the 2017 income year.

Transitional arrangements under the ‘3-year bring forward rule’ — The government’s advises that, if an individual triggered the ‘3-year bring forward rule’ in the 2016 or 2017 income years but had not fully used their 3-year bring forward NCCs cap before 1 July 2017, the remaining bring forward amount will be re-assessed on 1 July 2017 to reflect the new annual caps.

Using the withdrawal and re-contribution strategy before 1 July 2017 — the 3-year cap of $540,000 can be used in conjunction with a withdrawal and re-contribution strategy for someone under the age of 65 (where appropriate) before the cap is reduced down to $300,000 from 1 July 2017.

Such a strategy is designed to increase the tax-free component of a member’s accumulation entitlements in their fund, before commencing a pension with a higher tax-free component.

Example 1 — Individual triggers 3-year bring forward rule in 2017
Susan is 40 years of age and has a superannuation balance of $200,000 in her SMSF.
In September 2016 (i.e., during the 2017 income year), Susan received an inheritance of $250,000, and used all this money to make an NCC to her SMSF.

Her NCC triggers the ‘3-year bring forward rule’ in the 2017 income year, assuming she had not triggered this rule in any of the two preceding income years (i.e., the 2015 and 2016 income years).

As the NCC cap will be reduced from 1 July 2017, Susan’s 3-year cap will be re-assessed against the proposed reduced NCC caps. Susan’s 3-year cap will be re¬assessed to be $380,000 (i.e., $180,000 cap for 2016/17 plus $100,000 proposed cap for 2017/18 plus $100,000 proposed cap for 2018/19), instead of being $540,000 under the former rules.

On this basis, it is expected that Susan’s remaining 3-year cap from 1 July 2017 will be $130,000 (i.e., $380,000 reduced cap less $250,000 NCC made in 2016/17).

Therefore, Susan will be able to make total NCCs over the 2018 and 2019 income years of only $130,000, without breaching her cap.

Example 2 — Individual triggers 3-year bring forward rule in 2016
Bill is 50 years of age and has a superannuation balance of $500,000 in his SMSF.

During the 2016 income year, Bill made NCCs of $200,000, with the proceeds from the sale of an investment property.
As a result, he triggered the ‘3-year bring forward rule’ in the 2016 income year, assuming he had not triggered this rule in any of the two preceding income years (i.e., the 2014 and 2015 income years).

During the 2017 income year, Bill makes NCCs to his fund of $150,000.

As the NCC caps will be reduced from 1 July 2017, Bill’s 3-year cap will be re-assessed against the reduced NCC caps. His 3-year cap will be re¬assessed to be $460,000 (i.e., $180,000 cap for 2015/16 plus $180,000 cap for 2016/17 plus $100,000 cap for 2017/18).

On this basis, Bill’s remaining 3-year cap from 1 July 2017 will be $110,000 (i.e., $460,000 reduced cap less $200,000 NCC made in 2015/16 less $150,000 NCC made in 2016/17).

Therefore, Bill will be able to make total NCCs during the 2018 income year of only $110,000, without breaching his cap.

Example 3 — Individual exhausts 3-year cap in 2017 income year
Rochanie is 40 years of age and made NCCs of $400,000 by 30 June 2017, triggering the ‘3-year bring forward rule’ in the 2017 income year, assuming she had not triggered this rule in any of the two preceding income years (i.e., the 2015 and 2016 income years).

As the NCC caps will be reduced from 1 July 2017, Rochanie’s 3-year cap will be re-assessed against the reduced NCC caps. AS such, Rochanie’s 3-year cap will be re-assessed to be $380,000 (i.e., $180,000 cap for 2016/17 plus $100,000 cap for 2017/18 plus $100,000 cap for 2018/19).

As Rochanie has made $400,000 of NCCs in the 2017 income year (i.e., greater than her re¬assessed 3-year cap of $380,000), she will not be able to make any further NCCs in either the 2018 or 2019 income years, without breaching her cap.

Should you have any queries in regards to the above article, please do not hesitate to contact our office on
02 4958 1829 or email our Client Support Manager on email@davidobrien.com.au

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