Back in May 2016 the Treasurer released his Budget and one of the most upsetting and controversial changes was to retrospectively apply a lifetime cap to superannuation non-concessional contributions of $500,000 from 1 July 2007. That meant the maximum after tax contributions you could make in a lifetime would be $500,000 but also if you had legally exceeded this cap since 1 July 2007 you would now be penalised. Ridiculous.
Thank fully some changes have come on 15 September 2016 when the Treasurer issued a media release advising the $500,000 cap will be scrapped and replaced with an annual cap of $100,000 taking effect from 1 July 2017. The current $180,000 cap and three year bring forward $540,000 cap will remain in effect until $540,000 until 30 June 2017.
This is great news for those wanting to maximise their non-concessional superannuation contributions between now and 30 June 2017 and also great news the lifetime cap is now abolished.
What will happen from 1 July 2017?
The annual cap for non-concessional superannuation contributions will drop from $180,000 per year to $100,000 which is almost a 50% reduction. Also for those that know of the three year bring forward rule, this will drop from $540,000 to $300,000 (i.e. $180,000 x3 will now be $100,000 x3).
However there’s a little catch, from 1 July 2017 if your superannuation balance is more than $1.6M you will no longer be able to make non-concessional contributions. Note that the $1.6M balance will be calculated as the individual member’s superannuation balance as at 30 June of the previous financial year.
So a strategy to consider between now and 30 June 2017, if you are nearing retirement age and are looking to perhaps liquidate personal assets and contribute to your fund, you may be able to make a $540,000 contribution to your fund per person ($1.08M for a couple) if executed prior to the end of this current financial year.
PLUS business owners can also factor in flexibility around maximising their concessional contributions which until 30 June 2017 will be $35,000 for those aged over 49 years of age however from 1 July 2017 will reduce to $25,000.
The Government have provided a few examples on how these changes will work:
Kylie’s superannuation balance is $500,000. She sells an investment property and makes a non-concessional contribution to her superannuation of $200,000 in October 2017. As Kylie as triggered her bring forward, she would be able to make a further non-concessional contribution of $100,000 in 2018-19. In 2020-21 her non-concessional contribution caps would reset and she could make further contributions from then.
Molly is 40 and has a superannuation balance of $200,000. In September 2016, she receives an inheritance of $250,000, which she puts into her superannuation. This triggers her three year bring forward, which is $540,000. From 1 July 2017, as the cap has been lowered, Molly can make a non-concessional contribution of $110,000 in 2017-18 and $20,000 in 2018-19. She can then access the new bring forward from 2019-20 and contribute up to $300,000 in non-concessional contributions.
Eamon has a total superannuation balance of $1.45 million. He can make a non-concessional contribution in 2017-18 of $200,000. He cannot access the full three year bring forward as this would take his balance over $1.6 million. Eamon would also not be able to make any further non-concessional contributions.
Gary is a 72 year old retiree who works around 40 hours in September every year and has a superannuation balance of $450,000. As Gary meets the work test, he can make a non-concessional contribution of $100,000 in 2017-18. However, as Gary is aged over 65 he cannot access the three year bring forward.
These changes now bring a lot more flexibility to your estate, succession and retirement planning which I know will be a nice relief to a lot of clients. Speak to your advisor to ensure you maximise any possible strategy between now and 30 June 2017 when the current rates will be almost halved.