Legislation, passed in November 2016, included a decrease to the non-concessional contributions (NCCs) cap from 1 July 2017.

This article is for educational purposes only and is no longer available for CPD hours.

Importantly though, existing NCCs cap rules continue to apply until 1 July 2017. As such, up to that date, eligible contributors can still use the $180,000 NCCs annual cap or up to $540,000 bring-forward.

Broadly, this legislation reduces the NCCs cap to $100,000 per year, or $300,000 using the three year bring-forward rule, from 1 July 2017. However, additional rules will apply to:

• restrict the use of the bring-forward rule for individuals whose total superannuation balance (TSB) is approaching $1.6 million (in 2017-18);
• reduce an individual’s NCC cap to nil, when their 30 June TSB is $1.6 million or more; and
• provide transitional rules for those who have triggered, but not fully used, the bring-forward prior to 1 July 2017.

These will be explored further in this article.

It’s also worth noting that the rules around the assessment of excess NCCs have not changed.

Broadly, that means that if an individual exceeds their non-concessional contribution cap, notional earnings on the excess are calculated and included in their assessable income and taxed at their marginal tax rate.

Note: A budget proposal to remove the work test requirement for those aged 65 or over did not proceed. The work test is still required for any contributions made from when the member reaches age 65.

NCC cap rules applicable until 1 July 2017

As previously stated, it is important to note that the current rules and limits apply to NCCs made prior to 1 July 2017.

That is, eligible individuals may still contribute $180,000 per year or up to $540,000 using the three year bring-forward rule, irrespective of their superannuation account balance(s) – individuals are broadly eligible to trigger the bring-forward up to and including the year when they reach age 65.

Further, if the relevant bring-forward was triggered in 2015-16 or 2016-17, it will remain in force for the balance of the period beyond 1 July 2017, i.e. a new bring-forward period does not automatically begin on 1 July 2017. However, transitional rules will apply in such situations (these will be discussed later).

Notwithstanding this, eligible individuals can trigger the bring-forward and contribute the whole $540,000 NCCs prior to 1 July 2017, and that contribution is not affected by the NCCs cap rules which apply after that date.

Of course, where they do contribute the whole amount prior to 1 July 2017, no further NCCs are possible until the triggered bring-forward period has expired.

NCC cap rules applicable from 1 July 2017

From 1 July 2017, the annual NCC cap will reduce to $100,000, or up to $300,000 if using the bring-forward. This reduced cap is based on four times the annual concessional contributions (CCs) cap, which will be $25,000 in 2017-18.

Further, when an individual’s TSB as at 30 June in the previous year equals or exceeds the general transfer balance cap amount (GTBC), that individual will have no NCC cap space available, i.e. their NCC cap will reduce to nil – for 2017-18 the GTBC will be $1.6 million.

If an individual’s 30 June TSB subsequently falls below the GTBC in a later year, that individual may once again have NCC cap space and be eligible to make NCCs in the immediate following year.

Any NCCs made by an individual whose 30 June TSB exceeds their GTBC will effectively be excessive NCCs.

Example

On 30 June 2017, Bob’s TSB is $1.7 million. In 2017-18, the general transfer balance cap is $1.6 million.

Bob has no NCC cap space in 2017-18.

On 30 June 2018, Bob’s TSB has fallen to $1.5 million due to poor investment performance. In 2018-19, the GTBC is still $1.6 million.

Bob may have available NCC cap space in 2018-19.

Observation: Individuals who have difficulties establishing their 30 June TSB may need to carefully consider their ability to make further NCCs until such valuations can be obtained. This could occur when assets require a formal valuation. This will primarily affect self-managed super fund members.

New terminology

Total superannuation balance (TSB)

An individual’s ‘total superannuation balance’ will be measured each 30 June and compared against the ‘general transfer balance cap’ amount to determine the amount (if any) of NCC cap that an individual will have in the immediate following financial year. This balance will also determine an individual’s eligibility to trigger the bring-forward and the amount of the bring-forward.

TSB is the sum of an individual’s:

• accumulation superannuation balances, plus
• account balance of any transition to retirement (TTR) pensions, plus
• modified personal transfer balance account (i.e. the sum of any retirement pensions commenced), plus
• amounts not counted above because they are rollovers, less
• amounts contributed under the exemption for structured settlements/compensation or damages payments arising from personal injury claims.

The TSB includes both tax-free and taxable components.

An individual’s personal transfer balance account is the value (at commencement) of concessionally taxed or tax exempt retirement income streams that an individual has commenced. This includes a notional account balance for a defined benefit (DB) and constitutionally protected fund (CPF) and others that do not have an account balance, e.g. annuities or where access to capital is restricted, like a term allocated pension (TAP).

Where an individual has an interest in a DB or a CPF but has not yet commenced the income stream, the amount that will be counted towards their TSB is the amount they would receive if they voluntarily caused the interest to cease (i.e. left
the fund).

Note: It is beyond the scope of this article to examine the pension transfer balance account in detail.

The value of any contributions or retirement income streams commenced solely with the proceeds of structured settlement/personal injury amounts is excluded from both the modified and personal transfer balance account. However, earnings on these structured settlement amounts are included in an individual’s TSB.

The modified personal balance transfer cap is different from the individual’s personal transfer balance cap. The modified cap includes the actual 30 June account balances for account based/market linked retirement pensions and annuities, whereas the personal transfer balance cap measures the value of these retirement income streams at commencement and adjusted for specified credits and debits. The notional/crystallised balance at commencement of DB pensions, CPF pensions and annuities is also included.

Example

On 1 July 2017, John commenced an account based pension (ABP) using his accumulated super balance of $1.6 million. The amount counted against John’s personal transfer balance cap account is $1.6 million.

On 30 June 2018, the balance of John’s retirement ABP is $1.5 million and John has no other superannuation interests.

This is the value for John’s modified personal transfer balance cap used to determine his 30 June TSB.

If the GTBC is still $1.6 million, John may have NCC cap space in 2018-19 and can make NCCs in that year.

Rollovers

These are amounts that are ‘in transit’ between super funds as at 30 June. As such, they are not currently included in any account balance or otherwise reported.

Structured settlements

Amounts from structured settlements/compensation or damages claims arising due to personal injury settlements are excluded from the $1.6 million TSB. These amounts can continue to be contributed using the existing ATO election form and accompanying medical certification, so they are excluded from the NCC cap. That is, it is possible for an individual to have a TSB in excess of $1.6 million and still contribute proceeds of structured settlements.

Amounts from structured settlements will also be excluded from their personal and modified transfer balance cap when commencing ‘retirement’ pensions.

Small business CGT concessions

These amounts are excluded from the contribution caps, however, are included in an individual’s TSB. So, it’s possible to contribute amounts under the 15-year exemption (currently up to $1.415 million) or the retirement exemption (up to $500,000 lifetime limit) when the individual’s 30 June TSB is approaching or even exceeds the $1.6 million GTBC.

Where the individual has both amounts that qualify for the small business CGT exemptions and other amounts to be contributed under the NCC cap, they can still contribute both these amounts within a single year. As their TSB and eligibility to make NCCs is measured at the immediately previous 30 June, timing considerations in respect of these two different contributions do not arise, e.g. as long as their 30 June TSB is less than the GBTC making contributions using the CGT exemptions would not otherwise prevent other NCCs (within the bring-forward rules below), even if the TSB is then exceeded within the year.

However, the timing of the contribution could become an issue if, say, the individual contributed CGT concession amounts prior to 30 June, which then limited or excluded the individual from making further NCCs in the following year(s) due to the 30 June TSB exceeding the GTBC. In that case, it would be preferable, if possible, to contribute the NCCs first prior to 30 June, then contribute the CGT concession amounts after 30 June, as they are not then restricted by NCC cap limitations.

Bring-forward rules from 1 July 2017

Most of the rules around triggering the bring-forward do not change, including:

• The bring-forward will be triggered when NCCs in a year exceed the annual NCC cap, initially $100,000; and
• An individual must be age 64 or younger at the beginning of the financial year to be eligible to trigger the bring-forward. The work test must be met if the contribution is made after an individual turns age 65.

However, new rules apply from 1 July 2017, which will limit the ability and the amount of bring-forward that can be triggered, as an individual’s 30 June TSB gets closer to the GTBC of $1.6 million in 2017-18. This is illustrated in Table 1.

Table 1

As such, from 1 July 2017, the bring-forward period will not always be a fixed three-year period but may be either two or three years as determined by the individual’s 30 June TSB.

It should also be noted that if an individual triggers the bring-forward, but does not use the full amount in the first year, their ability to contribute the unused amount in later years is based on their 30 June TSB still being below the GTBC.

Example

On 30 June 2017, James has a TSB of $1.390 million. In 2017-18, the general transfer balance cap (GTBC) is $1.6 million. James is not in a previously triggered bring-forward period.

As James’ TSB is below $1.4 million as at 30 June, he can use the $300,000 bring-forward to make NCCs of up to $300,000 in 2017-18. James has a bring-forward period of three years.

Example

On 30 June 2017, Angus has a TSB of $1.450 million. In 2017-18, the GTBC is
$1.6 million.

Angus can trigger a bring-forward amount of $200,000 to be used over a two-year period.

In 2017-18, Angus contributes $150,000 and at 30 June 2018, his TSB is $1.6 million. If the GTBC is still $1.6 million in 2018-19, Angus cannot make any additional NCCs, as his 30 June 2018 TSB equals the GTBC. The $50,000 unused part of the two year bring-forward expires in the 2018-19 year.

On 30 June 2019, Angus’ TSB has fallen to $1.595 million. If this is less than the GTBC in 2019-20, Angus could make NCCs, as his previous two-year bring-forward has expired.

Transitional bring-forward rules

If an individual triggers a bring-forward in either 2015-16 or 2016-17 ($540,000), but does not use the full amount of the bring-forward by 30 June 2017, transitional bring-forward caps will apply. These transitional caps reflect the lower annual NCC cap available from 1 July 2017.

As previously stated, eligible individuals can trigger and use the full $540,000 bring-forward before 1 July 2017, regardless of their TSB, without penalty.

The transitional bring-forward limits are outlined in Table 2.

Table 2

A bring-forward triggered in the 2017-18 year and later, will be $300,000, subject to indexation of the NCC cap.

Example

Troy contributes $200,000 to his super fund in 2016-17. He has triggered the $540,000 bring-forward.

Troy can contribute another $340,000 to his super fund during the remainder of 2016-17.

If Troy does not contribute more than the initial $200,000, he would be limited to contributing a further $180,000 over the 2017-18 and 2018-19 financial years.

He can only make the additional NCCs if his TSB as at the previous 30 June, is below the GTBC in the year of the contribution.

Example

Alison, age 40, contributes $500,000 to her super fund in 2015-16, so she has triggered the bring-forward. She does not make any contributions in 2016-17.

Alison is not eligible to make any NCCs in 2017-18 (the third year of the bring-forward) because she has already exceeded her ($460,000) transitional NCC cap. No penalty applies because the contribution was made within the NCC cap applying at the time the contribution was made.

Alison may be eligible to make further NCCs in the 2018-19 year when the previous bring-forward has expired, subject to her 30 June 2018 TSB being below the 2018-19 GTBC.

Fabian Bussoletti, Technical Services Manager, AMP TapIn.