Rising cap implications

The concessional contributions cap is set to increase from 1 July. Colonial First State head of technical Craig Day outlines the impact this development could have on the strategies of certain SMSF members.

Following the release of the most recent wages data for the December quarter 2023, we now know the concessional contributions cap will rise from $27,500 to $30,000 a year from 1 July.

This also means the annual non-concessional contributions (NCC) cap will increase from $110,000 to $120,000 a year at the same time as the nonconcessional cap is calculated as four times the concessional cap.

As a result, clients may be able to get more into super at the commencement of the new income year. However, advisers will need to be mindful of the details as the changes are not as straightforward as they may seem.

Non-concessional cap using the bring-forward rules

The increase in the annual NCC cap from $110,000 to $120,000 also means the NCC bring-forward rules will increase from a maximum of $330,000 to $360,000.

However, if a client has previously triggered the bring-forward rule and they are still within their bring-forward window, they won’t get the extra cap to play with as they have already locked in their NCC cap for the duration of the bring-forward period.

For example, if a client triggered the three-year bring-forward rule in the 2023 financial year by making total NCCs of more than $110,000, their non-concessional cap for 2022/23 (Year 1) will have automatically reverted to three times the annual NCC cap of $110,000, or $330,000. Their NCC cap in the following two years will then be calculated as follows:

• Year 2 (2023/24): $330,000 less NCCs made in Year 1

• Year 3 (2024/25): $330,000 less NCCs made in Year 1 and Year 2 combined (assuming the total super balance (TSB) just prior to start of Year 2 and Year 3 is less than the general transfer balance cap applying in that year).

In this case, as the client locked in their nonconcessional cap at $330,000 in 2022/23, they won’t be able to benefit from the increase to the NCC cap until after their three-year bring-forward period expires at the end of 30 June 2025.

In addition, the increase in the NCC cap means it will be extremely important for clients wanting to maximise their NCCs using the bring-forward rule not to inadvertently trigger the bring-forward rule this year (2023/24) by contributing more than $110,000 prior to 30 June.

For example, getting it very slightly wrong and making total NCCs of just over $110,000 would trigger the bring-forward rule this year and lock in their non-concessional cap at $330,000 until after 30 June 2026.

Reduced TSB thresholds for bring-forward NCC cap

It’s also important to note something a bit strange is happening with the TSB thresholds that determine a client’s eligibility to use the bring-forward rules in 2024/25.

These thresholds are calculated by taking the current general transfer balance cap for the relevant year and deducting either one or two times the annual NCC cap applicable for that year.

And herein lies the gremlin. The combination of the increase in the annual non-concessional cap to $120,000 and the transfer balance cap remaining fixed at $1.9 million means the bring-forward thresholds will actually go down for the 2025 financial year.

This is shown in Table 1, which outlines the NCC bring-forward thresholds and cap amounts for this year and next year.

As a result, it will be important to double-check a high-balance client’s TSB at 30 June 2024 before triggering the bring-forward rule next year to avoid inadvertently exceeding their NCC cap due to the reduced thresholds.

Advisers who want to recommend contribution strategies that include making NCCs of up to $110,000 this year and then larger NCCs of up to $360,000 next year, should also be aware of these lower thresholds and may want to limit any contributions before 30 June to make sure they don’t affect a client’s ability to make the most of their NCC next year.

For example, suppose a client made an NCC of $110,000 before the end of the financial year and as a result their TSB on 30 June increased to just over $1.66 million. In that case they could only make NCCs of up to $240,000 next year.

Advice implications and the contribution cap increases

The contribution caps increase is obviously good news for clients looking to get more into super. However, they shouldn’t be considered in isolation as there are a range of other super and tax changes, such as the super guarantee (SG) increase from 11 per cent to 11.5 per cent and the stage 3 tax cuts, that need to be taken into consideration when reviewing contribution strategies. The implication of these factors can be seen here.

• Client type: Employees who salary sacrifice or make personal deductible contributions up to the concessional cap or due to the stage 3 tax cuts will be able to increase contributions up to the concessional cap from 1 July 2024 .

• Advice requirements: Review salary sacrifice and/or personal deductible contribution levels from 1 July 2024 considering:

o concessional cap increasing to $30,000,

o SG increasing to 11.5 per cent, and

o effective tax-free threshold increasing to $22,575 (if not eligible for the Seniors and Pensioners Tax Offset (SAPTO)) due to changes to stage 3 tax cuts.

• Client type: Self-employed/ retirees making personal deductible contributions up to concessional cap or due to the stage 3 tax cuts will be able to increase contributions up to the concessional cap from 1 July 2024.

• Advice requirements: Review recommended personal deductible contribution levels from 1 July 2024, considering:

o concessional cap increasing to $30,000,

o SG increasing to 11.5 per cent (if any part-time employment), and

o effective tax-free threshold increasing to $22,575 (if not eligible for SAPTO) due to changes to stage 3 tax cuts (or $35,813 for singles or $31,888 for members of a couple if eligible for low-income tax offset and SAPTO).

• Client type: Clients who will be under age 75 on 1 July 2024 who have not already triggered the bring-forward rule in 2022/23 or 2023/24, and who want to maximise NCCs under the bring-forward rule.

• Advice requirements: Consider delaying triggering the bring-forward rule by not making total NCCs in 2023/24 exceeding the standard NCCs cap ($110,000). The client can then make total NCCs of up to $360,000 from 1 July 2024 (subject to TSB at 30 June 2024).

Note – clients with large TSB balances may need to limit any NCCs this year to ensure the contribution does not cause their threshold on 30 June 2024 to exceed the reduced bring-forward thresholds of $1.66 million and $1.68 million, as this may limit their ability to make larger NCCs next year.

• Client type: Clients who have an SMSF and use the contribution reserving strategy.

• Advice requirements: Clients in this situation should take into account the increase in the concessional contributions cap to $30,000 from 1 July 2024 when determining their personal deductible contribution levels in June 2024.

Case study – Jim

Jim, age 61, is currently working parttime earning $46,500 a year and supplementing his income with payments from a transition-to-retirement income stream. He is seeking to maximise his concessional contributions in the lead-up to his retirement at age 65.

In the 2024 financial year, his employer contributes $5115 in SG (11 per cent of $46,500). Jim also salary sacrifices $22,385 in 2023/24 to fully utilise his $27,500 concessional contributions cap. Assuming no other taxable income or deductions, this strategy reduces Jim’s taxable income to $24,115, which is above his effective tax-free threshold of $21,884 (the point below which there’s generally no benefit in making further concessional contributions).

On 1 July 2024:

• the concessional contributions cap will increase from $27,500 to $30,000.

• Jim’s employer will need to increase SG to 11.5 per cent of his earnings.

• Jim’s effective tax-free threshold will increase from $21,884 to $22,575 due to the reduction in the 19 per cent tax rate to 16 per cent.

As Jim wants to maximise concessional super contributions, he needs to review his existing strategy considering these changes. However, instead of simply increasing his salary sacrifice by the amount of concessional cap increase, $2500, he needs to also factor in the fact his employer will be making SG contributions of $5347.50 in 2024/25 and that his effective tax-free threshold has increased.

Jim elects to increase his salary sacrifice contributions by $1540 from $22,385 to $23,925. This strategy reduces his taxable income to, but not below, his new effective tax-free threshold of $22,575, while keeping his concessional contributions within the $30,000 cap ($23,925 salary sacrifice + $5347.50 SG = $29,272.50).

Impact of stage 3 tax cuts on cash flow

The now legislated changes to the stage 3 tax cuts announced in January 2024, will provide more low and middle-income taxpayers with a larger tax cut from 1 July. While many people may elect to spend this additional cash in hand or direct it towards their mortgage, pre-retiree clients who have paid off their mortgage and don’t need the additional income to meet their higher living expenses, could consider directing it to super via a salary sacrifice or personal deductible contribution strategy.

For example, a taxpayer with taxable income of $145,000 will receive a tax cut from 1 July 2024 of $3729 a year or $311 a month. If that person, for example age 55, was able to salary sacrifice either 50 per cent or 100 per cent of their tax cut over the next 10 years, their projected super benefit at age 65 would increase as in Table 2.

Therefore, the combination of increased contribution caps and the stage 3 tax cuts could result in significant planning opportunities to increase clients’ contribution levels and their resulting retirement benefits.