9 minute read
Bring-forward contributions state of play
MEG HEFFRON is managing director at Heffron.
The ability of superannuants aged 65 and 66 to trigger the bring-forward rule for non-concessional contributions is currently uncertain. Meg Heffron examines what the current parameters for this provision are and the strategic opportunities still available to individuals in that demographic.
When the contribution rules changed on 1 July 2020 through Superannuation Industry (Supervision) In-house Asset Determination – Intermediary Limited Recourse Borrowing Arrangement Determination 2020 to allow those aged 65 and 66 to make superannuation contributions, and have contributions made on their behalf, without a work test, I hoped the equivalent changes to the bringforward rules wouldn’t be too far behind.
The bring-forward rule changes will move the deadline for commencing a non-concessional contribution bring-forward period to the 30 June following the member turning 67 years of age rather than 65. In all other respects the rules will remain as they are today.
The federal government’s intention is to still have these in place from 1 July 2020. That said, the
deferral of the first parliamentary sitting dates for 2020/21 until late August means we will have to wait even longer for the legislation to actually be passed.
How does this uncertainty affect someone turning 65 in 2020/21?
Consider a retiree whose total superannuation balance is well short of $1.4 million, making her confident the maximum bring-forward opportunity of $300,000 will be available. She would ideally like to make non-concessional contributions (NCC) of $100,000 in each of 2020/21 and 2021/22 and make a final large contribution, consisting of three years’ worth of NCC caps, for 2022/23 – the year in which she turns 67.
However, at this stage she doesn’t know whether this will be possible because some details remain unknown. Will the rules change to allow bring-forward periods to commence as late as the year in which she turns 67? Or will 2020/21, the year in which she turns 65, remain the last year for a bring-forward period to be initiated?
This is where the new rules we already have, that is, allowing contributions after 65 without a work test, are helpful.
Someone in this position would be well advised to contribute no more than $100,000 for now and wait until the position on bring forwards becomes certain.
If the bring-forward rules are changed as expected, she would not make any further NCCs in 2020/21. She would stick to her original plan of contributing $100,000 in each of 2020/21 and 2021/22 and delay her bring-forward period until 2022/23.
If the rules do not change, she would contribute her remaining $200,000 as soon as she knew the change wasn’t going to happen, which is at worst in June 2021. Thanks to the new rules we already have from 1 July 2020, it doesn’t matter whether this contribution is made before or after she turns 65, because there is no work test either way.
What about someone who will turn 67 in August 2020 and retired many years ago?
This client also faces some uncertainty until the new bring-forward rules are either passed or ruled out.
Someone in his position can already make $100,000 in non-concessional contributions before their birthday in August 2020 without meeting a work test. But should he take a chance, contribute $300,000 and cross all fingers and toes the bring-forward rules will change as planned? He has a more urgent deadline than the previous client – he can’t contribute after August 2020 unless he meets a work test. Hence, he can’t wait and see what happens with the new rules.
It’s worth noting that if the full $300,000 is contributed and the rules aren’t changed, the extra $200,000 won’t be illegal. It will be considered an excess NCC. However, it is not an amount that can simply be refunded within 30 days of discovering the error. This is because the immediate refunding rule only applies when contributions are made illegally, for example, by someone who is over 67, hasn’t met a work test and isn’t eligible to make work test exempt contributions.
In this case, the contribution will have been made entirely legally, it just proved to be too large. As such, the usual process for excess contributions will apply:
• the individual will need to wait until they receive an excess contributions determination, and
• the amount of the excess, in this case $200,000 plus 85 per cent of a notional amount of earnings, will be refunded to the ATO and eventually returned to the member after tax has been deducted from the notional earnings. Some clients may well feel these consequences are an acceptable risk to run because:
• there is no compliance breach to be reported,
• the excess will be returned to the member eventually, and
• the only real loss is tax on the notional earnings amount and the requirement to withdraw 85 per cent of the earnings amount from superannuation. Bear in mind, however, the notional earnings amount is calculated using a very high interest rate, currently 7.1 per cent, and would be applied from 1 July 2020 regardless of when the contribution was actually made. Even if the SMSF’s 2020/21 annual return is lodged very early, say October 2021, the earnings amount could still be nearly $20,000.
So the current situation definitely presents some challenges for those turning 65 or 67 this year and we hope that uncertainty is resolved quickly. Even once the rules have changed, however, bring forwards generally remain complex.
The inherent complexity of the bring-forward rules
The bring-forward rules have not changed since 1 July 2017 and are generally expressed in the following table:
TOTAL SUPER BALANCE at 30 June 2020 - BRING FORWARD RULES 2020/21
* $1.6m or more - $0 NCC cap, no bring forward
* $1.5m to less than $1.6m - $100k NCC cap, no bring forward
* $1.4m to less than $1.5m - $200k NCC cap, 2 years to use it
* Less than $1.4m - $300k NCC cap, 3 years to use it
In other words, as well as thinking about age and whether work tests are required, we must also be very aware of a client’s total superannuation balance when planning to bring forward NCCs several years ahead of time.
Could our client turning 65 this year in the first example above specifically choose to initiate a two-year rather than three-year bring-forward period?
At first glance this sounds like a great idea. It would mean the contributions for 2020/21 and 2021/22 would be contributed now, but the bring-forward period would end on 30 June 2022. The maximum bring -forward period of three years would then be available for 2022/23 – the year in which she turns 67 and, under the new rules, the last year in which a new bring forward can be initiated.
Unfortunately, this is not possible. If the member’s total superannuation balance is less than $1.4 million at 30 June 2020, and she contributes $200,000 in 2020/21, she will automatically initiate a three-year bringforward period that ends on 30 June 2023. She can’t choose a shorter time frame.
Could she contribute the remaining $100,000 in 2022/23?
Certainly she could. The only requirements she would need to meet would be:
• a total superannuation balance of less than $1.6 million at 30 June 2022 (anyone whose total superannuation balance is over $1.6 million as at the previous 30 June automatically has an NCC cap of nil regardless of what is happening with their bring-forward periods), and
• the contribution would need to be made before her turning 67 unless she is eligible for a work test exemption or has met the work test earlier in the year. Unfortunately, however, she couldn’t make a higher contribution to bring forward any future years’ contribution caps. She couldn’t start a new bring-forward period until she has finished the old one.
What if our hypothetical client turning 67 this year (in the second example above) is still working? Could he initiate his bring forward in 2020/21, but finish it off in a future year?
Yes he could. While 2020/21 will be the last year a bring forward can commence, this client could, for example, contribute $150,000 in 2020/21 and the remaining $150,000 in 2022/23. The only conditions he would need to meet in order to make the second contribution are:
• satisfy the work test before making the contribution, and
• have a total superannuation balance of less than $1.6 million as at 30 June 2022.
Interestingly, it is perfectly acceptable to contribute more than $100,000 in 2022/23 even though he will be well over 67 by then. The key is he would still be completing a three-year bring-forward period that has already started.
Continuing this example, what if our client had a total superannuation balance of $1.55 million at 30 June 2022 (assume for the moment that there has been no indexation of contribution caps or bring -forward thresholds)?
The apparent problem here is that our client wants to contribute $150,000 in 2022/23, but the table above indicates someone with a total superannuation balance of $1.5 million or more is limited to a $100,000 contribution.
However, the table of thresholds actually only applies when it comes to initiating a bring-forward period. In our client’s case this happened back in 2020/21. Once the bring forward is locked in, he can finish it off any way he likes as long as the two conditions outlined above are met – a work test and a total superannuation balance of less than $1.6 million as at 30 June 2022.
What if the contribution cap increases (due to indexation) from 1 July 2022? Could the member contribute more to reflect the fact the NCC cap is $110,000 in the final year?
Unfortunately no. Once a bring-forward period is locked in, the NCC cap is fixed for the entire period. Indexation has no impact.
Would meeting the work test in 2023/24 offer any other opportunities?
Yes it would. While he can’t initiate any more bring forwards because he is too old, as he will turn 70 during that year, meeting the work test will allow him to make further NCCs up to the normal one-year cap, currently $100,000. He can keep doing this every year until age 75 as long as he meets the work test each year and his total superannuation balance remains less than $1.6 million.
And in the future?
It’s only going to get more complex. The bring-forward thresholds shown earlier are actually not fixed at $1.4 million, $1.5 million and $1.6 million. Instead, they depend on, of all things, the general transfer balance cap and the annual NCC cap. In the next few years, these are both likely to increase due to indexation that will change all the figures in the table.
In short, regardless of what happens in terms of the current changes making it through the parliament, the bring-forward rules will keep us on our toes in the years to come.
