Strategies for managing the new non-concessional caps
Many SMSF members are now re-thinking some of their investment strategies.
This is subsequent to changes to super contribution rules announced this year that limited how much money fund members can contribute to the super environment.
As a result of the new rules, from 1 July 2017:
- Where an individual’s total super balance is above $1.6 million at the start of the year, they will no longer be able to make non-concessional contributions in that year.
- The annual standard non-concessional cap will be $100,000, down from $180,000, and super fund members are still able to bring forward three years of contributions.
- The concessional contribution limit will drop from $35,000 for people 49 and older and from $30,000 for people younger than this to $25,000.
One of the main groups of people affected by these changes are SMSF members who were part way through a three-year strategy to contribute to the maximum amount of $540,000 over three years.
On a top line level, SMSF members in this situation now have an opportunity to think about how they can contribute these funds into their SMSF before the rules change.
Rhiannon Kanoniuk, who is a director and practice principal at financial advice firm Pekada says the good news for those who were part way through contributing the full $540,000 before the rules changed is that they still have until the end of the current financial year to get the full amount into their fund.
To do this, members must ensure if they have turned 65 during this financial year that they have satisfied the work test. Under tax office rules, “if you have reached age 65, but not age 75, you must have worked at least 40 hours within 30 consecutive days in a financial year before your super fund can accept any contributions for you (including employer contributions, personal contributions, spouse contributions and government co-contributions).”
People between the age of 65 and 75 who are still working have been among those most concerned about the changes given how close they are to leaving the workforce and moving from accumulation to pension phase. This group may now not be able to contribute as much as they had hoped to their super fund before leaving the workforce.
“Trying to maximise their non-concessional cap needs to be of particular consideration for SMSF members who are still of contributing age and who have a member balance of $1.6 million or more. This is also the case for people with two member funds, where one member balance is close to or higher than $1.6 million and the other significantly lower,” explains Kanoniuk.
She explains that transitional bring forward rules will apply for fund members who have contributed more than $180,000 in either last or this financial year, but have not contributed to the full $540,000. This effectively reduces the member cap to $460,000 across this period.
It’s worth looking at an example to understand how this works, provided by Kanoniuk. In this example, in the 2015-2016 financial year Claire, 60, contributed $300,000 to her SMSF, but made no contributions in 2016-2017. The balance of her SMSF is $900,000, so in the 2017-2018 year, she is able to contribute $160,000 to fully use her non-concessional cap.
There is, however, a solution for SMSF members who have contributed too much to their SMSF, Kanoniuk explains.
“For those who have contributed in excess of their non-concessional contribution, to avoid non-compliance members can elect to have the excess withdrawn with any associated earnings, with these earnings taxed at the members marginal tax rate,” she says.
Overall, however, it’s important to stay inside the super rules given the consequences of not doing so involve extra taxes and charges, depending on how much has been contributed.
It’s easier than most members think to inadvertently break contribution rules. The idea is to remain vigilant about how much has been contributed over the year and set up system to track this on an ongoing basis.