Understanding the bring forward rule
If you want to make the most of the recently increased superannuation personal contribution limits, here is a timely explanation of how to use the ‘bring forward’ rule to your advantage.
The maximum personal contribution (i.e. non-concessional contribution) into an SMSF (or any superannuation fund) increased on 1 July 2014 to $180,000 per year or $540,000 using the two year bring forward rule. Many SMSF members are confused as to how to use the bring forward rule. The questions that I am often asked are: when does the clock start, which financial years are counted, and can you only make three years worth of contributions while you are under the age of 65?
Let me explain.
Firstly, the two year bring forward rule will be triggered automatically as soon as you make personal contributions totalling more than $180,000 in one financial year. This will occur even if you only exceeded the annual amount by one dollar.
Secondly, under the superannuation law, you are entitled to use the bring forward rule as long as you were under 65 years of age in the first year of contribution. You just need to make sure that at any time in the first financial year (from 1 July to 30 June) you were under 65 years of age. If your birthday falls on 2 July and you turned 65 on that date, you qualify because you were under 65 years on 1 July. It doesn’t matter that you are no longer under 65 years of age the rest of the first financial year or the following two financial years.
Thirdly, if you are aged 65 to 74, then you will need to be working at least 40 hours in a period of not more than 30 consecutive days in a financial year to be entitled to make a contribution into your SMSF. If you did trigger the bring forward rule in the first financial year when you were under the age of 65 and you have made some non-concessional contributions towards the $540,000 limit, and you are planning to contribute the remainder of your $540,000 after you turned 65, you will need to meet the part-time work test. The work test only has to be met once in a financial year. You can make contributions once you have met the work test. You do not need to be working every month to make further contributions.
The fourth point is once you have triggered the bring forward rule, you cannot make further non-concessional contributions into your SMSF until after the third financial year. So if you triggered the bring forward rule in the 2014/2015 financial year and contributed the full amount of $540,000, you cannot make any more personal contributions until 1 July 2017. This is because you have used up your annual limits for three financial years being 2014/2015, 2015/2016, and 2016/2017.
Finally, for those that have already triggered the two year bring forward rule in the last financial year (i.e. 2013/2014), you are stuck with the $450,000 limit (three times the old $150,000 cap) and cannot use the increased limit of $540,000 until your bring forward time period is over. Don’t make the mistake of claiming a further $90,000 under the three year cap by making further contributions. Your three year limit is still $450,000 because you triggered it prior to the change in the limit taking effect. Making a contribution in excess of your limit will be considered an excess contribution and you will be penalised.
A lot of people have missed a good opportunity to make larger contributions into their SMSF simply because they have not stayed informed of changes to government policy. It pays to have a good understanding of how the limits apply to your personal circumstances.
Monica Rule worked for the Australian Taxation Office for 28 years and is the author of ‘The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English’.
This content is provided by Cuffelinks and does not represent the views of AMP Capital.