Thursday 01 December 2016
Contribution considerations when approaching age 65
Thursday 01 December 2016
Concessional contributions cap
The standard concessional contributions (CC) cap is $30,000 in the 2016/17 financial year. The cap is indexed annually in line with Average Weekly Ordinary Times Earnings (AWOTE) and rounded down to the nearest $5,000.
For those aged 49 or over on 30 June 2016, a higher CC cap of $35,000 applies in the 2016/17 financial year.
2016 Budget update
The CC cap will be reduced to $25,000 from 1 July 2017. The new cap will apply to all individuals regardless of age. Indexation of the CC cap will reduce to increments of $2,500.
From 1 July 2018, individuals will be able to carry forward their unused CC cap for a rolling period of five years. Access to the unused cap amounts will be limited to those individuals whose total superannuation balance is less than $500,000.
Non-concessional contributions cap
The non-concessional contributions (NCC) cap is defined as six times the standard CC cap, or $180,000 per year (in 2016/17).
Those under age 65 at any time in a financial year may bring-forward up to two future years’ entitlements so as to contribute a maximum of $540,000 over a three-year period. The ‘bring-forward’ cap will trigger automatically in the first financial year that NCCs of more than the annual cap are made.
When the ‘bring-forward’ arrangements have been triggered, the cap is fixed and will not increase in the following two years with indexation. For example, if the ‘bring-forward’ arrangements were triggered in 2013/14 total NCCs in a three year period, starting on 1 July of the first financial year where NCCs exceeded $150,000, will remain capped at $450,000.
Example 1: ‘Bring-forward’ arrangements
Sam has unexpectedly inherited $500,000 that he would like to contribute to his SMSF. If Sam turns 65 on 20 July 2016, can he contribute the full amount to superannuation?
As Sam is under age 65 during the 2016/17 financial year and hasn’t used the ‘bring forward’ provisions in either of the two previous financial years, he can make up to $540,000 of NCCs over the current and future two years without exceeding the NCC cap, providing he has met the work test (discussed below).
2016 Budget update
The NCC cap will be reduced to $100,000 per annum from 1 July 2017. Those under age 65 during a financial year may be able to bring-forward up to two future years’ entitlements to contribute a maximum of $300,000 over a three-year period (depending on their total superannuation balance).
Those with a total superannuation balance of $1.6 million or more as at 30 June of the previous financial year will be unable to make further NCCs.
Those who have triggered the bring-forward arrangement in either the 2015/16 or 2016/17 years, though haven’t fully utilised the whole $540,000 cap, maybe be subject to a transitional NCC cap from 2017/18.
There are generally no restrictions on individuals under age 65 making contributions to superannuation. However, individuals aged 65 or more not only need to consider contribution caps, but also whether they are eligible to contribute to superannuation.
The rules can vary depending on age and the type of contribution. Two common contribution acceptance rules relevant for individuals turning 65 are the work test and the fund contribution cap. For information on other contribution acceptance rules see Macquarie FastFact Super contribution acceptance rules.
The work test
Once an individual turns 65 (and is under age 75), a superannuation fund can only accept personal contributions where the work test has been met.
The work test requires that an individual has been gainfully employed for at least 40 hours in 30 consecutive days in the financial year. This test must be met prior to the contribution being made.
Example 2: Work test
Sam retires from the workforce on 28 June 2016. If he contributes to superannuation prior to turning 65 on 20 July 2016, he will not need to meet the work test, even if some of these contributions represented a ‘bring-forward’ of future years’ entitlements. However, if he makes personal contributions to super on or after his 65th birthday he must meet the work test in the financial year the contribution is made before the fund can accept the contribution.
The fund contribution cap
A fund is currently unable to accept a single ‘fund-capped contribution’ in a financial year for a member that exceeds:
- the annual NCC cap (ie $180,000 in 2016/17) if the member is aged 65 or more on 1 July of the financial year, or
- three times this amount (ie $540,000 in 2016/17) if the member is under age 65 on 1 July of the financial year
Broadly, ‘fund-capped contributions’ include personal contributions not claimed as a tax deduction, spouse contributions and amounts transferred from foreign pension schemes. Employer contributions, personal contributions covered by a valid deduction notice, personal injury contributions, CGT small business concession contributions and certain payments from the ATO (eg co-contributions) are not considered ‘fund-capped contributions’.
The fund contribution cap applies to each contribution, not to all contributions made during a particular year or three year period (unlike the NCC cap) – see ATO ID 2007/225. Of particular note is the application of the fund contribution cap for individuals aged 65 or more on 1 July of a financial year who have previously triggered the three year ‘bring-forward’ arrangements. In this scenario, an individual’s fund contribution cap in a particular year may be less than their remaining NCC cap in that year.
The ‘fund-capped contribution’ restriction is proposed to be removed with effect from 1 July 2017. Not yet law at the time of writing.
Example 3: Fund contribution cap
Sam decides to contribute the full $500,000 to superannuation on 10 July 2016. As Sam is age 64 on 1 July, his fund is able to accept a single contribution of $500,000 from Sam as it is within his fund contribution cap of $540,000 (in 2016/17).
Sam decides to contribute $200,000 on 10 July 2016. As with Scenario 1, the fund is able to accept this contribution as it is within Sam’s fund capped contribution limit. Sam intends to contribute a further $300,000 in July 2017 (assuming he meets the work test in 2017/18). Despite Sam having $340,000 of his NCC cap remaining, as he will be 65 on 1 July 2017, the maximum single contribution his fund can accept is $180,000 (being the annual NCC cap in 2017/18).
To contribute the full $300,000 in 2017/18, Sam will need to make at least two separate contributions, with no single contribution exceeding $180,000.
Requirement for super funds to return contributions
As mentioned above, there are minimum requirements for accepting contributions. If a contribution is received in a manner that is inconsistent with these requirements, the trustee of the fund has 30 days from when it first became aware of the inconsistency to return the contribution.
Example 4: Returning contributions
Sam’s super fund is not able to accept personal contributions after 20 July 2016, unless he has met the work test. Any personal contributions received from Sam after this date without the work test being met need to be returned by the fund within 30 days of the contribution being made.
Macquarie Contribution Cap Companion
Macquarie FastFact Super contribution acceptance rules.
Australian Taxation Office ATO ID 2007/225
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