It’s been over a year since the 2017 Super Reforms, which included new non-concessional contribution (NCC) rules, came into effect. Legislation implementing the reforms not only introduced a number of new concepts that advisers need to be familiar with, but also created added complexity in determining a client’s NCC capacity in an income year. The following tips aim to assist financial services professional (‘advisers’) understand the new NCC rules, as well as some potential strategies to maximise a client’s superannuation contribution capacity.
1. Determine the client’s NCC capacity
Prior to the Super Reforms, determining a client’s NCC capacity was relatively straightforward, as it was only necessary to check their age and the amount of any NCCs made in the current or prior two income years. However, from 1 July 2017, advisers also need to consider the client’s total superannuation balance (TSB) and whether the client is subject to transitional bring-forward rules.
The following flowchart is a useful guide to determining a client’s NCC capacity for the 2018/19 year.
Chart 1: NCC capacity in 2018/19
2. Determine which contributions count towards the NCC cap
A client’s NCCs for a year broadly include contributions made for their benefit that aren’t included in the assessable income of their superannuation fund. Typically these will be personal contributions that the client is not intending to claim as a tax deduction. There are however a number of contributions that are specifically excluded from counting towards the NCC cap, including:
- small business CGT concession contributions
- personal injury/structured settlement contributions
- downsizer contributions
- co-contributions paid by the Government
These contributions along with concessional contributions are not limited or restricted by the client’s TSB. However, with the exception of personal injury/structured settlement contributions, they will add to the client’s TSB which may affect their ability to make NCCs in future years.
3. Calculate TSB
Chart 1 shows that TSB is an important element in the determination of a client’s NCC capacity. TSB is calculated effective immediately before the start of the current financial year (that is, at the end of the prior 30 June) and consists of the below components.
4. Superannuation interest valuation changes post 30 June don’t impact on TSB
Any subsequent changes to the valuation of a client’s superannuation interests following 30 June will not affect their TSB for that income year.
Joe, age 62, contacts his financial adviser to determine his NCC cap for the 2018/19 year. His superannuation benefits are still in the accumulation phase and his TSB immediately before 1 July 2018 was $1,490,000. By August 2018 the value of his accumulation account has increased to $1,530,000. Despite this increase, Joe’s NCC cap is still determined by his TSB immediately before 1 July 2018 - his NCC cap for the year is $200,000 (see Chart 1).
5. Nil NCC capacity if TSB exceeds $1.6 million
Once the bring-forward arrangement is triggered, the client’s overall NCC cap capacity is generally determined for the bring-forward period. An exception to this rule is where the client intends to make an NCC in the second or third year of the bring-forward period and their TSB is $1,600,000 or more immediately before 1 July of the year the contribution is intended to be made. In that case their NCC cap for that year is reduced to nil.
However, if the client has a three year bring-forward period and they are precluded from making NCCs in the second year because of their TSB, they may still be eligible to use their remaining NCC cap in the third year if their TSB subsequently falls below $1,600,000 just before 1 July of the third year.
Nicole, age 61, had a TSB of $1,380,000 just before 1 July 2018. She made an NCC of $140,000 in July 2018. By contributing more than $100,000, Nicole triggered the bring-forward arrangement and, subject to her TSB in future years, will have an NCC cap of $300,000 for the 2018/19, 2019/20 and 2020/21 years.
As a result of concessional contributions (CCs) and investment returns Nicole’s TSB just before 1 July 2019 is $1,620,000. As Nicole’s TSB is at least $1,600,000 at the point of assessment, her NCC cap for 2019/20 will be nil.
Subsequent negative market movements result in Nicole’s TSB dropping to $1,560,000 just before 1 July 2020. As her TSB is now below $1,600,000, she could contribute up to her remaining NCC cap of $160,000 in 2020/21.
6. Consider withdrawing and contributing to a spouse’s account
Withdrawing from one spouse’s account and contributing into the other spouse’s account may be an effective use of the receiving spouses NCC cap where:
- The withdrawing spouse has used, or is likely to use, the whole of their transfer balance cap, and
- The spouse receiving the contribution will be able to commence a retirement phase (ie tax free) income stream from the contribution.
Jen has commenced an account based pension for $1,600,000 and has unrestricted non-preserved benefits of $300,000 in an accumulation account. Dan has an account based pension that has used $1,000,000 of his transfer balance cap. Dan is under age 65 and has an NCC cap of $300,000 available to him.
Jen withdraws $300,000 from her accumulation account and uses that amount to make a spouse contribution to Dan’s super account. Dan commences an account based pension with the contribution.
As a result, $300,000 has been moved out of the taxable accumulation phase to the tax free pension environment. In addition Jen may be eligible to receive a $540 tax offset for the spouse contribution, depending on Dan’s other income.
7. Small withdrawals may increase NCC capacity
The NCC cap, including under the bring-forward rule, is calculated in $100,000 increments rather than the difference between the general transfer balance cap and the client’s TSB.
For example, a client with a TSB of $1,590,000 will have a NCC cap of $100,000 in 2018/19, not $10,000 (ie $1,600,000 less $1,590,000). See Chart 1.
For those whose NCC cap is affected by their TSB, withdrawing a small amount prior to 30 June of the relevant year to reduce their TSB, may result in an increase their NCC cap for the following year, allowing a greater amount to be held in superannuation.
Sandra’s TSB is expected to be $1,420,000 at the end of 30 June 2019. This means her NCC capacity for 2019/20 will be $200,000.
If Sandra withdraws $25,000 before the end of 2018/19 and reduces her TSB to less than $1,400,000 on 30 June 2019, her NCC capacity in 2019/20 will be $300,000.
The overall benefit of this strategy will be an additional $75,000 in superannuation, increasing her accumulated benefits to around $1,695,000, compared with $1,620,000 if she had not implemented this strategy.
However, Sandra will still only be able to commence an account based pension up to the transfer balance cap. As the additional $75,000 will generally need to be retained in the accumulation phase, consideration should be given to whether this amount is best invested in superannuation, in the individual’s name or another entity altogether.
8. Be aware of the impact of NCCs on carry-forward CC capacity
The Super Reform measures also allow the carry forward of a client’s unused CC cap from 2018/19. The carried forward amount can be first applied from 2019/20. To be eligible to use the unused CC cap, a client’s TSB must be less than $500,000 just before the prior 1 July.
As NCCs will affect a client’s future TSB, delaying NCCs may allow a client to use the carry-forward CC cap in a future year. The benefit of using the carry-forward CC cap needs to be weighed up against the potential tax cost of retaining additional amounts outside of the superannuation environment.
Jim is retired and has the following circumstances at April 2020:
- marginal tax rate of 39 per cent
- an accumulation account with a balance of $450,000
- $100,000 earmarked as an NCC in 2019/20
- an investment property worth $300,000 to be sold in 2020/21 with an unrealised capital gain of $120,000 (subject to 50 per cent capital gains tax discount)
- in 2020/21 Jim will potentially have a CC cap of $75,000, including a carry forward amount of $50,000 if he is eligible for this to be applied
One option would be for Jim to proceed with the $100,000 NCC in 2019/20. If Jim makes this contribution, his TSB at 30 June 2020 would exceed $500,000 meaning he would be unable to use his carried forward CC cap of $50,000 in 2020/21. Under this option, the allocation of Jim’s available funds could be as follows:
|Year||Item||Net super cont.|
|2020/21||$300,000 sale proceeds:|
|CGT liability ($120,000 *50% - $25,000) *39%||$13,650|
|Super balance increased by:||$382,600|
|Tax free component:||$361,350|
|Potential tax on lump sum death benefit (17.0%)||$3,612.50|
Alternatively, Jim could make NCCs of say $40,000 in 2019/20 with the objective of keeping the TSB below $500,000 at 30 June 2020. This would allow Jim to use his carried-forward CC cap and make a larger CC of $60,000 in 2020/21. Where this occurred, his funds would be allocated as follows:
|Year||Item||Net super cont.|
|2020/21||$300,000 sale proceeds:|
|CGT liability ($120,000 *50% - $60,000) *39%||$Nil|
|Super balance increased by:||$391,000|
|Tax free component:||$340,000|
|Potential tax on lump sum death benefit (17.0%)||$8,670|
The CGT saving of $13,650 from the additional CCs is partially offset by $5,250 of contributions tax on the additional CCs ($35,000). The overall tax benefit to Jim is $8,400 with option two.
Consideration should also be given to the potential tax outcomes on death for each option. Where the death benefit is paid to a tax law dependant (eg a spouse) the superannuation death benefits are tax free under both scenarios and as such the overall additional benefit under the second option remains at $8,400.
If the death benefit is paid to a beneficiary who is not a dependant under the tax law (eg an adult child), the taxable component will be subject to tax of up to 17 per cent (including Medicare). Using the figures in the example, additional tax of $5,057.50 will be payable under option 2, reducing the advantage of option 2 to $3,342.50.
Note also that the benefit of $8,400 arises potentially in the 2020/21 income year, whereas the additional lump sum death benefit tax won’t arise for potentially many years, will depend on who receives the death benefit, and the amount of tax liability will change over time as Jim’s account balance increases or decreases.
9. Maximise the spouse contribution tax offset and Government co-contribution
The income test thresholds for the spouse contribution tax offset increased from 1 July 2017. The lower threshold increased from $10,800 to $37,000 while the upper threshold increased from $13,800 to $40,000 meaning the tax offset will be available to a greater number of people.
When making non-concessional contributions, consideration could be given to making a spouse contribution to qualify for the spouse contribution tax offset, potentially worth $540 to the contributing spouse.
Furthermore, where the receiving spouse is considering a bring forward arrangement, rather than using the whole of the NCC cap in one year, leaving NCC capacity for spouse contributions in future years may be advantageous.
Although personal contributions (not claimed as a deduction) and spouse contributions both count towards the individual’s NCC cap, it may be appropriate to split the contribution between personal and spouse where:
- the recipient will be entitled to a government co-contribution for a personal contribution
- the recipient wants to keep open the option of claiming a tax deduction for a personal contribution
- the contributing spouse hopes to receive a tax offset for a spouse contribution (as noted above)
Kerry is considering using the bring-forward arrangement to make $300,000 of NCCs in 2018/19. Both Kerry and her husband Brian are currently working on a casual basis and expect to for the foreseeable future. Both are earning approximately $20,000 per annum.
Where Kerry makes the contribution in 2018/19 she would be entitled to a government co-contribution of $500.
Rather than Kerry making a personal NCC of $300,000 in 2018/19, they decide to structure the contributions for Kerry as follows:
This approach results in Brian being entitled to the maximum spouse tax offset each year for three years (total benefit of $1,620) and Kerry being entitled to government co-contributions of $1,500 over the three year period. The overall benefit from the revised strategy is $2,620 when compared to the original strategy.
10. Excess NCCs – wait for the Commissioner’s determination
Where the NCC cap is exceeded, a client will have the following two options.
Option 1 - No action
- Retain excess NCCs in super
- Excess NCCs subject to tax of 47 per cent
Option 2 - Excess refunded
- amount refunded is the sum of:
- Excess NCCs
- 85 per cent of associated earnings*
- Individual taxed on 100 per cent associated earnings less a tax offset equal to 15 per cent of the associated earnings
* The associated earnings will be calculated using an average of the general interest charge and compounded daily from the beginning of the financial year in which the excess NCCs were made to the date the Commissioner of Taxation makes their excess non-concessional contributions determination.
In order for the refund option to be effective, the individual must wait for the determination from the Commissioner and follow the formal process for withdrawing the excess amount.
The 2017 Super Reforms have brought new complexity to the NCC rules. However, advisers well versed in the new rules will be best placed to maximise the contribution opportunities for their clients.