MAXIMISING NON-CONCESSIONAL CONTRIBUTIONS TECH UPDATE

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1 MAXIMISING NON-CONCESSIONAL CONTRIBUTIONS TECH UPDATE Release Date l February 2017

2 CHANGES TO NON-CONCESSIONAL CONTRIBUTIONS By: Peter Kelly, Superannuation, SMSF, and Retirement Specialist, Centrepoint Alliance, Introduction One of the more controversial measures announced in the 2016/17 Federal Budget was a proposal to replace the current non-concessional contribution (NCC) cap with a single lifetime cap of $500,000 per person. To compound difficulties, all NCCs made since 1 July 2007 would be counted towards the lifetime cap. This new measure was to apply from 3 May On 15 September 2016 the government announced they would not be proceeding with the lifetime cap of $500,000; however, would make changes to the annual NCC cap which will take effect from 1 July This Update will explore the changes to NCCs which have now been legislated. Current position NCCs are currently (2016/17 financial year) capped at a maximum of $180,000 per person, per financial year. Where an individualis aged 64 (or younger) on 1 July of the financial year in which they wish to make a NCC, they may bring forward up to three years contributions thereby contributing up to $540,000. This is provided they haven t triggered their three year bring forward cap in the current or previous two financial years. The three year bring forward provision is triggered when NCCs exceed $180,000 in a financial year. Where the three year bring forward has been triggered, the maximum that can then be contributed over the first and subsequent two financial years is $540,000. This can be made as a single contribution of $540,000, or a series of contributions totalling $540,000. Where NCCs exceed a person s NCC cap, the Australian Taxation Office will make an excess NCC determination. It is not the intent of this Update to consider the treatment of excess NCCs. September 2016 announcement On 15 September 2016, the government announced the proposed $500,000 lifetime NCC cap would not be proceeding and would be replaced with a reduced annual NCC cap of $100,000 (reduced from the current $180,000). People under the age of 65 would be able to bring forward up to three years NCCs. Legislation introducing this change was passed by both Houses in November 2016 and received Royal Assent on 29 November

3 This legislative change includes a restriction on people with large superannuation account balances (exceeding $1.6M, for ) from making NCCs on or after 1 July Analysing the changes There are three elements to the changes to the NCC cap. They include the cap itself, an eligibility threshold, and transitional arrangements applying to the bring forward provision. Let us consider each in turn: 1. The cap The NCC cap will be $100,000. This is effective from 1 July The NCC cap is four times the concessional contribution cap, and will increase in line with the indexation of the concessional contribution cap. In most instances, an individual aged 64 (or younger) at the start of the financial year in which they intend to contribute will be able to access the three year bring forward provision. This will allow them to make NCCs of up to $300,000 in a given financial year, subject to a limitation that will be dealt with under the following heading. At this point it is important to remember there is a disconnect between the three year bring forward rule, and the ability of an individual to contribute after turning 65. Even though an individual may be able to trigger their three year bring forward cap,if they were aged 64 at the beginning of the financial year, they will need to have met the work test if planning to contribute after they turn 65. The ability to make NCCs will be restricted to people with less than $1.6M (for ) in superannuation. 2. Eligibility threshold The eligibility threshold will be determined by reference to an individual s total superannuation balance as at the previous 30 June. For individuals with multiple superannuation accounts, their balances will be aggregated for applying the eligibility threshold. This includes both accumulation and pension accounts. Where a person has a superannuation balance that is approaching $1.6M, they will be restricted by the amount of bring forward provision that can be applied. The following table sets out the maximum NCCs that may be made from 1 July 2017 for individuals with superannuation account balances approaching $1.6M. 2

4 Superannuation balance Contribution & bring forward available Less than $1.4M $100, years b/f total $300,000 $1.4 - <$1.5M $100, years b/f (total $200,000) $1.5 - <$1.6M 1 year (total $100,000) $1.6M and greater Nil The eligibility threshold may present difficulties to individuals, particularly those with self-managed superannuation funds wishing to make NCCs. If their accumulated superannuation savings are approaching $1.6M, they may need to wait until they receive their member statement for the previous financial year to determine if they are able to make a NCC and, if so, whether they are limited by the amount that may be contributed under the three year bring forward rule. From our reading of the legislation, an individual with $1,500,000will be limited to making a maximum NCC of $100,000, whereas an individual with $1,499,999 will be able to contribute $200,000, as they will have access to a two year bring forward opportunity. As a result, the amount an individual has in superannuation at the previous 30 June will become vitally important when planning future NCCs. 3. Bring forward provision - transitional arrangements Perhaps one of the more confusing aspects of the bring forward provision relates to the transitional provisions applying to individuals who triggered their three year bring forward cap in either or , and didn t fully maximise their NCCs before 30 June Importantly, this transitional arrangement will only apply to individuals that have triggered their three year bring forward provision before 1 July 2017 (i.e. in the 2015/16 or 2016/17 financial years) and have not fully utilised their bring forward cap ($540,000). Where the three year bring forward provision was triggered in either 2015/16 or 2016/17, and the full $540,000 has been contributed, no further NCCs can be made until after the expiry of the three year period (i.e. from 1 July 2018 where the three year bring forward was triggered in 2015/16, and from 1 July 2019, where the three year bring forward was triggered in 2016/17). However, where the three year bring forward provision was triggered in either 2015/16 or 2016/17 and has not been fully utilised (i.e. total amount of NCCs made was greater than $180,000 and less than $540,000) transitional arrangements will apply. The transitional arrangements will influence the remaining amount of NCC that can be made from 1 July 2017, and within the original three-year period. In simple terms, where the three year bring forward was triggered in 2015/16; the total cap available will reduce from $540,000 to $460,000. Where the three year bring forward was triggered in 2016/17, the total cap will be $380,000. 3

5 When it comes to determining the amount of NCC that may still be made within the three year term, it will be a simply matter of taking the revised three-year cap (i.e. $460,000 or $380,000), and deducting any NCCs previously made within the bring forward period. The following tables have been reproduced from the Government s Superannuation Fact Sheet 04: More than $460,000 Nil End of transition period $100,000 or 3 year bring forward - More than $180,000 Cannot exceed $460,000 from to End of transition - but less than 18 period $100,000 or 3 $460,000 year bring forward More than $380,000 Nil Nil End of transition period $100,000 or 3 year bring forward More than $180,000 but less than $380,000 Cannot exceed $380,000 from to End of transition period $100,000 or 3 year bring forward Examples: $200,000 $180,000 Nil $100,000 2 $200,000 $90,000 $90,000 $100,000 3 $200,000 $200,000 $60,000 $100,000 Nil 4

6 Example Elaine triggered her three year bring forward cap in when she made a NCC of $200,000. If she maximised her NCC opportunity before 1 July 2017, she could contribute a further $340,000, making a total of $540,000 over her three year period. However, Elaine made no further NCCs in and wishes to make an additional NCC in Rather than being able to contribute the remaining $340,000, from her original $540,000 NCC three year cap, she is subject to a transitional cap of $460,000. That is, the maximum NCC that can be made in will be $260,000 ($460,000 - $200,000). Had Elaine made her initial NCC of $200,000 in , her transitional cap is $380,000. The maximum that she could then contribute in is $180,000 ($380,000 - $200,000). What opportunities exist before 1 July 2017? On the surface, a reduction for NCCs that can be made to superannuation will be seen by many as a negative move. However, there are a number of opportunities that apply before 30 June Maximise NCCs before 1 July 2017 Any NCCs made before 1 July 2017 are subject to the current NCC cap of $180,000. In addition, for those individuals who were younger than 64 on 1 July 2016, they may bring forward up to three years NCCs and contribute up to $540,000 before 1 July There are however a number of important considerations: a. Ensure that the three year bring forward was not triggered in either or That is, were NCCs of more than $180,000 made in either year? If so, the maximum NCC that can be made before 1 July 2017 will be less than $540,000. b. Even if the three year bring forward hasn t been triggered in either of the previous two financial years, any NCCs already made in will need to be considered when determining the maximum amount that can be contributed before 1 July c. NCCs made during are not constrained by the $1.6M superannuation fund balance. The amount an individual currently has in superannuation will not restrict the ability to make NCCs before 1 July d. A contribution is regarded as having been made when the contribution is received by the superannuation fund to which it is made 1. Contributions that are made close to the end of a financial year may not be received by the superannuation fund until the following financial 1 See Taxation Ruling TR 2010/1 for the discussion on when a contribution is deemed to have been made. 5

7 year, in which case they are assessed under the relevant cap for the following financial year. The delay in receipt of contributions may arise where contributions are transmitted by post, and when made by electronic funds transfer. Contributions should be made well before the end of the financial year in order to avoid delays. Unfortunately, we regularly see cases of contributions being disallowed and carried over to the following financial year. e. Where a NCC is made, the individual may be eligible to receive a government co-contribution of up to $500 where certain criteria is met. f. NCCs form part of an individual s tax-free component of their superannuation. Increasing the tax-free component may be beneficial where an individual seeks to access their benefit before turning 60 years of age (subject to meeting a condition of release), or where a deceased individual s accumulated savings pass to a beneficiary who is not a tax dependant (including adult children). g. NCCs are not subject to tax when made to a superannuation fund 2. Recontributing strategy A recontribution strategy involves the withdrawal of superannuation benefits and the recontribution of those benefits as a NCC. However, preserved superannuation benefits may only be withdrawn when an individual has met a condition of release. Provided an individual has met a condition of release (such as having retired after reaching preservation age), and they are under the age of 65, they may withdraw their accumulated benefit and recontribute it as a NCC. Care should be exercised to ensure that the three year bring forward has not previously been triggered as this may restrict the amount that can be recontributed. Where an individual is aged between 65 and 74, they will need meet the work test 2 if they wish to recontribute. Furthermore, unless they were aged 64 at the start of the financial year in which they intend to contribute, they are unable to access the three year bring forward provision. Pursuing a recontribution strategy may be advantageous where an individual wishes to convert the taxable component of their superannuation savings, to tax-free component. One historic argument against a recontribution strategy is the potential loss of access to an antidetriment payment in the event of death. An anti-detriment payment is an additional payment made on the death of an individual where their accumulated superannuation savings are paid to an eligible beneficiary, such as the surviving spouse, as a lump sum benefit. As an anti-detriment payment was based on an individual s taxable component of their accumulated superannuation savings, a recontribution strategy would erode the potential amount of anti-detriment payment available. However, as anti-detriment payments are due to be abolished from 1 July 2017, this impediment to recontributing will no longer apply. 2 The work test requires an individual be gainfully employed or self-employed for at least 40 hours during a consecutive 30-day in the financial year in which they wish to contribute. 6

8 3. Spouse contributions A recontribution strategy generally involves an individual withdrawing and recontributing in their own name. However, in certain circumstances it is appropriate to make the recontirbution in favour of an individual s spouse. The advantages of making NCCs for a spouse include: a. Equalising or reweighting superannuation savings among members of a couple. With the superannuation changes placing limits on the amount above which NCCs cannot be made ($1.6M), and limits on the amount that may be transferred to a pension account ($1.6M), there may be merit in apportioning superannuation savings between spouses. This effectively allows a couple to double the amount of superannuation they may hold between themselves. b. When an individual reaches age pension age, their accumulated superannuation savings are included in the assessment of their age pension entitlement under the assets and income tests. However, where accumulated superannuation savings are withdrawn and recontributed to superannuation for a younger (below age pension age) spouse, the superannuation savings will be exempt from assets and income testing. This may create an opportunity for the pension recipient to receive a higher age pension entitlement. Transferring superannuation between spouses is not affected by the gifting rules. Care needs to be exercised when transferring superannuation to a younger spouse as NCCs are preserved. That is, they cannot be accessed from superannuation until the individual has met a condition of release. This is of particular importance where there is a significant age difference between spouses. c. Depending on individual circumstances, recontributing to superannuation for a younger spouse may provide access to the government co-contributions. Alternatively, where one partner makes a NCC for their low-income earning spouse, the contributing spouse may have an entitlement to a spouse superannuation tax offset. 4. Where does the money come from to make a NCC? Much of the preceding commentary involves recycling superannuation savings for recontributing. Except when embarking on a recontribution strategy, NCCs are (generally) sourced from after tax income and/or savings. That is, money that has been saved from income that has been subject to income tax. However, NCCs may be funded from a variety of sources including: a. Savings, b. Proceeds of the sale of assets or investments, c. Inheritances and windfalls, d. Gifts, e. Proceeds from downsizing the family home, f. Borrowed money. 7

9 In some circumstances, it may be prudent to borrow in order to make a NCC to superannuation. However, this strategy should be used with caution. The interest paid on the borrowed funds is unlikely to be tax deductible to the borrower. Borrowing money in these circumstances carries risks and will generally involve additional costs. Each opportunity should be considered on its own merits. Example Gerard has sold an investment property with a delayed settlement. The contract is unconditional however, the settlement will not occur until August Ideally, Gerard would like to contribute $540,000 of the proceeds from the sale to superannuation as a NCC. Gerard is under 65, he has not previously triggered his three year bring forward, and will have less than $1.4M in super (as at 30 June 2017). As the funds will not be available until August, the maximum amount Gerard will be able to contribute in under the three year bring forward provision is $300,000. In order to maximise his NCC, Gerard borrows $540,000 against the settlement proceeds of his investment property and makes a NCC before 1 July He therefore contributes under the current NCC cap. When the settlement proceeds are received, Gerard repays his loan. On occasions an individual may have assets they would like to contribute to superannuation. Rather than selling the asset in order to make the NCC, an asset may be transferred to a superannuation fund as an in-specie contribution. In-specie contributions are generally made to self-managed superannuation funds however; some retail superannuation funds may be willing to accept in-specie contributions of listed shares and similar assets. Superannuation legislation imposes restrictions of funds (particularly SMSFs) acquiring assets from related parties. However, an exemption from the general prohibition applies to certain assets including business real property, listed securities, in-house assets, and assets covered by paragraph 71(1)(b), (ba), (c), (d), (e), (f), (h), or (j) of the Superannuation Industry (Supervision) Act The in-specie contribution of an asset is treated as a disposal for tax purposes, and may involve other costs. In-specie contributions must be transacted at their market value. 8

10 Other considerations Example Scott is 48 years old and has <$1.4M in his SMSF. He personally owns the premise his family business operates from. The property is valued at $650,000. There are no borrowings. Scott checks his SMSF trust deed and finds that the fund can accept an in-specie contribution. Scott arranges to transfer the title to the property to his SMSF. The disposal of the property triggers a CGT event and he will have to pay transfer (stamp) duty on the value of the asset transferred. A transfer duty concession may apply depending on the State in which the property is located. As Scott has not previously made any non-concessional contributions and the transfer will occur before 1 July 2017, $540,000 of the transfer will be treated as a non-concessional contribution, and the SMSF will purchase the difference ($110,000) by paying this from the cash reserves of the SMSF. Once the transfer is complete, Scott reviews, his SMSFs investment strategy to ensure if reflects his current investment mix. There are a number of other aspects that need to be considered in any discussion about the changes to NCCs. These include: 1. The NCC caps do not currently affect contributions made because of a personal injury settlement. This situation is to continue after 1 July That is, a recipient of a personal injury settlement wishing to contribute it to superannuation will not be impacted by the NCC cap, or by the general prohibition of funds accepting NCC contributions for individuals with more than a $1.6M total superannuation account balance. 2. Where an individual has more than $1.6M in superannuation, they will no longer be eligible to receive the Government co-contribution. 3. At least, a part of an amount transferred from a foreign superannuation fund to an Australian fund is treated as a NCC. It is subject to the NCC cap, and the restriction in making NCCs where an individual has more than $1.6M in superannuation. 4. Individuals with more than $1.6M in superannuation who fund their stand-alone life insurance premiums,by way of a NCC, may need to review their personal situation as those premiums may no longer be able to be made. 9

11 Where to from here? Aspects of the changes to NCCs are complex, particularly in relation to the transitional arrangements for unused amounts under the three year bring forward provision. There are opportunities available to maximise contributions prior to 1 July 2017 however, care should be exercised to ensure: 1. Contributions conform to the current ( ) NCC caps, and inadvertent excess contributions are avoided. Past years contributions should be thoroughly checked and accounted for before recommending (large) NCCs be made, 2. Contributions are only made by individuals over the age of 65 where they have met the work test, 3. NCCs that are to be applied to the financial year should be made well before 30 June 2017, 4. In-specie contributions are made in a manner compliant with superannuation laws, and reflect their current market value, 5. Once a contribution is made to a superannuation fund, it will be preserved and may not be accessible for many years. 6. Even though the superannuation system may offer significant tax advantages, taxation is just one of the matters to be considered when making an investment decision. In closing, it is also it is important to mention that NCCs made under the small business CGT concessions and personal injury settlements are not subject to the NCC caps covered in this Update. Disclaimer: The content of this document is of a general nature only, and does not take into account your personal objectives, financial situation and/or needs. Accordingly; the information should not be used, relied upon, or treated as a substitute for specific financial advice. While all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Limited nor its employees or agents shall be liable on any grounds whatsoever with respect to decisions or actions taken as a result of you acting upon such information. 10