Both the concessional and non-concessional contribution caps will be indexed from July 1, 2021, the first time since the revised amounts were introduced in July 2017. This means that some clients will be able to contribute more to superannuation on both a pre and post-tax basis from next financial year. Furthermore, for clients considering making non-concessional contributions (NCCs) during the current financial year, careful consideration will be required.
The indexation of the contribution caps will see the standard concessional cap increase to $27,500 and the general non-concessional cap increase to $110,000, with the potential for some clients to bring forward up to three years worth of NCCs ($330,000).
Each client’s circumstances are different, with their individual limits being determined by their total superannuation balance (TSB) and contributions they have previously made, so it’s really important to know the rules to get things right.
Contribution eligibility comes first
Before considering the contribution caps, advisers should determine if a client can contribute to superannuation in the first instance.
Anyone under age 67 can contribute. However, aside from downsizer contributions and mandated employer contributions (e.g. Superannuation Guarantee), a client who wishes to contribute on or after their 67th birthday must meet either the 40/30 work test or recent retiree work test exemption.
Once a client reaches age 75, voluntary contributions (e.g. personal and salary sacrifice contributions) cannot be accepted by the fund outside of 28 days following the end of the month in which the client turns 75. This is the case even if the client continues to work.
Once it has been determined that the client can contribute to super, the next consideration is what level of concessional and non-concessional contributions they can make.
Continued uncertainty for older clients
There’s still uncertainty about the extension of the NCC bring-forward rule which allows clients to bring forward up to three years of NCCs.
Currently, a client can trigger the bring-forward rule if they are less than age 65 at some stage during the financial year in which they want to contribute. In the 2019/20 Federal Budget, the bring-forward rule was proposed to be accessible to those aged less than age 67 at some stage during the financial year.
In the same budget, the government proposed to increase the age from which the work test (or work test exemption) was required from age 65 to age 67.
Regulations to permit contributions without satisfying a work test for those aged at least 65 but under 67 came into effect on July 1, 2020. However, legislation is required to enable people in this cohort to make use of the three year bring-forward rule. The necessary change was introduced to parliament in May 2020 however the Senate has yet to deal with this proposed legislation.
With a start date of July 1, 2020, this is leaving many older clients uncertain as to how much and when to contribute NCCs. It is currently unclear when this legislation will be debated in the Senate. Alternatively, the changes may be clarified or amended in the Federal Budget due to be handed down on 11 May.
The concessional cap is finally increasing
The standard concessional cap will increase from $25,000 to $27,500 on July 1, 2021. This cap is available to everyone who can contribute, regardless of their TSB.
However, a client might have a higher concessional contributions cap if they are eligible to apply unused concessional contributions cap from previous financial years (i.e. catch-up concessional contributions). To be eligible to make catch-up concessional contributions, a client must have had a TSB of less than $500,000 on 30 June of the preceding financial year.
Therefore, to apply any catch-up concessional contributions in 2021/22, the client’s TSB on June 30, 2021 must be less than $500,000. This threshold won’t be indexed. Furthermore, only the actual unused concessional cap amounts accrued since July 1, 2018 can be applied – that is, those amounts will not benefit from the July 1, 2021 indexation.
Example
Damien (age 57) used his full concessional cap in 2018/19 and 2019/20. However, in 2020/21 he only used $15,000 of the available $25,000 cap.
Damien’s TSB on June 30, 2021 is $400,000. Therefore, his concessional cap for 2021/22 is $37,500 (i.e. standard cap of $27,500 plus unused amount of $10,000 from 2020/21).
The non-concessional cap is increasing too
The general non-concessional cap is set at four times the concessional cap. The indexation of the concessional cap accordingly flows through to the general non-concessional cap which will increase to $110,000 for 2021/22.
Where eligible, a client may be able to bring forward up to three years worth of NCCs using the bring-forward rule (i.e. up to $330,000 for 2021/22).
The bring-forward rule is automatically triggered when an eligible client makes NCCs in excess of the general NCC cap for that year. Importantly, to trigger a new bring-forward period, the client cannot still be in a previously triggered bring-forward period.
Clients who are already in a bring-forward period in 2021/22 will not benefit from the indexation of the non-concessional cap. This is because the client’s non-concessional cap is based on a multiple of the general non-concessional cap that applied in the financial year in which the bring-forward was triggered.
Example
Don (age 58) had a TSB of $1.3 million on June 30, 2020.
He makes an NCC of $200,000 on June 19, 2021. This contribution (being in excess of the $100,000 general NCC cap) triggered a bring-forward period and locks in a bring-forward amount of $300,000 over three financial years.
Consequently, any additional NCCs Don makes in 2021/22 and 2022/23 is limited to $100,000 (i.e. $300,000 less the $200,000 contributed in 2020/21). Moreover, Don will not immediately benefit from the indexation to the NCC cap.
The importance of total superannuation balance
A client’s TSB on the preceding June 30 determines:
- The amount of NCCs that can be made (if any), and
- The length of the bring-forward period
For 2020/21, the applicable thresholds are as follows:
| Total superannuation balance at 30 June 2020 |
Bring-forward period for 2020/21* |
NCC cap for 2020/21 * |
| Less than $1.4 million |
3 years |
$300,000 |
| $1.4 million to less than $1.5 million |
2 years |
$200,000 |
| $1.5 million to less than $1.6 million |
Standard cap only |
$100,000 |
| $1.6 million or more |
Nil |
Nil |
*Assumes client is not in a bring-forward period from a previous financial year.
Due to the indexation of the general transfer balance cap from $1.6 million to $1.7 million on July 1, 2021, these thresholds will rise as follows for 2021/22:
| Total superannuation balance at 30 June 2021 |
Bring-forward period for 2021/22* |
NCC cap for 2021/22* |
| Less than $1.48 million |
3 years |
$330,000 |
| $1.48 million to less than $1.59 million |
2 years |
$220,000 |
| $1.59 million to less than $1.7 million |
Standard cap only |
$110,000 |
| $1.7 million or more |
Nil |
Nil |
*Assumes client is not still in a bring-forward period from a previous financial year.
Accordingly, clients with a TSB on June 30, 2021 of less than $1.7 million may be able to make NCCs of at least $110,000.
The increase in these TSB thresholds could lead to some client’s now being able to contribute in 2021/22 when they couldn’t in the current financial year.
Example
Harry (age 63) had a TSB of $1.635 million on June 30, 2020. He has not made any NCCs in recent years.
Because Harry’s TSB on June 30, 2020 exceeded $1.6 million, he cannot make any NCCs in the current financial year (i.e. 2020/21).
Due to market movements, Harry’s TSB on June 30, 2021 has increased to $1.67 million. Because his TSB is less than $1.7 million, Harry can now make NCCs of $110,000 in 2021/22.
Maximising NCCs over the shortest period
To contribute the maximum amount of NCCs over the shortest period, clients could consider making a $100,000 NCC this financial year, followed by a $330,000 NCC next financial year. By doing this, they have been able to make NCCs of $430,000 over a short period.
For this to work, the client must not be in a previously triggered bring-forward arrangement. Further, to use the full $330,000 in 2021/22, their TSB on June 30, 2021 would need to be less than $1.48 million. And finally, they would need to be eligible to use the bring-forward rule in 2021/22.
Example
Peter (age 60) has $430,000 in the bank from the sale of an investment property and wishes to contribute to superannuation as an NCC. He has not made any NCCs in recent years. Peter has a TSB on June 30, 2021 of $900,000.
Peter could make a $300,000 NCC in the current financial year, triggering the three year bring-forward, and then wait until July 1, 2023 to contribute the remaining $130,000.
Alternatively, he could make a $100,000 NCC in the current financial year and make a further NCC with the remaining $330,000 after 1 July using the bring-forward rules. By doing this, he has contributed the full amount over a short period and benefited from the 1 July indexation.
Look before you leap
Knowledge of the client’s previous concessional and non-concessional contributions and their TSB is paramount when providing correct advice.
Whilst some of the relevant details can be sourced from their superannuation fund(s), clients should consult their MyGov account for accurate information.
MyGov contains an abundance of key superannuation information for the client, including:
- TSB for previous financial years,
- reported concessional contributions for current and previous financial years,
- available catch-up concessional contributions, and
- whether or not the client is in a bring-forward arrangement.
When using MyGov, it’s important to be aware that if there have been recent transactions, some information may not have been reported to the ATO.
Time to revisit the cap rules
Next financial year will be the first that advisers have to deal with the indexation of contribution caps. It may provide opportunities for some clients to contribute more to superannuation. However, the rules are complex, and each client may have different amounts available to them. It’s therefore a good time to revisit the contribution cap rules in preparation for 1 July.
