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MUST READ – SHORT WINDOW for LARGE SUPER CONTRIBUTIONS
18 May 2016

With the proposed Lifetime Cap now removed only 4 months after its announcement on (Federal Budget night) some sliding doors have been reopened temporarily until 30 June 2017 when they will either partly or permanently close again.  This is relevant to a minority but if it is relevant, the advantages are substantial and should be discussed with your Hudson adviser. 

Take Home Points 

  • It’s important to rethink your Contribution capacity since the government backflip announced in September this year – Refer Hudson article dated 16 September 2016.
  • If you are looking to load large contributions (up to $540,000 subject to qualifying criteria) into Super, you have higher capacity before 30 June 2017 than after this date.
  • If you already have larger super balances near or above $1,600,000, this financial year it is your best (and in some cases last) chance to build a larger Super balance for the long term taxation benefits.
  • This could be your best chance for rebalancing super levels between spouses and / or increasing your tax free components to benefit your children’s future inheritance of any remaining super balances. 


NON CONCESSIONAL CONTRIBUTION LIMITS

Proposed Commencement is 1 July 2017

There are 2 major changes in the latest proposed superannuation limiting how much you can personally contribute to super (tax free) termed ‘Non-concessional Contributions (NCC).  Existing rules remain in place until 30 June 2017.  The new rules are proposed to commence from 1 July 2017.   This leaves only 8 more months to take advantage of the more generous offerings currently in existence.  I have broken these changes down to review in isolation.


1.  Contribution CAPS (old rule but with reduced amounts)

  1. Annual Contribution Caps  
  2. Maximum 3 Year Bring Forward Provision 
  3. Transitional 3 Year Bring Forward Provision
  • Maximum Super Balance (new rule) 

  1. CONTRIBUTION CAPS

1A.  Annual Non-Concessional Contribution (NCC) Caps  

This year         $180,000         (2016/17) 

Next Year(s)   $100,000         (2017/18),  (2018/19),  etc                   

1B.  Maximum 3 Year Bring forward Provision (if under age 65) 

To qualify for the 3 year rule you need to be under age 65 as of 1 July in the year you trigger this rule and you must also qualify to make a contribution by either :

  • Being Under Age 65 on day of contribution;  OR 
  • Over Age 65  but have satisfied the work test (40 hours work within 30 days).

Last Year / This year CAP is $540,000         (2016/17)  

Will be triggered by contributing more than $180,000 NCC before 30 June 2017.

Next Year(s)   CAP is $300,000         (2017/18)  or  (2018/19)  etc 

Will be triggered by contributing more than $100,000 NCC between 1 July 2017 and 30 June 2018 (same applies in future financial years).

1C.  Transitional 3 year Bring Forward Provision 

What if you trigger the 3 year rule this year (or even last year) by contributing more than $180,000 but have not yet had the capacity to use up all of your $540,000 (3 Year CAP) by 30 June 2017 ? 

The Bring forward maximum in this case is reconstructed as follows :

3 Yr Triggered in  2015/16     CAP is  $460,000  (180,000 + 180,000 + 100,000)


3 Yr Triggered in  2016/17     CAP is  $380,000  (180,000 + 100,000 + 100,000)

Example 1  

If in 2015/16 (last year) your NCC was $200,000, therefore triggering the 3 year rule  and you contributed nothing in 2016/17  (2nd year)  =>  up to a further $260,000 could still be contributed in the 2017/18  financial year (based on $460,000 CAP).   

Example 2  

If in 2016/17  your NCC is $400,000 , therefore triggering the 3 year rule =>  you have already surpassed the Transitional 3 year CAP ($380,000) that applies in 2017/18,  therefore no further NCC contributions would be allowable in the next 2 years.  Where a client has already used more than their restructured bring forward cap (as in this case) by 1 July 2017, they will not be penalised or required to withdraw the excess. 

  • MAXIMUM SUPER BALANCE (NEW RULE)

Proposed Commencement is 1 July 2017

New Balance Cut Off of $1,600,000 limit applies 


In its most simplest form, this new rule is intended to prohibit any further personal non concessional Contributions to Super once your balance has reached $1,600,000. How it works in practice is a little more complex. 

Prior to 30 June 2017 

No restrictions apply at all before 30 June 2017 so you can continue to build your super balance as high as you like well past $1,600,000 up until 30/6/17 without consequence.  There will be no requirement to reduce your super balance at 1 July 2017 when the proposed new rule kicks in.  Any contributions will of course have to be within the contribution CAPS mentioned above.  

Example

If your super balance now is $2,000,000 and you are under age 65 and have not triggered the 3 year bring forward provision in the last 2 financial years, you can still add another $540,000 to super this year (by 30 June 2017) taking your balance past $2.5 Million compared to ZERO further contributions if you wait until after 30 June 2017. 

After  30 June 2017


It starts to get more complex here, but to give you some perspective without covering all scenarios – I note the following:

As at 30 June 2017, everyone can know their Super balance (either by statement or enquiring with your super fund). 

  • If your balance is above $1.6 Million already (as at 30/6/17) => no more contributions allowed in the next financial year.
     
  • If your balance lies between $1.5 and $1.6 Million (as at 30/6/17), then you can contribute up to $100,000 in 2017/18.
  • If your balance lies between $1.4 and $1.5 Million (as at 30/6/17), then you can contribute up to $200,000 in 2017/18 (if you qualify for the bring forward provision).
  • If your balance is under $1.4 Million (as at 30/6/17), then you can contribute up to $300,000 in 2017/18 18 (if you qualify for the bring forward provision).

After  30 June 2018  (and any other year)

The same process of calculation and limitations apply.  The calculations will always be based on the balance of your Super as at 30 June in the relevant year.  

Strategy  Considerations For This Financial Year 2016/17

  1. Maximise personal contributions this year.
    Consider using up their entire $540,000 bring forward cap during this financial year, before it is reduced to $300,000.  This could mean selling that investment property this year instead of next year or using up that large Cash Offset balance you have been sitting on.  
  2. Consider Re-contribution Strategy This year 
    If you are looking to reduce the amount of ‘Taxable Component’ applicable to your super balance via a ‘re-Contribution Strategy’, then this year may be a better year to do this (to utilise the higher $540,000 3 year bring forward provision).  

    This strategy could benefit your children in the form of reduced taxes upon ultimate inheritance of any super balance.  

    Caution : The qualifications for this strategy are specific and complex and need to be discussed and implemented through your Hudson adviser. 

  3. Rebalance Super Balance Split between Spouses

    It is a better year to build your spouse’s super (if well under your own balance) by utilising the $540,000 3 year provision.  This strategy will be dependant upon your capacity to qualify for ‘unpreserved’ withdrawals (free of tax) and your spouse’s qualification to take advantage of the ‘3 year bring forward provision’.    

    The benefits are two-fold :  

    (a) increasing the tax free component of your collective super balances  (again benefiting potential future children inheritance with reduced tax).

    (b) lowering your current Super balance further under the new $1.6 Million CAP allowing further contributions to Super in the coming years. 

    Caution : The qualifications for this strategy are specific and complex and need to be discussed and implemented through your Hudson adviser.




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