It has been three years since the introduction of the Simpler Super rules. It amazes me to this day that the application of the non-concessional contribution (NCC) ‘bring forward’ rule continues to catch out individuals, accountants and financial advisers.
What is the ‘bring forward’ rule?
An individual has the ability to make a non-concessional contribution of up to $150,000 per annum. For any member under age 65 at 1 July in the year where the contribution is made, they have the ability to bring forward the next two (2) years of contributions, making the maximum allowable NCC limit of $450,000. Any amount above this is excessive and would incur an excess contributions tax applicable at 46.5%.
Any amount in excess of $150,000 in a particular year will trigger the bring forward rule and limit the amount of contributions over the next 3 financial years to $450,000.
Important Note – Any excessive concessional contribution (CC) in a financial year will not only incur excess contributions tax, but will also carry across to count against an individuals non-concessional contribution limit. Where the NCC cap is breached, the contribution could end up being ‘double taxed’ at the penalty rate (93%).
One of the regular traps individuals get caught with in the use of the bring forward rule is that the once a (or sum of) contribution(s) has been made in excess of $150,000, you have triggered the bring forward rule for the next three years. This is the case even where the member does not intend to use up to the $450,000 over the next three financial years.
Take an example of James who makes a $270,000 NCC contribution in the 2009/10 financial year. He does not intend to contribute any further in 2010/11, but may do so in 2011/12.
What is the maximum amount he could contribute?
The correct answer is $180,000.
Many people answer this question with $450,000. This is incorrect. Why? Simply because James in 2009/10 made a contribution of more than $150k triggering the bring forward provisions that allow him to make contributions up to $450,000 between 1/7/09 – 30/6/12 (3 x FYs) inclusive.
Leading up to age 65
It is important when considering making contributions (or re-contributions, click here to read my article on ‘TheSMSFReview’) that you work backwards from age 65 to consider the timing of any contributions. Why? because an individual who is less than 65 at 1 July in the year in which they make the contribution can trigger the bring forward rule without having to meet the ‘work test’ beyond age 65. This in essence allows for a member to contribute (or recontribute) an extra $300,000 that they would have otherwise been unable to do. Therefore, it is important to spend time planning the timing of contributions being made into the fund leading up to age 65.
NB. I regularly apply this strategy with clients who undertake a recontribution and create multi-pension strategies (to create 100% tax-free proportion income streams).
What if I can contribute beyond age 65?
You are limited to $150,000 per annum and can not use the bring forward rule. However, there is one exception!! To explain this, I will use the following example.
Helen is 64 at 1 July 2010 (turns 65 in Nov 2010). She makes a contribution of $160,000 into her SMSF in August 2010. The following financial year, she inherits $500,000. What is the maximum she can contribute?
The answer is $290,000, as Helen has previously triggered the bring forward rule prior to turning age 65.
There is a catch though in making the contribution. Helen would need to:
- meet a ‘work test’ to contribute; and
- make the $290,000 contribution in at least 2 x separate payments not exceeding the fund-capped contribution limit of $150,000 (per payment)
It is easy from some of the information above to see how people can get tripped up with these rules… it was meant to be Simpler Super wasn’t it????
It is therefore critically important for individuals (and their advisers) that they are acutely aware of their current contribution amounts and whether they have triggered the bring forward rule. Many of the current ATO excess contribution tax notices relate to this issue, and there is very little a member can do to seek the Commissioner’s discretion to waive this penalty tax.
As they say… timing is everything!!