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Understanding the new ‘red zone’

The decision by the Federal Government to abandon the $500,000 lifetime and replace it with a reduction in the non-concessional contribution cap has created some interesting challenges and opportunities for individuals looking to make after-tax contributions into super.

The announcement last week by the Treasurer, Scott Morrison now means that the non-concessional contribution rules from 1 July 2017 will:

  • include a $100,000 annual NCC cap (currently $180,000 p.a.); and
  • introduce a member balance eligibility threshold of $1.6 million for eligibility to contribute into super.

The diagram below outlines how eligibility and the non-concessional contribution rules will apply based on a member’s age and account balance:

Introducing the ‘red zone

One the critical areas for consideration with the new non-concessional contribution rules is the level of contributions that can be made for a member who is approaching their $1.6m account balance (‘red zone’).  Under the new rules, a member will be limited in how much they will be eligible to ‘bring forward’ as a contribution for the contribution year.  Where their member balance for the previous year is above $1.4 million, they will not be allowed to bring forward the entire 3 years worth of NCC amounts (i.e. $300,000), as this would result in a breach the $1.6m eligibility threshold.

To help understand this further, I have included the following example:

Example

Evan (57) has a total superannuation balance of $1.45m.   As a result of the changes, he will only be able to make a non-concessional contribution in 2017-18 of $200,000 (‘contribution year’).  Evan is unable to access the full three-year bring forward ($300,000) as this would take his balance over $1.6m.  Evan would also not be able to make any further non-concessional contributions.

Note: The $1.6m eligibility threshold will be indexed as per the transfer balance cap, which will index in $100,000 increments in line with CPI.

We will be exploring the impact of these changes to non-concessional contributions and much more in the upcoming Changing Face of SMSF webinar.

changing-face-of-smsf-2

Comments

comments

4 thoughts on “Understanding the new ‘red zone’

  1. Hi Aaron

    From what you have written above it would seem that you can still implement recontribution strategies if you are careful and so long as you don’t have a 30 June balance over $1.6m in the prior year. For example could one, if their 30/6/17 balance is $1.55m, withdraw $300,000 in June 2018 (making the June 2018 balance say $1.3m with earnings) and recontribute it in July 2018?

    Thanks for your updates, they are most useful.

    • Yes Jen, you are correct, however at this time we are only going by Treasury fact sheets rather than Bills that will become law.

  2. Hi Aaron
    Therefore, with the backtracking on the $500K lifetime cap on non-concessional contributions made from 1/7/2007, does that mean that I could be aged in my early 70’s, with a super balance in excess of $1.6M, and provided I meet the work test I could contribute another $180K of non-concessional contributions during the 2016/17 year?

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