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:
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.