(03) 9020 2905PORTFOLIO POINT: Don’t forget non-concessional contributions when it comes to retirement income planning. They are now close to being a compulsory part of your building super strategy.
The focus of the anger that surrounded the halving of the concessional contribution caps 18 months ago has been largely from the over-50s.
If you’re 50, or not far from it, the cut from $100,000 to $50,000 for concessional contributions was a major blow. Previous generations have been able to get $100,000 or more into super concessionally each year. But now, you’re limited to $50,000 for the 2010-11 and 2011-12 financial years and after that it’s the same $25,000 a year limit as everyone else.
If you’re closer to 40, you’re less likely to care that you can now only get $25,000 a year into super, rather than $50,000. With large mortgages to reduce and kids soaking up limited spare cash, salary sacrifice is not generally seen as part of the main game, even though it will have to become increasingly important from a younger age.
Non-concessional contributions are, therefore, going to climb in importance for those trying to get money into super. While I’ve written a few columns in recent weeks on paying no tax in super (Oct 19) through borrowing to invest, in-specie transfers (Nov 3) and recontribution strategies (Nov 24), let’s just look at straight non-concessional contributions and how and why they can be used for super management.
Concessional versus non-concessional
Concessional contributions (CC) are, largely, those made as Superannuation Guarantee payments by an employer, that salary sacrificed by an employee, or those made by the self-employed through their business for themselves. They are contributions for which someone is going to claim a tax deduction.
Non-concessional contributions (NCC) are those made with after tax money. It is money that has been previously taxed, such as your take home salary, savings, or money left over after capital gains tax has been paid (all three of these examples are essentially the same thing – left over money after the ATO has taken its bit).
The limit for NCC is set at six times the base concessional limit of $25,000. That means the current NCC limit is $150,000.
Limits on making NCCs
If you are under 65, you may make NCC’s at will, up to the $150,000 annual limit. There is no work test. And you can actually put in more than that in a single year (see “Bring-forward rules” below) with some implications.
From age 65, however, there are two restrictions. First, you can’t use the bring-forward provisions. And second, you must satisfy the “work test”. The work test being paid work of at least 40 hours in a 30-day period during a financial year.
Turning 65 in a financial year
What happens if you turn 65 during a financial year? If you make your contributions prior to turning 65, then you won’t need to pass the work test and you can still make use of the bring-forward provisions.
There is a peculiar rule about the year in which you turn 65. If you are 64 on July 1 of a financial year and subsequently turn 65, you can still contribute $450,000, but it must be in separate lots of $150,000.
After 65, however, you will need to pass a work test to make the contributions.
Bring-forward rules
While an individual is allowed to contribute $150,000 a year in NCC with no restriction prior to age 65, it is actually possible to contribute up to three times that figure in a given year, due to the “bring-forward rules”.
An individual can contribute up to $450,000 in a single year. But this will mean that he has used up to his limit for the next two financial years. That is, if you were to put in $450,000 in NCC into your super fund today, you would be using up your NCC limit for the 2010-11, 2011-12 and 2012-13 financial years.
You don’t trip the NCC bring-forward provisions unless you contribute in excess of $150,000 in a single financial year. That is, if you only put in $150,000 each and every year in NCC, then you will never trip the bring-forward provisions.
However, if you to put in, say, $200,000 in a single year, you will have triggered restrictions on NCC contributions for yourself that will run for the following two financial years.
The NCC contribution limits are individual, which means that both members of a SMSF can use those limits.
Penalties for breaching the NCC cap
Stiff. Don’t do it. You could lose up to 46.5% of the contribution. And given that many will have already paid up to 46.5% of tax on that money to make it non-concessional money in the first place, it’s hardly ever going to be worth it.
Strategies to make the most of NCC limits
One strategy worth looking at is the event where a couple has more than $900,000 in NCCs to put into super. If you put in $150,000 per person in the current financial year ($300,000 for the two of you), then you could dump another $900,000 into your SMSF come July 1 the following financial year.
In some cases, if it was June, you could get $1.2 million in to super in the course of a couple of weeks, by putting in $150,000 each for two members prior to June 30 and then up to $450,000 for each member after July 1.
Similarly, if you have some years before turning 65 and you have large sums of money you want to get into super, then some planning will be required. Make sure you can put $450,000 into super in your name before you turn 65 and work backwards from there, making sure that you can get in $150,000 each year, potentially in lots of $450,000, to maximise contributions for yourself (and your spouse).
Also, in-specie transfers of personally held assets into super are also considered to be NCC.
Therefore, not having the cash to contribute into super is not necessarily a problem. If you have shares outside of super that you would like to get in, then you potentially can, but read my column on in-specie transfers from November 3 first.
*****
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.