From 1 July 2021, the concessional and non-concessional contribution caps are set to increase due to indexation for the first time since July 2017.
The concessional contribution cap, originally set at $25,000 from 1 July 2017, is indexed by average weekly ordinary time earnings (AWOTE) in increments of $2,500.
With the announcement of the AWOTE figure for the December 2020 quarter, the concessional contribution cap is set to increase from $25,000 p.a. to $27,500 pa from 1 July 2021.
The non-concessional cap in 2021–22 will see the standard cap increased from $100,000 to $110,000 from this date.
In addition, the maximum amount a member who was under 65 at the start of the year can contribute under the non-concessional contribution cap bring-forward rule is also set to increase from $300,000 to $330,000 from 1 July 2021.
It is important to note that the proposal announced in the 2019 federal budget to extend access to the bring-forward rule to people under age 67 at the start of the first financial year is not yet law.
Therefore, only members who are aged under 65 at the beginning of the financial year will be eligible to trigger the bring-forward rule, according to Colonial First State.
Craig Day, head of technical services at Colonial First State, told SMSF Adviser that it is also important to consider the $1.6 million non-concessional cap threshold is changing due to the indexation of the general transfer balance cap on 1 July 2021 to $1.7 million.
In an example provided, from 1 July 2021, a person’s non-concessional cap will be nil if their total super balance on 30 June 2021 is $1.7 million or more.
“In addition, the bring-forward period thresholds (based on a member’s total superannuation balance) are also set to increase from 1 July 2021 due both to the increase in the standard non-concessional cap to $110,000 and the increase in general transfer balance cap to $1.7 million,” Mr Day said.
Mr Day said it will be important to consider the knock-on effects from the bring-forward rule for clients in different scenarios.
For clients who have already triggered the bring-forward rule, they won’t be able to make extra non-concessional contributions due to the increased cap during their bring-forward period.
“Clients that have previously triggered the non-concessional contributions cap bring-forward rule and who are still in their bring-forward period in 2021–22 will not benefit from the increase in the non-concessional cap until after their bring-forward period expires,” Mr Day said.
“Under the bring-forward rule, a person’s non-concessional cap is based on a multiple of the standard non-concessional cap that applied in the year they triggered the bring-forward rule.”
In another example provided by Colonial First State, a client with a total super balance of less than $1.4 million who triggered the bring-forward rule in either 2019–20 or 2020–21 would have a non-concessional cap for that year (Year 1) of three times the standard annual cap or $300,000.
Their non-concessional cap for Year 2 and Year 3 would then be calculated as follows:
The Year 2 cap would equal the Year 1 cap amount ($300k) less total non-concessional contributions in Year 1.
The Year 3 cap equals the Year 1 cap amount ($300k) less total non-concessional contributions in Year 1 and Year 2 combined.
“Therefore, because a person’s cap under the bring-forward rule is based on the value of the standard cap that applied when they triggered the bring-forward rule, a client that triggered the bring-forward period in either 2019–20 or 2020–21 will not benefit from the higher non-concessional cap until their bring-forward period expires,” Mr Day said.
“For example, if a client triggered the non-concessional cap bring-forward rule by making a $300,000 non-concessional contribution this year (2020–21), their non-concessional cap for 2021–22 and 2022–23 would be calculated as nil and they would be unable to make any additional contributions under the higher cap until after their bring-forward period expires on 30 June 2023.”
Another possible scenario is clients who triggered the bring-forward rule in 2019–20 but who have been unable to contribute their remaining non-concessional cap in 2020–21 due to their total superannuation balance exceeding $1.6 million on 30 June 2020, to be able to contribute their remaining cap next year when the general transfer balance cap increases to $1.7 million on 1 July 2021.
Colonial First State said, with the new changes, it will be possible as long as the client’s total superannuation balance as of 30 June 2021 is less than $1.7 million.
“Under the non-concessional contribution cap rules, a client’s non-concessional cap in a year will be reduced to nil (including under the bring-forward rule) where their total super balance at 30 June at the end of the previous financial year is equal to or greater than the general transfer balance cap for that year,” CFS explained.
“Therefore, so long as their total superannuation balance at 30 June 2021 is less than the indexed general transfer balance cap of $1.7 million, their non-concessional cap for the final year of the bring-forward period will be restored.”
Further, if a client triggered a three-year bring-forward period in 2019–20 by making a non-concessional contribution in June 2020 of $125,000, their non-concessional cap for 2020–21 would normally be $175,000.
“However, if as a result of their contribution the value of their total super balance increased to just over $1.6 million on 30 June 2020, their non-concessional contribution cap for 2020–21 would instead be nil,” CFS said.
“But if the client’s total super balance 12 months later on 30 June 2021 is less than the new indexed general transfer balance cap of $1.7 million, their non-concessional cap for 2021–22 (the final year of their bring-forward period) will be restored to $175,000.”