One of the final pieces of the 2021/22 planning jigsaw dropped into place late last week. The release of the November 2020 Average Weekly Earnings data means we now know for sure that the concessional contributions cap will increase from $25,000 to $27,500 from 1 July 2021.
If it feels like a long time between drinks, that’s because it is. The last time the contribution cap for concessional contributions was above $25,000 was back in 2016/17.
So what does this mean for planning right now?
For a start, indexation of the concessional contributions cap automatically flows through to an increased non-concessional cap ($100,000 will become $110,000 from 1 July 2021).
We can also now populate the (slightly complex) table of bring forward thresholds and amounts for 2021/22. It’s complex because it depends on both the general transfer balance cap (increasing to $1.7m from 1 July 2021) and the non-concessional contributions cap (as we now know, this is also increasing).
|Total Super Balance at 30 June 2021||Non-concessional contribution cap / bring forward rules|
$1.7m or more
$0, no bring forward
$1.59m or more but less than $1.7m
$110,000, no bring forward
$1.48m or more but less than $1.59m
$220,000, 2 year bring forward period
Less than $1.48m
$330,000, 3 year bring forward period
The $1.59m threshold above is:
The general transfer balance cap ($1.7m)
1 x the annual non-concessional contributions cap ($110,000)
Importantly, the same table applies to everyone. While the personal transfer balance cap will be different for different individuals from 1 July 2021, this table of contribution thresholds depends on the general transfer balance cap ($1.7m) regardless of the individual’s personal cap.
There are a number of important flow on impacts for clients.
Timing of large non-concessional contributions
Those considering large non-concessional contributions will need to think carefully about whether they do that in 2020/21 or 2021/22.
Consider a 60 year old client with a $1m total superannuation balance at 30 June 2020 who has not previously used the bring forward rules but is about to do so.
Contributing $300,000 now locks in the 2020/21 non-concessional cap of $100,000 for all three years (2020/21, 2021/22 and 2022/23) even though the cap will actually increase next year. All other things being equal, it may be preferrable to contribute $100,000 now and $330,000 in July 2021.
What about those with slightly more super – say, hovering around the $1.4m mark? They have a delicate balance between:
- Contributing the full $300,000 now while they are still below the key threshold for this year ($1.4m at 30 June 2020), vs
- Contributing only $100,000 now, increasing the total superannuation balance and possibly impacting their ability to maximise their bring forward in 2021/22.
For example, if this client’s total super balance was instead $1.35m at 30 June 2020, a $300,000 contribution would clearly be possible in 2020/21.
Contributing $100,000 in 2020/21 instead, however, might mean their balance at 30 June 2021 scrapes over one of the new thresholds ($1.48m). Their non-concessional contributions would be limited to only $220,000 in 2021/22 (a bring forward period of two years rather than three).
All that said, even this outcome is not such a bad thing. While it might not be as much as they had hoped ($100,000 in 2020/21 and $330,000 in 2021/22), the total contributed for the three years up to 30 June 2023 would be $320,000 ($100,000 in 2020/21 plus $220,000 in 2021/22). That’s still better than putting the full $300,000 in now.
Watching unexpected impacts on the bring forward rules
We all like to think that bring forward periods are carefully considered and happen exactly when the client meant to use these rules to maximise their non-concessional contributions.
In fact, remember that they are triggered automatically whenever the annual non-concessional cap is exceeded. The contributor has no choice about the period of the bring forward. If someone with a total super balance of $1m at 30 June 2020 has even 1 cent more than $100,000 counted for their non-concessional contribution cap in 2020/21, they will automatically lock in a three year period up until 30 June 2023 and their non-concessional contributions over that time will be limited to $300,000.
Traps for the unwary are small contribution amounts that have been forgotten about which cause the person to exceed the cap even though they thought they had only contributed $100,000. For example:
- personal contributions to an industry fund to maintain insurance cover
- personal contributions for which a tax deduction has been denied
- spouse contributions
- SMSF expenses paid personally that weren’t reimbursed, and
- excess concessional contributions where no action was taken on the excess notice and so the contributions remained in the fund (remember these only count towards the non-concessional contributions cap if they are not refunded)
Double deduction strategies
A strategy sometimes employed by those who need a large tax deduction in one year but not the next is the “double deduction” strategy. A common example for someone who is (say) no longer receiving employer contributions is:
- contributions up to the concessional contributions cap are made any time during the year (say 2020/21);
- an additional contribution is made in June 2021 but not allocated to the member until July 2021; and
- a personal tax deduction is claimed for two years’ worth of contributions in a single year (because both contributions were made in the same year) but the contributions count towards the relevant cap in different years, avoiding any nasty excesses.
So what’s different now? If that strategy is being adopted for 2020/21, don’t forget that the second contribution in June 2021 can be $27,500. This is because it’s being tested against the 2021/22 concessional contributions cap – and by then, the cap will be $27,500.
An increase in the contribution caps can only be a good thing for SMSF clients. While it does make life a little tricky as we all adjust, I’m sure we will.
If you’re a Heffron Super Companion user, you’ll see updated content on the change in contribution cap amounts shortly – the new caps, the new table of bring forward thresholds and our usual wealth of practical tips and examples. If you aren't a user, sign up here.