It's a bright new year in superannuation

By Martin Breckon, Technical Services Managers

The introduction of the new $35,000 transitional contribution cap for superannuation contributors who were aged 59 years or over on 30 June 2013 was a welcome piece of news for pre-retirees trying to ramp up retirement savings and added relevance to TTR and salary sacrifice strategies.

The welcome news this year is the $35,000 transitional cap also applies to those aged 49 years or over on the last day of the current financial year, that is 30 June 2014.

However it gets better for financial advisers. Remember back in November 2011, the government announced that they would again freeze the $25,000 general concessional contribution cap for the 2012/13 and 2013/14 financial years. This has remained unchanged but it means normal indexation of the $25,000 concessional contribution cap resumes for the 2014/15 year. It is very likely the $25,000 cap will be indexed to $30,000 for the 2014/2015 year!

So how does this work and what does it mean?

In accordance with section 960-285 of the Income Tax Assessment Act 1997 (ITAA 1997), the concessional contributions cap is indexed in line with average weekly ordinary time earnings (AWOTE), in increments of $5,000 (rounded down). The new relevant AWOTE indexation amount is generally available each February.

How this works is stipulated in ITAA 1997 Section 960 -285 where we have to apply the formula:

 

C.C. x
Index number for quarter ending Dec 31 just before start of relevant financial year

Index number for the quarter ending 31 December 2008
 

AWOTE for 31 December 2008 was $1,165.30

Currently at the time of writing the December 2013 AWOTE figure is unavailable however to get an indication we can use the next latest figure available being for the June AWOTE  figure of $1420.90.

The result is as follows:

$25,000 x ($1,420.90 ÷ $1,165.30) = $25,000 x 1.2193=$30,482

This signifies that unless there is an additional change from the Government to extend the freezing of the indexation, then the general concessional contribution cap for the 2014/15 year will be $30,000.

What does this means for the concessional
contribution cap?

So if you are reviewing your client’s cash flow capabilities into super for the upcoming financial year you have two categories

  • age 49 or more at 30 June have a concession contribution cap of $35,000
  • under age 49 at 30 June have a concessional contribution cap of $30,000

Another important activity to re-consider is managing the cash flow of non-concessional contributions.

How important is this for the non-concessional
contribution cap?

The fund non-concessional contribution cap is governed by ITAA 1997 section 292-85 which since 2009/10 has been prescribed the cap as 6 time the concessional contribution cap. Consequently as of 1 July 2014 the annual non-concessional cap will increase from $150,000 to $180,000 and the three year bring forward cap will increase from $450,000 to $540,000

This is critical if you are planning to maximise a client’s non-concessional  contributions in to their superannuation account because if you accidentally trigger the $450,000 bring forward provisions this year then according to tax law you cannot use the new caps until the expiring of the initial three year rule triggered under the original relevant cap amount. This can be best explained by way of the following case study.

Case Study: John

  • John, age 59, wishes to maximise non-concessional contributions before 65.
  • He makes a $150,000 non-concessional contribution on 20/6/2013 (2013/14 FY).
  • In the 2014/15 financial year he makes a further $540,000 Non-Concessional Contribution (up to the ‘new’ NCC Cap)
  • John also had some insurance cover in super the premium is $3,000 per annum which was paid for by automatic direct debits from his bank account as a non-deductible contribution.
  • The 3 year bring forward provision was unintentionally triggered in the 2013/14 financial year thus invoking the $450,000 three year bring forward amount. As a result in the 2014/15 financial year John only has a non-concessional contribution of $297,000 (ie $450,000 - $150,000 - $3,000) left to use for the three years.
  • When John paid $540,000 in the 2014/15 financial year he has triggered an excess non-concessional contribution of $243,000  resulting in a tax liability of $112,995 (ie $243,000 x 46.5%)*.
  • John is incapable of using the new $180,000 cap and the $540,000 bring forward provisions until the 2017/18 year and has not achieved his aspiration of maximising after tax cash flow into superannuation.

Age at 1/7

Caps Intended

Caps Actual

ATO View

59 (2013/14)
$150,000$150,000/$450,000$153,000
60 (2014/15)$540,000$297,000
$297,000 and
$243,000 excess*
61 (2015/16)
NilNil
Nil
62 (2016/17)
Nil$180,000/$540,000Nil
63 (2017/18)^ $180,000 $180,000/$540,000^ $180,000
64 (2018/19)^
$540,000$540,000^
$540,000
 $1,410,000
$1,297,005

^  the government expects concessional contribution caps to reach $35,000 from 1 July 2018 this increases the NCC caps to $210,000 p.a. or $630,000 using the bring forward provisions.

* the ATO has a discretion to apply the de minimis test. This is a Latin term, which is a shortened form of the expression “de minimis non curat lex” meaning ‘the law does not care about very small matters’. 

It is often considered more efficient to waive very small amounts of duties and taxes rather than collect them. 

For ECT purposes, it appears that the ATO is looking to apply this rule to small amounts that have created sizeable excess contributions tax liabilities.  However, the ATO has not nominated any dollar amount as being the cut-off point. There are some anecdotal indications that breaches up to one or even two thousand dollars may qualify for favourable de minimis treatment.

Which clients should I focus on?

In conjunction with this an increase in contribution caps is very welcome news. Remember this increase applies to:

  • Those who have access to the $35,000 transitional concessional contribution cap
  • Indexing the general concessional cap from $25,000 to $30,000
  • Those who wish to maximise after tax dollar inflows as the non-concessional cap increases from $150,000 to $180,000 and the three year bring forward provision increases from $450,000 to $540,000

Many clients will be interested in these developments, consider clients such as clients:

  • wishing to maximise transition to retirement and salary sacrifice strategies
  • adversely impacted by having to pay super guarantee in excess of the previous $25,000 cap
  • with surplus employment  income who wish to maximise retirement wealth
  • increasing life insurance cover in superannuation
  • clients who have received an inheritance or downsizing their home
  • wishing to increase deductible personal contributions
  • increasing liquidity for limited recourse borrowing arrangement purposes

Conclusion

With a new government we have seen a re-thinking of some major policy changes that affect the advice industry in the 2014 calendar year. The reducing of the “red tape” over heads means financial adviser may concentrate on more productive activity such as protecting and creating client wealth.

At the start of the 2014 the year looks far more positive and brighter when compared to the same time last year and the ability to create and protect client wealth is far more robust than before.