Budget strategies and advice reforms

The Government has continued to tinker with superannuation, this time amending its own proposed reforms in the 2016 May Federal Budget.

Some of the latest reforms, such as maintaining the work test for those aged 65 to 75, won’t make a difference for your clients. Others however, may do. One such change includes the reduction of the non-concessional contributions (NCCs) cap to $100,000 from its current limit of $180,000 (the $500,000 lifetime cap was a non-starter, as it turns out!)

While it’s not the only change, this NCC reduction, together with the restriction of NCCs for balances over $1.6 million, offers a genuine advice strategy for your clients.

Changes to the non-concessional contributions cap

The Government has decided to remove the proposed $500,000 lifetime cap on non-concessional contributions, including the retrospective ‘look back’ to contributions made since 2007. Instead, this will be replaced with a simple change that reduces the current $180,000 annual cap on non-concessional contributions to $100,000 annually. Members will still be able to bring forward the next 2 years of the cap (but limited to $300,000 over 3 years to reflect a lower annual cap). Also, as it currently applies, the bring-forward provisions will not apply to those aged 65 or over.

The $100,000 non-concessional contributions cap will be fixed at 4 times the concessional contributions cap. Consistent with current rules, increases will be linked to changes in the concessional contributions cap.

Importantly, these proposed changes will apply from 1 July 2017. This presents a window to take advantage of existing caps and an advice strategy for some of your clients.

Transitional measures announced for the reduced non-concessional contributions cap from 1 July 2017

The current rules allow for a non-concessional contributions cap of $180,000 annually or a bring-forward cap of $540,000 over three years. However, transitional measures will apply to those who trigger the bring-forward rule in 2015/16 and 2016/17 and have not fully used their NCC bring-forward amount before 1 July 2017. The remaining ‘bring forward’ limit will be reassessed on 1 July 2017 to reflect the new lower annual caps.

Therefore from 1 July 2017:

  • A client who triggered the bring-forward cap in 2015/16 will have their cap reduced from $540,000 to $460,000 ($180,000 for 2015/16 + $180,000 for 2016/17+ $100,000 for 2017/18).
  • A client who triggers the bring-forward cap in 2016/17 will have their cap reduced on 1 July 2017 to $380,000 ($180,000 + $100,000 + $100,000).
Advice strategy

Clients who have not contributed the maximum allowed under the existing NCC cap ($180,000 annually or $540,000 over three years) should consider doing so before 30 June 2017.

Case study 1

Jane contributed $200,000 of non-concessional contributions in 2015/16 and triggered the bring-forward rule. She can contribute a further $340,000 up to 30 June 2017.

Otherwise from 1 July 2017, her cap will drop to $460,000 ($180,000 + $180,000 + $100,000) and she will only be able to contribute a further $260,000 ($460,000 - $200,000). On 1 July 2018, her cap resets again.

If instead Jane contributes an additional $300,000 of non-concessional contributions in 2016/17 - a total of $500,000 before 1 July 2017 - she will be not be in breach of the NCC cap. However for 2017/18 she will be unable to contribute any further non-concessional contributions (as her adjusted cap is $460,000) until her cap resets on 1 July 2018.

As 1 July 2017 is the intended start date for these changes, current NCC rules apply. Therefore a client who has not triggered the bring-forward cap in the previous two years can contribute $540,000 of non-concessional contributions by 30 June 2017.

If the client has triggered the bring-forward cap in 2015/16, they can contribute the balance up to $540,000 by 30 June 2017.

Introducing a $1.6 million balance threshold

Those with accumulation balances over $1.6 million will not be able to make further non-concessional contributions. The $1.6 million threshold will be measured on 30 June of the previous financial year. Where account balances are close to $1.6 million, the bring-forward provisions may be restricted.

Advice strategy

As 1 July 2017 is the intended start date for these changes, clients who have account balances already in excess of $1.6 million should consider maximising their non-concessional contributions in 2016/17.

Case study 2

Jane triggered the bring-forward cap in 2015/16 when she contributed $200,000 of non-concessional contributions. Her account balance is currently $1.7 million. Although she can contribute an additional $340,000 up to 30 June 2017, she will be unable to contribute more non-concessional contributions from 1 July 2017.

Case study 3

Nick decides to contribute $540,000 of non-concessional contributions under the current rules in June 2017. As he uses up the current bring-forward cap of $540,000, he is unable to contribute further until 1 July 2019.

It is not yet clear how the transitional provisions will apply if a member has triggered the bring-forward cap in 2016/17 and also has an account balance close to $1.6 million on 30 June 2017. It will depend on how the legislation is drafted, but the ability to bring forward future years cap amounts may be limited.

The path ahead

The question here becomes whether the ALP will support this change and pass the legislation through the Senate. The ALP's concern with the $500,000 lifetime cap was that it was retrospective and this removes the retrospective element to the reforms. The change also links non-concessional contributions to the $1.6 million transfer cap, which the ALP supports.

Importantly, there is an opportunity for clients to maximise non-concessional contributions under the current rules prior to 1 July 2017. Clients can contribute up to $540,000 before the new rules commence.

Finally, clients with account balances over $1.6 million should consider making non-concessional contributions this financial year as they will be prohibited from making further contributions from 1 July 2017.

The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.