The old saying “to err is human” applied to my last column. As a result of misinterpreting how the new non-concessional contribution limits will apply if the legislation is passed, I incorrectly advised that the maximum non-concessional contribution for the 2017 year could be $380,000.
Rather than the non-concessional contribution limit being $380,000 if the legislation is passed, the non-concessional contribution limit for the 2017 year is and will remain at $540,000 up to June 30, 2017. As it turns out my recommendation that clients should make a $540,000 non-concessional contribution was the correct advice, but for the wrong reasons.
This non-concessional contribution limit only applies to people who are under 66 during the 2017 financial year. Anyone who turns 65 during the 2017 year can make the full $540,000 contribution before their birthday without passing any other tests; however if the contribution is made after they turn 65 they must pass the work test for the 2017 year.
The coalition in scrapping the retrospective $500,000 lifetime non-concessional contribution limit that was to apply from budget night in May 2016, will introduce a two-tiered non-concessional contribution limit that will apply from July 1, 2017.
Under the first tier, the non-concessional contribution limit will only be $100,000, being four times the concessional contribution limit that will apply from July 1, 2017. The ability to bring forward two years of non-concessional contributions will be retained under the new system.
A new limit
The second tier of the new system imposes a new limit at which point no further non-concessional contributions can be made. When the value of a person’s superannuation is greater than the new $1.6 million pension transfer limit, or will exceed this limit after a non-concessional contribution is made, no further non-concessional contributions can be made.
If the legislation is passed to implement the new system the maximum non-concessional contribution that can be made after July 1, 2017 will be $300,000 using the bring forward rule. However if the non-concessional contribution will result in a superannuation balance of more than $1.6 million, the contribution is limited to the amount that would bring the superannuation balance up to $1.6 million.
Superannuation funds will not have to calculate whether a non-concessional contribution will result in the $1.6 million limit being exceeded continually through a year; instead the $1.6 million limit will apply to what a member’s superannuation balance was at June 30 of the previous year.
For example, if a member’s balance was under $1.3 million at June 30, 2017 they will be able to make a maximum non-concessional contribution of up to $300,000 after July 1, 2017. If that member’s balance were $1.45 million, they would be limited to a maximum non-concessional contribution of only $150,000.
Who will be disadvantaged?
The clients that will be disadvantaged, if for the new non-concessional contribution limits are passed, are those that activate the bring forward rule but do not contribute the maximum amount by June 30, 2017.
If the bring forward rule was activated during the 2016 year the maximum non-concessional contribution will be $460,000, being two years of $180,000 and one year of $100,000, while if it is activated in the 2017 year the maximum contribution will be $380,000.
Those clients that will be under 66 at June 30, 2017, that have considerable funds outside of superannuation, should be advised to contribute up to the $540,000 maximum amount before the new rules apply. If clients already have more than $1.6 million in superannuation it is even more important that they maximise their non-concessional contribution before the second tier limit applies.