Consider delaying contributions, trustees told
Clients who make non-concessional contributions now may miss out on any future indexation increases with the proposed non-concessional contribution cap, with the cap likely to be percentage-based instead of dollar-based, an industry lawyer has warned.
Speaking at an event in Sydney, Townsends Business and Corporate Lawyers special counsel for superannuation Michael Hallinan said SMSF trustees will have to decide whether to use the proposed cap amount earlier in life, with the benefit of it being invested for longer, or wait closer to retirement to get the benefit of the higher indexed value of the cap.
"That’s a decision SMSF practitioners are going to have to make with their client," said Mr Hallinan.
The $500,000 non-concessional contribution cap, he explained, will likely be measured in percentages rather than in dollar terms.
"The reason for that is that by measuring in percentage terms, once you’ve exhausted the cap you’re not entitled to any increase from the subsequent indexation in the cap," said Mr Hallinan.
"For example, if Bill makes a non-concessional contribution during the 2017-18 year and exhausted 80 per cent of the cap, he’s got 20 per cent remaining. If the cap is subsequently indexed to $550,000 Bill’s available non-concessional cap will be 20 per cent of $550,000 which is $110,000."
Mr Hallinan clarified the remaining cap amount would not be $150,000, as would be the case if it was based in dollar terms.
"If Bill then makes an additional $110,000 non-concessional contribution, the cap will then be exhausted," he said.
"The benefit of any subsequent indexation of that $500,000 cap is now irrelevant to Bill, he’s now exhausted his cap."
He also stressed that practitioners should be ensuring that clients owning businesses or planning to set them up, have the correct structures so that they’re entitled to the small business concessions.
"The only way to get substantial money into super going forward will be under the 15-year exemption and the retirement exemptions, so the focus on a lot of SMSF planning for corporate businesses will be to ensure that they are not disqualified from qualifying for those CGT concessions," he said.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.