Key strategic considerations arising from contribution cap changes
With the super contribution caps set to increase for the first time since 2017, Heffron has outlined key cumulative effects that will need to be considered in the changes that will affect SMSF strategy.
With the announcement of the AWOTE figure for the December 2020 quarter, the concessional contribution cap is set to increase from $25,000 p.a. to $27,500 p.a. from 1 July 2021.
The non-concessional cap in 2021–22 will see the standard cap increased from $100,000 to $110,000, while the maximum amount a member who was under 65 at the start of the year can contribute under the non-concessional contribution cap bring-forward rule is also set to increase from $300,000 to $330,000 from 1 July 2021.
Heffron managing director Meg Heffron said in a blog SMSFs considering large non-concessional contributions will need to think carefully about their timing strategy and whether they do that in 2020–21 or 2021–22.
“Consider a 60-year-old client with a $1 million total superannuation balance at 30 June 2020 who has not previously used the bring-forward rules but is about to do so,” Ms Heffron said.
“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 preferable to contribute $100,000 now and $330,000 in July 2021.”
For those with slightly more super, around the $1.4 million mark, Ms Heffron said they have a delicate balance between contributing the full $300,000 now while they are still below the key threshold for this year ($1.4 million at 30 June 2020) or 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 $1.35 million at 30 June 2020, a $300,000 contribution would clearly be possible in 2020–21,” she said.
“Contributing $100,000 in 2020–21 instead, however, might mean their balance at 30 June 2021 scrapes over one of the new thresholds ($1.48 million). 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.”
Monitoring unexpected impacts from the bring-forward rules
With the bring-forward rules also set to align with the changes in the contribution caps, Ms Heffron said that it will be important to monitor for unexpected impacts that may cause traps for the SMSFs once they trigger the rules in the specific period.
“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,” she said.
“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 $1 million 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, according to Ms Heffron.
Examples include personal contributions to an industry fund to maintain insurance cover, personal contributions for which a tax deduction has been denied along with spouse contributions.
Furthermore, SMSFs need to watch out for 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).
Considerations for double deduction strategies
Another key consideration for SMSFs from the impacts of contributions changes is managing double deduction strategies where sometimes it is employed by those who need a large tax deduction in one year but not the next.
Ms Heffron said common scenarios need to be considered for someone who is no longer receiving employer contributions, including contributions up to the concessional contributions cap are made any time during the year (2020–21) and where an additional contribution is made in June 2021 but not allocated to the member until July 2021.
“Furthermore, 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,” she said.
Ms Heffron explained that with the new increases, if that strategy is being adopted for 2020–21, don’t forget that the second contribution in June 2021 would amount to $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,” she said.