SMSFs flagged on key pitfalls facing the bring-forward strategy

Speaking at the recent Heffron Strategy Update, Lyn Formica, head of education and technical services, said the change to the general TBC from 1 July 2021 (i.e. from $1.6 million to $1.7 million) means the thresholds for determining whether an individual can trigger a bring forward and, if they can, the amount and duration of the bring forward will shift.

This also coincides with pending legislation that has been tabled in Parliament to amend the tax law to enable a member “under 67” (instead of “under 65”) to trigger a bring forward of their non-concessional contributions cap in a particular year (if all other criteria outlined above are met).

“The current approach we’re familiar with is checking our client’s total superannuation balance at 30 June 2020 if it was less than $1.4 million and the client is under age 65 in the year when triggering it. It would have a non-concessional contribution cap of $300,000 and three years in which to put that in,” Ms Formica said.

“But on the 1st of July, those figures and those thresholds will change. To do the maximum bring forward, there will need to be a total superannuation balance at 30 June 2021 of less than $1.48 million and then have a $330 000 non-concessional contribution cap.”

In consideration of those changes, Ms Formica said it will be crucial for advisers to think about whether to trigger a bring-forward mode this financial year or whether it might be better off starting it in the next financial year, as these strategies each come with the potential pitfalls that will be seen.

Ms Formica said that one of the risk areas that advisers need to be very careful with is in relation to clients who haven’t utilised all of the bring-forward amount in the current financial year.

“I normally tell clients that if you’re going to trigger bring-forward mode, put everything in you possibly can up to your bring-forward amount,” she said.

“The reason is if we trigger bring-forward mode and we don’t utilise all of it, then we have to check our total superannuation balance again and make sure that it’s less than $1.6 million at the relevant time. Otherwise, even though we’re partway through a bring-forward period, we won’t be able to utilise the rest of it.”

In an example, Ms Formica said to consider a scenario where a client had $300,000 bring-forward amount and three years to which to put it in and it was last year where a further $180,000 was put in.

“I triggered my bring-forward mode, I used $180,000 of that, but I have $120,000 left over for this financial year. I’m not eligible to use that unless my total superannuation balance is less than $1.6 million at 30 June 2020,” she explained.

“If I’ve gone over then my non-concessional contribution cap is nil for this current financial year and because it’s a three-year bring forward, I’d have the opportunity to check it again next financial year. So, think about what the total superannuation balance at 30 June 2021 will be to work out whether there is still an opportunity to put that remaining $120,000 in the following year.

“There also needs to be considerations that the general transfer balance cap is going to change, so going forward, advisers have to be comparing the $1.7 million thresholds to work out whether someone can utilise the remainder of the bring-forward amount.”

Automatic triggers and locking in bring-forward mode

When beginning the bring-forward strategy, it will automatically be triggered in a year if the member is under 65 at any time in that year, where the NCC allocated are greater than the general NCC cap and the member is not mid-stream through the existing bring-forward period, according to Ms Formica. 

This can pose further risks especially around choosing to treat triggering NCC as an “excess” contribution.

“So, you can’t choose to just treat the excess as an excess contribution. For example, if I contributed $101,000 in this current financial year, I will automatically trigger bring-forward mode whether I like it or not if I qualify for bring-forward mode,” she explained.

“I don’t have the opportunity to just treat that extra $1,000 as an excess non-concessional contribution so that I’ve got the opportunity to trigger bring forward next year. Unfortunately, it doesn’t work that way.

“Also remember you can’t choose the bring-forward period or the bring-forward amount, as it is purely dependent on what the total superannuation balance is at that relevant time on 30 June.”

Importantly, in a year when the NCC caps are about to change, Ms Formica noted that the bring-forward amount is locked in for the life of that bring-forward period once it is triggered.

This is determined from the general NCC cap in the trigger year which is locked in for the life of the bring-forward period and can’t be adjusted mid-stream, even if the general NCC cap is indexed in that period.

“If I were to trigger a non-concessional contribution cap bring forward this financial year, I will lock in what that figure is. If I had the opportunity for a $300,000 non-concessional contribution and three years in which to put it in, I will lock it in at $300,000,” she explained.

“The fact that the caps might be increasing effective on the 1st of July is bad luck, and as a result, I don’t get the benefit of any of those increases in the cap.”