Increased contributions caps from 1 July 2021
By Janet Manzanero-Caruana, Senior Technical Manager
From financial year (FY) 2021-22 the total superannuation balance threshold, concessional and non-concessional contributions caps will increase, allowing your eligible clients to contribute more to their super.
This article provides an overview of the increase in the:
- concessional contributions (CC) cap and carried forward unused CC caps
- non-concessional contributions (NCC) caps and the total superannuation balance threshold for making these contributions.
Total superannuation balance
From 1 July 2021 the general transfer balance cap (TBC), which is indexed to the Consumer Price Index (CPI) will increase from $1.6M to $1.7M. The total superannuation balance (TSB) threshold at which the NCC cap is nil for a financial year, is equal to the general transfer balance cap. An NCC cap of nil effectively means the client cannot make NCCs.
This means the TSB threshold measured at 30 June 2021 for NCCs made in the FY2021-22 will be $1.7M. Eligible clients with TSBs of less than $1.7M at 30 June 2021 can make NCCs from 1 July 2021.
The CC cap is indexed to average weekly ordinary time earnings (AWOTE) in $2,500 increments. The increase in the CC cap from 1 July 2021 is calculated as:
| AWOTE Dec 2020|
AWOTE Dec 2016
| $1,711.60 x $25,000|
|=||$27,728 rounded down to $27,500 pa.|
The NCC cap is four times the CC cap and therefore will increase from $100,000 pa to $110,000 pa ($27,500 x 4) from 1 July 2021. This means eligible clients can make more after-tax contributions to superannuation.
The increased TSB, CC and NCC caps allow clients to accumulate more superannuation. Eligible clients on low incomes who have TSBs greater than $1.6M but less than $1.7M will be able to top up their super and receive the Government co-contribution and/or spouse contribution if they meet requirements, for example, members who are retired, on maternity leave, or on a career break. Those who are aged 67 to age 74 must meet the work test in the financial year of contribution (except for downsizer and mandated contributions) unless they qualify for the work test exemption.
Advisers need to also become familiar with how the increased contributions caps affect the carried forward unused CC cap and bring-forward NCC cap.
Carry forward unused CC cap
The CC cap available for clients whose TSB is less than $500,000 is equal to the annual CC cap plus any unused CC cap since the 2018-19 financial year. This means the maximum CC cap available for these clients where they have not made any CCs since 2018-19 is $75,000 in 2020-21 (calculated as $25,000 in 2018-19 + $25,000 in 2019-20 + $25,000 in 2020-21).
In 2021-22 the maximum CC cap available for these clients will be $102,500 (calculated as $25,000 in 2018-19 + $25,000 in 2019-20 + $25,000 in 2020-21 + $27,500 in 2021-22).
Clients who expect to have TSBs of less than $500,000 at 30 June 2021 and who plan to realise large capital gains on the sale of their assets may consider deferring the sale to the next financial year if they have any carried forward unused CC caps and the work test is not an issue next financial year.
Martha, aged 63, retired 5 years ago. Her TSB at 30 June 2020 was $100,000. She wishes to sell her investment property and expects to make a capital gain after the 50% CGT discount of $175,000. She has not made any CCs in the last 5 years so her personal CC cap in 2020-21 is $75,000. If she sold her property in April 2021 she can reduce her taxable capital gain by making a $75,000 personal deductible contribution to her super to $100,000 ($175,000 less $75,000).
If she defers the sale to after 30 June 2021 she can make a personal deductible contribution of $102,500 to reduce her taxable capital gain to $72,500 ($175,000 less $102,500).
By deferring the property sale by a few months to the 2021-22 financial year and using her increased CC caps to make a larger personal deductible contribution she can reduce her taxable capital gain by an additional $27,500. Her personal deductible contributions will be taxed at 15% in super which is still less than her marginal tax rate.
Martha should consider other factors such as whether she can easily sell the property at the same price or higher if she deferred the sale.
Bring-forward NCC cap
From 1 July 2021 eligible clients may trigger the bring-forward NCC cap which applies to the relevant bring-forward period if, at 30 June 2021, if their TSB is:
|Total superannuation balance (TSB)||Contribution cap and bring- forward period|
|Less than $1,480,000||$330,000 cap over three years|
|Greater than or equal to $1,480,000 but less than $1,590,000||$220,000 cap over two years|
|Greater than or equal to $1,590,000 but less than $1,700,000||$110,000 cap with no bring-forward period|
|Greater than or equal to $1,700,000||Nil|
|Tech Tip: |
Clients who are under age 65 on 1 July 2021 and wish to contribute more than $100,000 may consider contributing up to the annual cap in FY2020-21 and trigger the bring-forward NCC cap in FY2021-22 to allow them more NCCs in total.
Jose is age 63 on 1 July 2020. His TSB at 30 June 2020 was $1,000,000. He is not currently in an NCC bring-forward period. He has $450,000 from the sale of a property which he wishes to contribute to his super. In FY2020-21, Jose can contribute NCCs up to $300,000 and trigger the three year bring-forward period which ends on 30 June 2023. The remaining $150,000 (i.e. $450k - $300k NCC) may be contributed to his super fund as CCs up to the annual CC cap over several financial years and will be subject to contributions tax. From FY2023-24 Jose can make additional NCCs if he is eligible to contribute.
Alternatively, Jose can make a $100,000 NCC in FY2020-21 and if his expected TSB is less than $1,480,000 at 30 June 2021, he can make NCCs up to $330,000 in FY2021-22, triggering the three year NCC bring-forward period which ends on 30 June 2024. Under this strategy, Jose’s total NCCs are $430,000. The balance of the sale proceeds ($20,000) may be contributed as CCs, if eligible.
Under existing law, clients who are age 65 or older on 1 July 2021 cannot trigger the bring-forward NCC cap in FY2021-22.
|Note: At the time of writing, clients under age 65 on 1 July of a financial year may trigger the bring-forward NCC cap. Legislation was introduced into Parliament to allow clients under age 67 on 1 July of a financial year to trigger the bring-forward NCC cap, effective from 1 July 2020, but is not yet law.|
Once the bring-forward NCC cap is triggered, it crystallises the NCC cap that covers the bring-forward period (e.g. $200,000 over the two year bring-forward period and $300,000 over the three year bring-forward period). Once crystallised, the bring-forward cap does not increase even if the annual NCC cap increases during a bring-forward period.
Where the client expects not to be eligible to contribute in the next financial year (they don’t meet the work test or the expected TSB will result in a nil NCC cap), it may be best to maximise contributions in the current financial year.
Elsa works part-time and is age 64 on 1 July 2020. Her TSB at 30 June 2020 was $1,300,000. She has $300,000 to contribute to super. Elsa can make up to $300,000 of NCCs in FY2020-21 triggering the NCC bring-forward cap and three year NCC bring-forward period. The contribution can be made at anytime in FY2020-21.
On the other hand, if Elsa makes a $100,000 NCC in FY2020-21, she can only contribute up to $110,000 of NCCs in FY2021-22.
Total NCCs, across the two FYs, will be $210,000 as she is not eligible to trigger the NCC bring-forward cap in FY2021-22. If eligible she may contribute the balance as CCs up to the annual CC cap. In this scenario she is eligible to contribute less to super.
The increase in contribution caps and TSB threshold for making non-concessional contributions, is good news for clients who wish to accumulate more retirement savings in a concessionally taxed structure.
For clients aged between 64 and 67 timing their bring-forward NCCs can make a huge difference to their superannuation savings. At the time of writing, legislation allowing clients under age 67 on 1 July 2020 to trigger the bring-forward NCC cap is still in the Senate and provides a lot of uncertainty for advisers and clients wishing to take advantage of this proposed change.
Advisers must be alert to opportunities, use increasing caps and any changes in legislation for their clients’ benefit.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.