Self Managed Super Funds (SMSF)

Indexation allows for higher super contributions from 1 July, 2021

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

Making super contributions after 1 July this year comes with a nice surprise as the concessional and non-concessional caps have been indexed along with the increases to the Transfer Balance Cap and Total Super Balance Cap. So how do the contribution changes work?

Increase in concessional contributions cap
Indexation of the standard concessional contributions cap takes place in increments of $2,500, calculated on increases in the Average Weekly Ordinary Time Earnings index since 1 July 2017. The standard cap since 2017 has been held at $25,000, and it is only now that increases based on in the index have reached the $2,500 mark. So from 1 July 2021, the standard concessional contributions cap will be $27,500.

Example
A fund member is under the age of 67 and each year makes a concessional contribution of $25,000 to his super fund so he can claim a tax deduction. From 1 July 2021, the member will be able to increase the amount he contributes to $27,500 and can claim a tax deduction if he wishes.

Increase in non-concessional contributions cap

Following the increase in the standard concessional contributions cap, the non-concessional contributions cap also increases. That cap will increase by 4 times the concessional contributions cap increase, which is $10,000 (4 x $2,500), and this means that the non-concessional contributions cap will be $110,000 from 1 July 2021. Members that are eligible to access the ‘bring-forward rule’ for non-concessional contributions from 1 July 2021, may be entitled to non-concessional contributions of up to $330,000 over a fixed period. However, that may depend on their total superannuation balance on 30 June in the previous financial year.

Example

A fund member is 55 years old, has a total super balance on 30 June 2021 of $600,000 and has made a non-concessional contribution of $105,000 to his super fund on 31 August 2021. He can make the contribution without penalty as his non-concessional contribution is within the non-concessional contributions cap of $110,000, and his total super balance is less than $1.7 million.

The increase in the concessional and non-concessional contributions caps are as follows:

Graph

Increase in total super balance cap

The Total Super Balance Cap, which limits the amount of non-concessional contributions that can be made to super, is also indexed from 1 July 2021 along with all the other super caps. It will move from $1.6 million to $1.7 million from 1 July 2021 and allows anyone with a total super balance of less than $1.7 million to make up to $110,000 each financial year as a non-concessional contribution if they qualify due to age, or are required to meet the work test if they are 67 years or older.

For members who are able to access the bring-forward rule, there is also an increase in the range at which the bring-forward amount and relevant period cuts in, as follows:

Graph2

Example

An individual has a Total Super Balance of $1.51 million on 30 June 2021 and has not triggered the non-concessional bring-forward rule in the previous 3 financial years. If the member makes a non-concessional contribution of greater than $110,000 in the 2021/22 financial year, it will trigger the bring-forward rule so that she can make non-concessional contributions, in total, of up to $220,000 at anytime during the 2021/22 and 2022/23 financial years.

Bring-forward rule triggered before 1 July 2021?
For members who have triggered the bring forward rule prior to 1 July 2021, they may not have access to the indexed non-concessional contributions cap. The reason for this is because once the cap is triggered the bring-forward amount is set for the fixed period. This can be illustrated as:

Example

Joanna had a Total Super Balance of $1.3 million on 30 June 2019 and made a non-concessional contribution of $130,000 during the 2019/20 financial year. As the amount contributed by Joanna was greater than the standard non-concessional contributions cap of $100,000 she was able to access the bring-forward rule and could make non-concessional contributions of up to $300,000, in total, at any time during the 2019/20, 2020/21 and 2021/22 financial years. Because these contributions triggered the bring-forward rule prior to the indexation of the caps from 1 July 2021, she will not have access to the indexed non-concessional contribution for the 2021/22 financial year.

Welcome news!

The ATO’s announcement has now provided certainty around indexation and how it will apply to the contribution’s caps, total super balance and total balance cap. It’s now up to fund trustees, members and their advisers before 1 July arrives to contemplate the best use of contribution and pension strategies.

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Graeme Colley, Executive Manager, SMSF Technical and Private Wealth SuperConcepts
  • SMSF News
  • Self Managed Super Funds (SMSF)
  • Superannuation
  • Tax
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