CCs Cap Indexation
By Colin Lewis, Head of Technical Services, Fitzpatricks Private Wealth
The good news keeps coming for super.
From 1 July this year, you may be able to boost your superannuation savings and have more for retirement because the contribution caps are going up.
A month ago, we learnt that the general transfer balance cap (TBC)—the limit on the amount you can transfer into the tax-free retirement phase in super—is increasing from $1.6 million to $1.7 million on 1 July.
Now, following the release of the Average Weekly Ordinary Times Earnings figure on 25 February, the limit on the amount you may get into super will also increase—the first time this has happened since the new superannuation regime commenced on 1 July 2017.
Concessional (pre-tax) contributions
From 1 July 2021 the concessional contributions (CCs) cap is being indexed from $25,000 to $27,500.
CCs are pre-tax super contributions and include an employer’s compulsory award and Superannuation Guarantee (SG) contributions and additional voluntary contributions—including salary sacrifice contributions—and personal contributions you may make for which you claim a tax deduction.
For people making voluntary pre-tax contributions, the increase in the CCs cap for the 2021/22 financial year onwards will mean a bigger deduction and tax saving.
Be mindful that if you are a wage earner and your employer pays the super fund’s administration fees and/or insurance premiums on your behalf, these amounts also count towards your CCs cap.
The SG rate is legislated to increase from 9.5 per cent to 10 per cent from 1 July—but there is considerable lobbying going on within the Morrison Government in the wake of the COVID-19 crisis to delay this increase yet again.
So, if you’re a wage earner, the opportunity to make increased voluntary CCs from 1 July—arising from indexation of the cap—will be partly absorbed by the increase in your employer’s SG contributions, provided the Government doesn’t delay it.
If you want to use the carry forward rule this financial year—that is, you intend making additional CCs by utilising unused cap amounts from previous years—then you can only do it where you didn’t utilise the full $25,000 CCs cap in 2018/19 and/or 2019/20, and your total superannuation balance—the total of everything you have in the super system—at 30 June 2020 was less than $500,000. The opportunity arises from unused cap amounts from previous years and until 1 July this year, the CCs cap is—and has been—$25,000 a year.
The higher $27,500 cap does not come into play until the 2021/22 financial year.
If you wish to use the ‘contribution reserving strategy’ in June this year to claim a larger tax deduction in 2020/21, then be mindful that the maximum deduction will be $52,500 (up from $50,000) with the second contribution now being up to $27,500 because it’s being tested against the CCs cap in 2021/22—and don’t forget to allocate this contribution by 28 July.
Non-concessional (after-tax) contributions
From 1 July, you may be able to get more into super by way of making personal after-tax contributions as these are going up too.
The non-concessional contributions (NCCs) cap—currently $100,000—is four times the CCs cap. Accordingly, with the CCs cap increasing to $27,500, the NCCs cap will increase to $110,000.
Your total superannuation balance (TSB) determines your eligibility to make NCCs and is equal to the general TBC.
With the TBC increasing to $1.7 million from 1 July it means that if your TSB on 30 June 2021 is less than $1.7 million you may be able to make after-tax contributions of at least $110,000 next financial year, i.e. in 2021/22. Without indexation of the TBC, you would have been unable to contribute if you had between $1.6 and $1.7 million in super.
Your TSB also determines your entitlement to use the NCCs bring-forward rule to get more into super. So, combining both the higher NCCs cap and TSB amount resulting from indexation of the CCs cap and general TBC respectively, it means that if you did not trigger a bring-forward arrangement in either 2019/20 or 2020/21 and your TSB is less than $1.48 million at 30 June 2021 then you may be able to contribute up to $330,000.
If you have $1.48 million to less than $1.59 million then you may be able to contribute up to $220,000, otherwise the maximum you can put in is $110,000. Of course, if your TSB is $1.7 million or more you cannot contribute at all.
Voluntary employer (e.g. salary sacrifice) and personal contribution rules
Of course, your eligibility to contribute to super is dependent on your age.
Anyone under age 67 may contribute, but if you’re aged 67 to 74, you must meet the work test—40 hours of gainful employment in 30 days—or work test exemption (WTE) to contribute.
The WTE may be used to contribute to super—provided you haven’t used it before—where you had no more than $300,000 in super at the previous 30 June and you met the work test in the last financial year.
You cannot contribute after 28 days after the end of the month in which you turn 75. Only employer mandated award and SG contributions can be made.
Whilst the age to make super contributions without meeting the work test or WTE has been extended to people aged 65 and 66, the extension of the NCCs bring-forward rule for people in this age group hasn’t—yet. Unfortunately, the legislation allowing 65 and 66-year-olds to use the bring-forward arrangements is still sitting in Parliament.
Until it becomes law, only those under age 65 at 1 July can avail themselves of the bring-forward rule. Consequently, 65 and 66-year-olds may be stuck with making NCCs of only $100,000 in the current financial year and $110,000 in 2021/22 if it’s still not law.
In all likelihood it will go through Parliament—it’s only a matter of time—so keep an eye out if this applies to you.
Note that the age restriction, work test and TSB test don’t apply to downsizer contributions.
The long-awaited indexation of the contribution caps and the transfer balance cap is a breath of fresh air for the superannuation system. It was hoped that it would have occurred last year—but didn’t. So, it is great news it’s finally happening this year.