The $1.6m transfer balance cap explained

Now that all three tranches of the Federal Budget’s proposed superannuation reforms have been introduced to parliament, greater clarity has emerged regarding the mechanics of the $1.6 million transfer balance cap and its interaction with non-concessional contribution caps (‘NCC’). This information is particularly relevant for accountants in Sydney who deal with superannuation matters.

What is this $1.6m transfer balance cap?

• The $1.6m cap is a limit an individual can transfer into the pension phase from 1 July 2017. Any excess amount will be maintained in an accumulation account (where earnings will be taxed at 15%).
• Depending on the member’s balance as of 30 June of the previous year and their NCC history, they may be restricted to the amount of NCC that can be contributed (e.g. no NCCs will be permitted for the member once their super balance exceeds $1.6m).

NCC caps – which one applies?

Current rules (for 2016/17) – a member’s annual NCC cap each year:

• 6 times the concessional contributions cap of $35,000 (i.e. maximum of $180,000); or
• Maximum 3-year bring forward NCC cap of $540,000 regardless of total super balance.

Proposed rules (for 2017/18 and in the future) – a member’s annual NCC cap each year:

• 4 times the new concessional contributions cap of $25,000 (i.e. maximum of $100,000 for 2017/18); or
• Maximum 3-year bring forward NCC cap (will vary depending on prior year NCCs made and their total super balance on 30 June of the previous year); or
• Nil if the member’s total super balances exceed $1.6m on 30 June of the previous year.

Here are a couple of examples:

Donald and Melissa are both members of an SMSF. Donald has a total balance of $1.58m on 30 June 2017, so his NCC cap for 2017/18 will be $100,000.

Melissa had a total balance of $2.2m on 30 June 2017, so her NCC cap for 2017/18 will be $0.

Now bring forward rules from 1 July 2017

To be eligible to make NCCs from 1 July 2017, the following eligibility criteria must be met:

• The member contributes more than the annual cap of $100,000;
• The total super balance is less than the general transfer balance cap of $1.6m;
• The member was under the age of 65 at any time during the financial year;
• The bring forward rule was not triggered in the last 2 financial years; and
• The difference between the general transfer balance cap of $1.6m and the member’s total super balance is higher than the general NCC cap of $100,000.

Here are some more examples:

Michelle is 55 years old, and her total balance on 30 June 2017 was $500,000. She has not previously triggered the bring forward rule. On 1 August 2017, she made an NCC of $200,000 – is she eligible for the bring forward NCC cap?

Yes, because she has met all of the eligibility criteria.

Bob is 63 years old, and his total balance on 30 June 2017 was $1.55m. He has not previously triggered the bring forward rule. He would like to make an NCC of $170,000 during 2017/18 – is he eligible for the bring forward NCC cap?

No, because he has not met the eligibility criteria – the difference between the available transfer cap ($1.6m) and his total super balance ($1.55m) is not higher than the general NCC cap ($100,000). But he can still contribute up to his annual cap of $100,000 for 2017/18.

Transitional bring forward rules from 1 July 2017

The available bring forward cap for a member will be 2 or 3 times the annual cap (i.e. $380,000 or $460,000 as per the below calculation). The caps may differ for each individual due to their total super balance as of 30 June the previous year and/or any unused bring forward balance during the 3-year period.

Here is another example for you:

Faye is 49 years old with a total super balance of $750,000. In December 2015, she made an NCC of $250,000 and no further NCCs during 2015/16 – as such, she triggered the current bring forward cap of $540,000.

So in Year 2 (2016/17), her available NCC cap will be $290,000 = $540,000 – $250,000 (year 1 contribution).

If she then makes an NCC of $100,000 in 2016/17, then her remaining NCC cap for Year 3 (2017/18) would meet the transitional rules (i.e. in Year 3 (2017/18), her available NCC cap will be $110,000 = $460,000 (transitional cap) – $250,000 (Year 1 contribution) – $100,000 (Year 2 contribution).

In summary, The NCC cap remains at $180,000 or $540,000 under the 3-year bring forward rule until 30 June 2017.  Though the above changes from 1 July 2017 are unlegislated, they have now been introduced to parliament. Nonetheless, contributions made in 2016/17 may impact the following year if these draft proposals are passed.

There will be a significant need to put strategies in place running up to 30 June 2017 to maximise opportunities with superannuation.

If you have any questions in relation to the above, feel free to reach out and contact us.

Kreston Stanley Williamson Team

*Correct as of November 2016

Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.