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Indexation and contributions opportunities now and from 1 July
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BY AYTEN OZDER

While contribution caps are not expected to increase for the 2023/24 financial year, the ATO has confirmed the general transfer balance cap (TBC) will be indexed from 1 July 2023. This may provide some important contribution and advice opportunities for clients with large super balances.

Back in 2017 when the super system ended up with more acronyms than you could poke a stick at, the concept of total super balance (TSB) was introduced. One of its applications is to determine eligibility to make non-concessional contributions (NCCs) including those under the bring forward rule.

For this purpose, the TSB limits are based on both the general TBC and the annual NCC cap. Despite the NCC cap not looking likely to increase, indexation of the TBC will provide enhanced contribution opportunities and strategic advice considerations in the lead up to 1 July.

Average weekly ordinary time earnings (otherwise known as AWOTE) figures released by the ABS for the December 2022 quarter indicate based on the existing indexation rules, that there will be no indexation of the concessional cap, and therefore no change to the NCC cap.

Note that for some high balance clients, the proposed changes to taxation of super accounts in excess of $3 million will be top of mind. This article does not consider the appropriateness of ongoing super contributions for those who may be impacted if this proposal is made law.

TSB and the impact on NCC eligibility

The tables below summarise NCC eligibility based on TSB at the 30 June prior to the financial year in which an NCC is made (or that the bring forward rule is triggered, if applicable).
These limits are summarised for the current financial year, as well as the anticipated thresholds from 1 July 2023. As the tables indicate, the increase in the TSB thresholds mean that from 1 July an individual can:
  • Have up to $1.9 million (currently $1.7 million) in super to make an NCC up to the annual limit, and
  • Trigger either a two or three year bring forward period with a larger TSB, which may provide new or enhanced strategic advice opportunities to consider the timing of contributions over the coming months.
           

NCC advice opportunities and considerations

While new contribution opportunities may become available to high balance clients from 1 July, there is also an opportunity to:
  • Consider the timing of any contributions between now and the end of the financial year, to manage 30 June 2023 TSB. This could enable greater contributions to be made from 1 July; and
  • Review clients who are currently within a bring forward period and have cap space remaining but are currently ineligible because their 30 June 2022 TSB exceeds the current general TBC of $1.7 million.

Example 1: Managing TSB and contribution timing to maximise total contributions

Sarah (63) had a TSB of $1.47 million on 30 June 2022 and has capital available to contribute to super. As a result of indexation of the general TBC from 1 July, Sarah’s NCC cap and total contributions she can make will differ, depending on the timing of her contributions.

Option 1:

If Sarah maximises contributions this financial year, her TSB on 30 June 2023 will exceed the general TBC for 2023/24, meaning she is not eligible to make additional NCCs in 2023/24.              

^Assumed TSB based on contributions, fund earnings, less fees. *Assumes the general TBC and NCC caps are not indexed for simplicity. **If the general TBC is indexed from 1 July 2024, review the client’s TSB towards the end of 2023/24. As the general TBC is indexed in $100,000 increments, it would need to increase (to $2.1 million in Example 1, and $2.2 in Example 2) for the client to be eligible to make NCCs up to the annual cap. Additional strategies may be considered to manage TSB to maintain eligibility.

Option 2:

By making NCCs this financial year only up to the annual cap, Sarah’s projected TSB on 30 June 2023 will mean as a result of indexation to the TBC, she will be eligible to contribute an additional $330,000 next financial year, maximising her total contributions over this two-year window.            

Option 2B:

Alternatively, she could contribute up to the annual NCC cap early in Year 2 and wait until closer to the end of the 2023/24 financial year once there is more certainty about her upcoming 30 June TSB, as well as any indexation of the general TBC from 1 July 2024. Based on this information, she could either contribute the additional $220,000* at that time, or wait until after 1 July 2024, where she may have yet another opportunity to trigger the bring forward rule depending on her TSB, indexation of the caps and general TBC.

Example: Within bring-forward period, currently ineligible to make additional contributions

Mark (58) had a TSB of $1.47 million on 30 June 2021. Based on his age and TSB he was eligible to trigger the 3 year bring forward rule in 2021/22. He contributed $230,000, leaving an available NCC cap balance of $100,000.

However, the following year, his TSB on 30 June 2022 was $1.785 million. As this exceeded the general TBC at that time, he was ineligible to make NCCs during the 2022/23 financial year. This is because each year during a bring forward period, the 30 June TSB must be less than the general TBC to make additional NCCs in the following year.

However, when the TBC is indexed in 2023/24, if his 30 June 2023 TSB is less than the new increased general TBC of $1.9 million, Mark will be eligible to contribute the balance of his NCC cap to super from 1 July. Mark could contribute the full balance of up to $100,000, even though his actual TSB after the contribution will exceed the general TBC of $1.9 million. This is because TSB is only tested at the prior 30 June, and just needs to be below the general TBC at that time.
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