How is the ‘bring forward rule’ triggered, and what happens when the $450,000 cap is only partially used at or around the time a client turns 65? Colonial First State’s technical services team explains.
One of the most common questions from financial advisers concerns the rules around making non-concessional contributions and the ‘bring-forward rule’.
These questions generally arise as part of a strategy to maximise a client’s superannuation savings before the client ceases to be eligible to contribute to super.
Of particular importance is how the bring-forward rule is triggered, and what happens where the $450,000 cap is only partially used at or around the time a client turns 65.
Part of the confusion around contributions and the caps comes from the fact that there are separate pieces of legislation that govern how contributions are made, in terms of eligibility to contribute, and then any excess contributions assessment.
When looking at a particular client, the first step is always to ask, ‘Can the client contribute to superannuation?’ If the answer is yes, then you can determine how much can be contributed without exceeding contribution caps.
Can your client contribute to superannuation?
The ability to make a contribution to super is governed by the Superannuation Industry (Supervision) (SIS) regulations.
Eligibility is based on the client’s age on the date the contribution is made, and generally requires the client to either be under age 65 at the time of the contribution, or meet the work test during the financial year prior to making the contribution.
How much can your client contribute tax-effectively to superannuation?
The amount that can be contributed tax-effectively is determined by reference to both:
- The Income Tax Assessment Act 1997, in relation to the client’s contribution cap, and
- The SIS regulations, in relation to the fund-capped limit relevant to the client. This is the maximum single contribution that a fund may receive from a client and is related to their non-concessional cap.
In both cases, the amount that can be contributed during a financial year is determined by the client’s age on 1 July of that financial year.
Triggering the bring-forward rule – in the year your client turns age 65
The bring-forward rule can only be triggered in a year in which your client is age 64 or less on 1 July.
The trigger is contributing more than $150,000. Where a client has triggered the bring-forward rule in the financial year they turn age 65, they may continue to have access to the bring-forward remaining for the next two financial years.
This means that where a client has more than $150,000 of non-concessional cap left under the bring-forward rule, it may still be contributed to superannuation. This is despite the fact that the client is not age 64 or less on 1 July in either of the next two financial years.
The key is this: a superannuation fund cannot accept a single contribution of more than $150,000 where the client is 65 or more on 1 July. This means that if the contribution is more than $150,000 it must be made over two or more transactions.
To avoid any doubt, it is recommended that these contributions be made on separate days and be clearly identified through both banking transaction and contribution paperwork as distinct contributions.
These concepts are best illustrated with an example.
Example
Cersie turned age 65 in February 2012 and will continue to meet the work test for several years. She has $200,000 available to contribute this year, and will sell a property worth $250,000 in 2 years time when she is 67.
Q: Can Cersie contribute to superannuation in March 2012, having turned 65?
A: Yes, because she is aged 65 but less than 75 and has met the work test during 2011-12 prior to making the contribution.
Q: How much can she contribute in March 2012?
A: Cersie can contribute the full amount of the $200,000 she wishes to, because she was aged 64 on 1 July of the 2011-12 financial year. Her non-concessional cap under the bring forward rule is $450,000. Note that by contributing more than $150,000, she automatically triggers the bring forward rule.
Q: Can she contribute in 2013-14?
A: Yes, because she is aged 65 but less than 75 and meets the work test: that is, she has worked for 40 hours in 30 consecutive days for gain or reward, prior to making the contribution.
Q: How much can she contribute?
A: She can contribute a total of $250,000.
However this must be contributed over at least two separate transactions, for example $150,000 and $100,000. Cersie has $250,000 remaining of her non-concessional cap that can be contributed under the bring-forward rule.
The fund cannot accept a single contribution of more than the $150,000 fund-capped limit, so it must be split over at least two transactions.
Diagrams 1 and 2 will help advisers make decisions about whether their clients can make a non-concessional contribution, and if so exactly how much.
By Colonial First State’s technical services team.
