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How to make the most of higher super contribution caps

Depending on your age and how much you’ve already got in retirement savings, after July 1 the new pre-tax cap will be $27,500 and the after-tax cap $110,000.

From July 1 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 learned 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 July 1.

Now, following the release of the Average Weekly Ordinary Times Earnings figure on February 25, the limit on the amount you may get into super will also increase – the first time this has happened since the new superannuation regime started on July 1, 2017.

Concessional (pre-tax) contributions

From July 1, 2021, the concessional contributions cap is being indexed from $25,000 to $27,500.

These are pre-tax super contributions and include an employer’s compulsory award and Superannuation Guarantee (SG) and additional voluntary contributions – including salary sacrifice – and personal contributions you may make for which you claim a tax deduction.

For people making voluntary pre-tax contributions, the increase in the 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 cap.

The SG rate is legislated to increase from 9.5 percent to 10 percent from July 1, but there is considerable lobbying 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 concessional contributions from July 1 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 to make additional contributions by utilizing unused cap amounts from previous years – then you can only do it where you didn’t utilize the full $25,000 cap in 2018-19 and/or 2019-20, and your total superannuation balance – the total of everything you have in the super system – at June 30, 2020, was less than $500,000. The opportunity arises from unused cap amounts from previous years and until July 1 this year, the concessional contribution cap is $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 may be $52,500 (up from $50,000) with the second contribution now being up to $27,500 because it’s being tested against the cap in 2021-22 – and don’t forget to allocate this contribution by July 28.

Non-concessional (after-tax) contributions

From July 1, 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 cap – currently $100,000 – is four times the concessional contribution cap. Accordingly, with the concessional cap increasing to $27,500, the non-concessional cap will increase to $110,000.

Your total superannuation balance (TSB) determines your eligibility to make non-concessional contributions and relates to the general TBC.

With the TBC increasing to $1.7 million from July 1, it means that if your TSB on June 30, 2021 is less than $1.7 million you may be able to make after-tax contributions of at least $110,000 next financial year (ie, in 2021-22). Without indexation of the TBC, you would have been unable to contribute if you had between $1.6 million and $1.7 million in super.

Your TSB also determines your entitlement to use the non-concessional bring-forward rule to get more into super. So, combining both the higher non-concessional cap and TSB amount, 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 June 30, 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.

Salary-sacrifice and personal contribution rules

Your eligibility to contribute to super is dependent on your age. Anyone under 67 may contribute, but if you’re 67-74, you must meet the work test (40 hours of gainful employment in 30 days) or work test exemption to contribute.

The work test exemption 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 June 30 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 awards and SG contributions can be made.

While the age to make super contributions without meeting the work test or work test exemption has been extended to people aged 65 and 66, the extension of the non-concessional contribution bring-forward rule for people in this age group hasn’t – yet. Unfortunately, the legislation allowing those aged 65 and 66 to use the bring-forward arrangements is still sitting in Parliament.

Until it becomes law, only those under 65 on July 1 can avail themselves of the bring-forward rule. So those aged 65 and 66 may be stuck with making non-concessional contributions 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.

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