Super Contribution Caps Set to Increase from 1 July 2021
For the first time since July 2017, the concessional and non-concessional super contribution caps are set to increase. For those eligible, this means they can improve their superannuation savings and have more monetary security in retirement.
This comes as a nice surprise following the announcement 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. This announcement has provided certainty around indexation and how it will impact contribution caps.
So, how do the changes to super contribution caps work? And how can you make the most of them?
Increase in concessional (pre-tax) contributions cap
Firstly, concessional contributions are those made into your superfund before tax and therefore, taxed at a rate of 15% within your super fund.
Since 1 July 2017, the indexation of the concessional contributions cap takes place in $2,500 increments. The standard cap since 2017 has been benchmarked at $25,000 per annum and as of 1 July 2021 will now increase to $27,500 per annum. However, be aware that if the superfund’s administration fees and/or the insurance premium are paid by the employer on your behalf, they also count towards your cap.
e.g.: A fund member who is under the age of 67 makes a concessional contribution of $25,000 to her super fund so she can make a tax deduction claim. From 1 July, she will now be able to contribute $27,500 and continue to claim a tax deduction.
Increase in non-concessional contributions cap
Non-concessional contributions are made after-tax income and are not taxed within your superannuation fund. As of 1 July 2021, the cap will increase four times the concessional contribution to $110,000 (4 x $27,500). Overall, this means that non-concessional caps will increase from $100,000 to $110,000.
The eligibility for making a non-concessional contribution is determined by your total superannuation balance (TSB). As of July 1, the TBC increase to $1.7 million means that if your TSB is less than $1.7 million on 30 June 2021, you may be allowed to make after-tax contributions of at least $110,000 in the 2021-22 financial year.
e.g.: A 55-year-old fund member has a total super balance of $450,000 as of 30 June 2021 and wishes to make a non-concessional contribution of $105,000 on 16 August 2021. As his non-concessional contribution is below $110,000, he can make it without a penalty.
A summary of the changes to concessional and non-concessional caps are found in Table 1.
Table 1: Changes to concessional and non-concessional super contribution caps.
The bring-forward rule
A member’s TSB also determines their entitlement to use the non-concessional bring-forward rule to transfer more into super. This means that if you did not utilise a bring-forward arrangement in either 2019-20 or 2020-21 and your TSB is $1.48 million to less than $1.59 million (as of 30 June 2021), then you can contribute up to $220,000.
As your TSB decreases the amount you can contribute steadily increases. Where you have less than $1.48 million then you may be able to contribute up to $330,000. If your TSB is $1.7 million or more, you are unable to contribute. This information is shown in Table 2.
Table 2: Bring-forward rule for non-concessional contributions
Eligibility to contribute
Eligibility to contribute is dependent on your age. If you’re 64-74 years old, you must meet the work test (40 hours of employment in 30 days) or receive a work test exemption to contribute. Anyone under the age of 67 can contribute.
Provided you have not used the work test exemption before, it may be used to contribute super if you had no more than $300,000 in super at the previous June 30. You must also have met the work test the previous year.
However, the non-concessional contribution bring-forward rule has not been extended to the ages 65 and 66. Only those under the age of 65 on 1 July 2021 can utilise the bring-forward rule. Therefore, those aged 65-66 may have to make non-concessional contributions of $100,000 in 2020-2021 and $110,000 in 2021-2022. However, the legislation is currently sitting in parliament so watch this space to see if this applies to you.
If you have any questions about the new super contribution caps or need advice on a related matter, get in touch with the Provide Wealth specialists.