From a legislative development perspective, the Federal Government election result on 18 May 2019 has provided a more stable outlook for financial services professionals, at least over the short term. It is timely then to take stock of the current state of superannuation contribution options for clients now that the changes proposed by the Australian Labor Party are off the agenda.
The concessional contributions cap (CC) remains at $25,000 for the 2019-20 income year.
The annual CC cap is indexed with average weekly ordinary times earnings (AWOTE), but only when the accumulated indexation exceeds $2,500. An increase in the cap is unlikely to occur in the 2020-21 income year. An average increase in the AWOTE rate of 2.5% per annum will be required for the CC cap to increase to $27,500 in 2021-22.
Carry-forward of unused CC capacity
The 2019-20 income year is the first year a client's CC cap can be increased by the unused CC cap from previous years. The unused CC cap from the 2018-19 and subsequent income years will be carried forward for up to five years if the client's total superannuation balance (TSB) is less than $500,000 just before the start of the income year in which the increased CC cap is to apply. The 2018-19 income year is the first year the unused CC cap can be carried forward.
For example, if a client's CCs were $15,000 in 2018-19, that client may contribute CCs of up to $35,000 in 2019-20, or in a following year up to and including 2023-24, if their TSB is less than $500,000 just before the start of the year the contribution is made.
Deductibility of personal contributions
Personal contributions may generally (subject to age and notification requirements) be claimed as a tax deduction after the removal of the 'maximum earnings (10%)' test from 1 July 2017.
This measure allows employees to fully utilise their CC cap each year without entering into a salary sacrifice arrangement with their employer. Employers are able focus purely on meeting their superannuation guarantee (SG) obligations, potentially without the additional administration burden associated with offering salary sacrifice arrangements. Employees can target their CC cap more precisely by making personal contributions up to the CC cap in late June, hopefully with full knowledge of their employer's SG payments to date.
As the annual non-concessional contributions (NCC) cap is based on four times the CC cap, it remains at $100,000 in the 2019-20 income year. If the CC cap increases to $27,500 in 2021-22 (AWOTE of at least 2.5% per annum is required), the annual NCC cap will increase to $110,000 in that year.
The annual NCC cap is available to any client who is eligible to contribute to superannuation and has a TSB of less than $1.6 million just before the start of the income year. Clients are eligible to contribute if their age is less than 65 years at the time of the contribution or, if more than 65 years, they meet the 'work test' and make the contribution before the 28th day after the end of the month in which their 75th birthday occurs.
The work test generally applies from a client's 65th birthday. To satisfy the test, a client must have been gainfully employed for 40 hours in 30 consecutive days prior to making a contribution. Mandated employer contributions (ie. award or superannuation guarantee contributions) and downsizer contributions are exempt from this requirement.
From 1 July 2019, clients aged 65 to 74 are exempt from the work test in the income year following their retirement if their TSB just before the start of that income year is less than $300,000 and they satisfied the work test in the year of retirement.