The new proposal provides for an annual NCCs cap of $100,000 per financial year (‘FY’) from 1 July 2017. The current $180,000 per FY NCCs cap will apply for FY2017.

The rule that allows individuals aged under 65 to be able to ‘bring forward’ three years’ worth of NCCs will continue to apply. However, since the annual NCCs cap will reduce to $100,000 per FY, the maximum amount of NCCs that can be brought forward will be reduced from $540,000 to $300,000 from 1 July 2017. (The bring forward rule broadly applies to those under 65 years.)

Where an individual has not fully used their ‘bring forward’ NCCs cap before 1 July 2017, special transitional arrangements apply. These transitional arrangements are discussed below.

The new superannuation balance cap

Individuals will also no longer be eligible to make NCCs if their superannuation balance is more than $1.6 million from 1 July 2017. This $1.6 million threshold will be indexed in line with the $1.6 million balance cap (ie, the $1.6 million balance cap is the maximum amount on which the pension exemption will apply to pension assets in a member’s retirement phase account from1 July 2017). We will refer to the new limit that precludes further NCCs as the ‘superannuation balance cap’.

The table below summarises the NCCs caps that existed and that have been announced by the Government since 2 May 2016 (ie, the day before the Budged).

* The NCCs cap is subject to the lifetime NCCs cap of $500,000.
** The NCCs caps are subject to the superannuation balance cap of $1.6 million as indexed.

Who are the individuals primarily affected?

This revised proposal will allow more individuals to build a superannuation balance cap to attain their $1.6 million pension balance cap in their retirement phase. The $1.6 million balance cap (plus earnings and growth on that balance) will be the maximum amount of assets that can enjoy tax-free earnings subject to the special rule below where a member can exceed the $1.6 million threshold. However, from 1 July 2017, the superannuation balance cap for the prior 30 June will broadly include earnings and growth in measuring whether any further NCCs can be made.

Transitional arrangements

The Government has announced that there will be transitional arrangements. Broadly, for those individuals who have not fully utilised their $540,000 bring forward NCC' cap, there will be a reassessment of their remaining bring forward amount where the bring forward period spans 30 June 2017 to reflect the new annual caps. The transitional arrangements for those individuals who have not fully used their $540,000 bring forward NCC' cap before 1 July 2017 are briefly summarised as follows:

‘Bring forward’ rule triggered pre-1 July 2017 and NCCs to be made in reliance on the ‘bring forward’ rule post-1 July 2017

• If the ‘bring forward’ rule was invoked in FY2016 and the individual intends to make further NCCs under the ‘bring forward’ rule in FY2018, then the remainder of their NCCs cap at 1 July 2017 is $460,000 less the amount of NCCs that they made in FY2016 and FY2017.
• If the ‘bring forward’ rule was invoked in FY2017 and the individual intends to make further NCCs under the ‘bring forward’ rule in FY2018 and/or FY2019, then the remainder of their NCCs cap at 1 July 2017 is $380,000 less the amount of NCCs that they made in FY2017.

‘Bring forward’ rule triggered pre-1 July 2017 and no further NCCs in reliance on the ‘bring forward’ rule post 1-July 2017

• If the ‘bring forward’ rule was invoked in FY2016 and the individual does not intend to make further NCCs under the ‘bring forward’ rule in FY 2018, then the individual is entitled to make NCCs of up to $540,000 prior to 1 July 2017. Where the individual has made NCCs amounting to $460,000 or more, then the remainder of their NCCs cap at 1 July 2017 will be reassessed to nil.
• If the ‘bring forward’ rule was invoked in FY2017 and the individual does not intend to make further NCCs under the ‘bring forward’ rule in FY2018 and/or FY2019, then the individual is entitled to make NCCS of up to $540,000 prior to 1 July 2017. Where the individual has made NCCs amounting to $380,000 or more, then the remainder of their NCCs cap at 1 July 2017 will be reassessed to nil.

Careful planning is therefore needed before making further contributions where the ‘bring forward’ NCCs cap has been invoked before 1 July 2017.

Given one of the subsidiary objectives of superannuation is an aim for simplicity, a much simpler alternative would have been for those who invoked the bring forward three year rule before 30 June 2017 to have the remaining balance of the $540,000 cap. However, unfortunately, this is not the case.

Practical application of the $1.6 million cap

The Government has stated in its Superannuation Fact Sheet:

The $1.6m eligibility threshold will be based on an individual’s balance as at 30 June the previous year. This means if the individual’s balance at the start of the financial year (the contribution year) is more than $1.6m they will not be able to make any further non-concessional contributions…

Thus it appears that a member can make additional NCCs if their superannuation balance falls below $1.6 million in subsequent years even if they have previously fully utilised their $1.6 million (pension) balance cap.

The Government has also stated in its revised Superannuation Fact Sheet 04 dated 20 September 2016 that where an individual’s balance is near $1.6 million, ‘they will only be able to make a contribution in that year and access the bring forward of future years contributions that would take their balance to $1.6 million’.

We have extracted a table from the Superannuation Fact Sheet 04 that indicates the amount of contribution and ‘bring forward’ available:

It appears from the above table that an individual can contribute and exceed their superannuation balance up to just under $1.7 million without breaching the new superannuation balance cap rule that is proposed.

Naturally, monitoring systems will need to carefully track balances and contributions especially where a member has accounts in several different funds where the complexity of the super system is likely to increase considerably.

Daniel Butler, director and Joseph Cheung, lawyer, DBA Lawyers