Did freezing indexation of the contribution caps change anything?

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When the Simpler Super reforms (the Tax Laws Amendment (Simplified Superannuation) Act 2007) were brought in a $ 50,000 Concessional Contributions cap was introduced. This amount was supposed to be indexed annually to the increase in AWOTE (Average Weekly Ordinary Time Earnings) in $ 5,000 increments rounded down. However the 2014/15 year will be the first in which the Concessional Cap will be indexed:

Increase in Concessional Contribution Cap from Indexation

Increase in Non-Concessional Contribution Cap from Indexation

It may appear at first that this lack of increase in the cap was due to the repeated freezing of indexation – in 2009 the Tax Laws Amendment (2009 Budget Measures No 1) Act 2009 dropped the Concessional cap to $ 25,000 for the 09/10 year, with it to be indexed from 2010/11. However in 2012 the Tax and Superannuation Laws Amendment (2012 Measures No 1) Act 2012 extended the freeze on indexation from to 2013/14 by fixing the cap at $ 25,000.

The following superannuation related provisions are indexed under s960.25 of the Income Tax Assessment Act 1997 – but only item 9 of the table was frozen:

ItemTopicProvision
9Excess concessional contributions – concessional contributions capsubsection 291-20(2)
10Excess non-concessional contributions tax on superannuation contributions – index amount (CGT cap amount)subsection 292-105(4)
11Superannuation benefits – index amount (low rate cap amount)subsection 307-345(4)
12Superannuation benefits – index amount (untaxed plan cap amount)subsection 307-350(4)

Source: s960.265 Income Tax Assessment Act 1997

Note: The concessional cap is indexed compared to the 2008 year, while the other caps are indexed based on the 2006 year.

 

The other caps have all increased since they were implemented, some significantly:

Cumulative Increase in Superannuation Caps from Indexation

Per Year Increase in Superannuation Caps from Indexation

However not freezing the caps would have made little difference to the current concessional contributions cap. As the indexation is an increase against the base amount of the cap a larger cap will increase by much more, and more often, than a lower cap.

Using the AWOTE figures from the ATOs website, the amount of indexation which would have applied to a $ 50,000 Concessional Cap can be calculated, as compared to the amount applying to a $ 25,000 Cap – if indexation had not been frozen. The results are show in the following graph:

Indexation of Concessional Contributions Caps

With a $ 50,000 cap indexation increases occur every two years during the period, to a total of $ 65,000 by 2014/15. This compares to the increase to $ 30,000 of the $ 25,000 cap – which is where it is now. So the freezing of the indexation was redundant once the cap was dropped to $ 25,000, though this could not have been know for certain at the time – a large increase in AWOTE could have increased an indexed cap of $ 25,000, though this would have been unlikely.

So how would this have changed the Non-Concessional Cap? As it is not directly indexed, but is based on Concessional Cap – firstly at 3 times, and then later when the Concessional cap was halved at 6 times, it too would have increased every two years in the period, as shown in the following graph:

Indexation of Non-Concessional Contributions Caps

With an indexed $ 50,000 Concessional Cap the Non-Concessional cap would have reached $ 195,000 in the 2014/15 year instead of $ 180,000. This is based on a Non-Concessional Cap 3 times the Concessional Cap, which a reasonable assumption given the move to a 6-times cap was so that the Non-Concessional Cap remained the same when the Concessional Cap was halved.

Note, the transitional contribution caps are not discussed in this article as they and aren’t eligible for indexation – indeed expectation that indexation will exceed the current transitional cap of $ 35,000 is written into the legislation.

So despite the freezing of indexation of the Concessional Contributions cap, once the cap dropped to $25,000 it was not going to increase until the 2014/15 year anyway – it was really the decrease in the cap which determined the indexation.

 

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