Three-year bring-forward rule for super contributions

 

Update: note the potential changes announced in the 2016 Budget.

The three-year bring-forward provision allows some super fund members to use three times the non-concessional contributions cap during a three-financial year period. For example, a member may have a $ 150,000 non-concessional contributions cap, and they could make the following contributions without triggering excess contributions tax:

  • Year 1: $ 200,000
  • Year 2: $ 200,000
  • Year 3: $   50,000

Or:

  • Year 1: $ 450,000
  • Year 2: $            0
  • Year 3: $            0

Though, of course, not the full amount of the three-year bring-forward needs to be used once triggered.

Also care must be taken when using the three-year bring-forward, as even small errors can lead to large amounts of contributions tax – in some cases 93% or even higher of the original contributions.

The three-year bring-forward rule is created by section 292.85 of the Income Tax Assessment Act 1997, which effectively says that where:

  • The non-concessional contributions in the first year are over the non-concessional contributions cap, and
  • The member was under age 65 at any point in the first financial year
  • Then, the normal non-concessional contributions cap doesn’t apply

Instead the non-concessional contributions cap for the first year and the subsequent two financial years is three times the non-concessional contributions cap of the first year. If the contributions during this three-year period exceeds three times the non-concessional contributions cap than this will trigger excess contribution tax. This is where errors in contributions can trigger large excess contributions tax.

Say that a member’s non-concessional contributions cap was $ 150,000, they had thought they had contributed $ 150,000 in the previous year and were going to contribute $ 450,000 in the current year. However they were $1 over the contribution cap in the first year:

  • Year 0: $ 150,001
  • Year 1: $ 450,000
  • Year 2: $            0
  • Year 3: $            0

Instead of triggering the cap in year 1, the $1 of contributions in year 0 has triggered the three-year bring-forward and the three years are not years 1-2-3, but years 0-1-2.  So the total non-concessional contributions for the three-year period are $ 600,001 – $150,001 over the non-concessional contributions cap. This is one reason why care is required when trying to maximise contributions to super and when using the three-year bring-forward. It should also be noted that under some circumstances concessional contribution can also count against the non-concessional cap – which cold trigger the three-year bring-forward early.

The Superannuation Industry (Supervision) Regulations 1994 reg 7.04(3) allows a super fund to accept a contribution which is three times the non-concessional contributions cap for a member who is “64 or less on 1 July of the financial year“. However see below how the wording of this regulation can cause some issues.

Three-year bring-forward with higher non-concessional contributions cap

ITAA 97 s292.85(4) says that “your cap for the first year is 3 times the amount mentioned in subsection (2) for the first year“. Which means that the once the three-year bring-forward is triggered the amount of the cap is not determined by the non-concessional cap for the current year, but the cap when the bring-forward was triggered, as confirmed by the ATO:

“Once you have triggered the bring-forward in a year, any change to the non-concessional (after-tax) contributions cap for the subsequent two years doesn’t apply to you”.

This wasn’t much of an issue when the non-concessional contributions can was effectively frozen at $ 150,000, but for the 2014/15 year it has increased to $ 180,000. So if the three-year bring-forward was triggered in 2013/14 or earlier the three-year cap would be $ 450,000, but if it was triggered in 2014/15 the three-year cap would be $ 540,000. The amount of the three-year cap in future years will depend on the indexation of the non-concessional contributions cap.

Importance of Age 65

If a member is under or over age 65 is important for the three-year bring-forward provision. The bring-forward can only be triggered by someone under the age of 65, at some point in the financial year.

However, this does not mean that someone who is 65 or older at 1 July cannot continue to use the three-year bring-forward. Where the three-year bring-forward was triggered in a year where the member was aged 64 or younger on 1 July, they could continue to make contributions under the three-year bring forward provide they:

  • meet the work test, and
  • keep any single contribution to less than the normal (not three-year bring-forward) non-concessional cap

This is because of the wording of SISR reg 7.04(3), which means that a super fund is not allowed to accept the full amount of a contribution greater than the non-concessional cap from a member over the age of 65.

The three-year bring-forward provision can be a powerful tool to increase superannuation savings – however it requires careful planning, monitoring and professional advice about the particular circumstances of the member.

 

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