Indexation applied to concessional contributions from 1 July 2021 could effectively diminish the total super balance (TSB) limits that determine whether individuals can make non-concessional contributions, a technical specialist has said.
SuperGuardian education manager Tim Miller recognised this situation could arise due to a mismatch in the methods determining indexation for concessional contributions and indexation for the TSB.
To this end, indexation for concessional contributions is based on average weekly ordinary time earnings, while the determining factor for TSB indexation is the consumer price index (CPI). Due to the economic effect of the coronavirus on these two measures, it is highly likely indexation will be triggered for the concessional contributions cap while indexation for the TSB will not, Miller said.
The concessional contributions cap would increase to $27,500 a year from 1 July 2021 as a result of indexation, which would in turn raise the non-concessional contributions cap to $110,000 or four times the concessional cap, he added.
“[The increased non-concessional cap] means if you have a client with a TSB between $1.49 million and $1.6 million, they’d be able to make one year’s worth of non-concessional contributions. [If they have a TSB] between $1.38 million and $1.49 million, then they’d be able to make [a non-concessional contribution of] $220,000, so utilising two years’ [contributions], and [if they have a TSB of] less than $1.38 million, then they would have the capacity to use [three-years’ non-concessional contributions of] $330,000,” he noted.
Currently an individual can make non-concessional contributions of $100,000 if their TSB is $1.5 million to less than $1.6 million, $200,000 if their TSB is $1.4 million to less than $1.5 million, and $300,000 if their TSB is less than $1.4 million.
“So by virtue of negative CPI what we’re actually seeing is currently [the TSB amount allowing a person to bring forward three-years’ non-concessional contributions] sits at $1.4 million and we’re actually going to see a diminishing value there of what your balance can be to be able to utilise the full bring-forward provisions,” Miller said.
According to Miller, once indexation is activated, an additional level of complexity will be added to contributions strategies advisers might recommend for their clients.
“When we’re starting to have to subtract one year’s worth of non-concessional amounts from the total super balance to work out whether we’re entitled to the bring-forward amount, we’re going to create issues for our clients because we’re going to have clients that do the wrong thing and so we need to be able to help guide them through it,” he said.