01/04/2011

The Federal Government is currently considering a proposal to allow individuals aged fifty and above to make concessional contributions to their superannuation of up to $50,000 per annum from 1 July 2012.

This compares to the usual concessional cap of $25,000, an amount which is indexed to average weekly ordinary time earnings (AWOTE) in increments of $5,000.

Concessional contributions are those made by members of a super fund which are tax deductible for those members.  This is compared with non-concessional contributions which have a much higher limit ($150,000 per annum) but for which no tax deduction is allowed.

The new limit will only be available to those whose total superannuation account balance is below $500,000.  Account balances include all superannuation entitlements including accumulation and defined benefit interests, taxed and untaxed schemes.  The account balances will be aggregated to determine whether the $500,000 threshold has been exceeded.

The proposal comes at a time when the transitional concessional contribution cap is due to expire on 30 June 2012.  It is designed to fill in a gap to enable those who are close to retirement to make “catch up” contributions.

The Government estimates that about 275,000 individuals will benefit from this measure.  As the $500,000 threshold will not be indexed, it is anticipated that those who can benefit from the increased cap will progressively decline over time. 

With regard to self managed superannuation funds, the following additional measures will apply.

• The member’s share of the fund reserves will be included in the account balance.
• Only members of funds who report at net market value to the Australian Taxation Office will be eligible.
• The member’s withdrawal benefits will be used to calculate eligibility for the higher concessional contribution cap.  A member’s withdrawal benefit is defined as the total amount of benefits that would be payable if the member voluntarily ceases to be a member.

The challenge is to decide whether withdrawals are to be included in the calculation of the $500,000 threshold and how it should be administered. 

An individual’s superannuation account balance does not remain constant, but fluctuates through contributions, investment performance, earnings and withdrawals.  Three options have been provided by the Government in relation to the treatment of withdrawals.  Each of the options has drawbacks which are recognised in the Government’s consultation paper. 

1.    Include withdrawals in the account balance calculation.

Under this option, withdrawals will be recognised and will be added back to an individual’s account balance calculation.  The withdrawals will be indexed to AWOTE.  This would necessitate:

• the funds reporting all drawdowns including pension payments and lump sums to the ATO on an annual basis (withdrawals made on hardship grounds will be excluded)
• maintenance of lifetime records of cumulative indexed drawdowns for all individuals aged 50 and above; and
• careful selection of the date chosen to commence counting of drawdowns which will have ramifications, with various dates under consideration.

2.    Do not add withdrawals to the account balance.

Individuals who are able to meet the age and balance criteria will be eligible for the higher cap.  Withdrawals would not be added back to determine the account balance.  This will reduce the complexity associated with maintaining records and reporting withdrawals annually.  However, there is a concern that individuals may keep their balance below the $500,000 threshold through withdrawals and then subsequent re-contribute back to superannuation.

3.    Exclude those who have commenced withdrawals.

Under this option, those who have commenced drawing down any of their superannuation would be excluded from the higher cap. This option will avoid the complexity associated with reporting and maintaining lifetime records of withdrawals, but will exclude individuals whose account balance may be less than $500,000 but have commenced drawing down their superannuation.

It remains to be seen which option the Government will eventually adopt as each of them has its drawbacks and deficiencies.  Changes to the options may also be made after consultation.

Superannuation contributions can be maximised and enhanced through management of the contribution caps.  For example:

1.    It is possible for an individual to make non-concessional contribution (NCC) of $600,000 virtually simultaneously, subject to eligibility to make the relevant contributions, as follows:

                       Contribution           Amount
30 June 2011    NCC                       $150,000
  1 July 2011     Bring forward NCC   $450,000
                                                     $600,000

If there is a spouse, a couple together will be able to simultaneously contribute $1,200,000 to their self managed superannuation fund.

2.    In addition to the concessional and non concessional contribution caps, each individual also has a lifetime CGT retirement exemption limit of $500,000. Where a trust or company has two or more stakeholders, each stakeholder can also use their respective retirement exemption cap to reduce capital gains on disposal of an active asset of the business that satisfies the CGT retirement exemption requirements and make contribution to superannuation.

3.    Each individual also has a lifetime CGT cap which is $1,155,000 for the 2010-11 year of income.  This cap is indexed to AWOTE.

4.    It is also possible to make in specie contribution of business real property to superannuation through a combination of caps.  The shortfall in capital may be subsidised through gearing in superannuation under section 67A of the Superannuation Industry Supervision Act 1993.

For assistance in this area, please contact our Superannuation Special Counsel Maria Siu on (02) 8296 6222.