I receive a lot of questions from readers seeking information about how the non-concessional (after-tax) super contributions rules work; in particular, how the bring-forward rule works. More recently I have received several emails from readers who have fallen foul of the bring-forward rules and received excess contributions tax statements from the Australian Tax Office.
1. What is the bring-forward rule?
The annual non-concessional (after-tax) contributions cap is $150,000 (for the 2013/2014 year), although Australians under the age of 65 have the opportunity to bring forward two years of non-concessional contributions.
If you’re under the age of 65, once you contribute more than $150,000 in a financial year, you automatically trigger the bring-forward rule for the following two years.
The bring-forward rule means that it is possible to make up to $450,000 (for the 2013/2014 year) in non-concessional contributions in a single financial year, or, say, for example, $300,000 in the first year and the balance of $150,000 over the following two years, or any financial combination that adds up to $450,000 over the 3-year period.
2. Does the bring-forward rule protect Australians from exceeding the annual non-concessional contributions cap of $150,000?
If you’re aged 64 (or under) when you contribute more than $150,000 in non-concessional contributions in one year, you automatically trigger the bring-forward rules for the following two years. You would only be subject to penalty tax (of 46.5%) if you exceed $450,000 in non-concessional contributions in one year, or you exceed $450,000 in non-concessional contributions over the 3-year period.
Based on several recent emails from readers, I strongly suggest you check the date/s when you made non-concessional contributions in previous financial years if the size of your total non-concessional contributions for a financial year were close to the annual $150,000 cap, and you don’t believe you have triggered the bring-forward rules in the past. You don’t want to get an excess contributions tax surprise because your non-concessional super contributions were recorded in the wrong financial year, triggering the bring-forward rules without your knowledge.
Note: If you’re aged 63 or 64 and you’re planning to take advantage of the bring-forward rules then Fact 6, later in the article, is essential reading.
If you’re aged 65 or over however (and you don’t fall within the one-off over-65 exception – see Facts 8 and 9 later in the article), contributing more than $150,000 in non-concessional contributions in one year means that you exceed the contributions cap and the excess non-concessional contributions will be subject to penalty tax of 46.5%.
3. Can my spouse also take advantage of the bring-forward rules?
The annual non-concessional (after-tax) contributions cap applies to each person, which means a couple can make up to $300,000 in non-concessional contributions (combined) for the 2013/2014 year. If the couple are both under the age of 65, then they can make up to $900,000 over a three-year period (potentially paid in a single $450,000 contribution in year 1 for each individual) if they take advantage of the bring forward rules.
4. Can I play catch-up with my contributions? Can I make $450,000 in non-concessional contributions in Year 3, representing my caps for Years 1, 2 and 3?
You can’t play catch-up with the annual cap, or the bring-forward rules — a ‘bring forward’ can only relate to contributions for future years, not past years. If you fail to utilise your non-concessional cap for one or more years, then the cap for those years is gone forever.
Note: The annual non-concessional cap of $150,000 is available until you reach the age of 74.
5. If I make a $250,000 non-concessional contribution in Year one, can I then make a $200,000 in Year 2, and then trigger another bring-forward in Year 3 and contribute a further $450,000?
No, that’s not how the bring-forward rule works. If you make a $250,000 after-tax contribution during the 2013/2014 year, say on 15 March 2014 (Year 1), that contribution triggers the bring-forward rule for the next two years (Years 2 and 3). You then can only make a further $200,000 in non-concessional contributions during the two-year period that ends on 30 June 2016 (Years 2 and 3). You could only make the additional $450,000 non-concessional contribution in Year 4 (from July 2016 onwards, using our example), assuming you’re under the age of 65.
I provide further practical examples of how the bring-forward rule works in the article Your 2013/2014 guide to non-concessional (after-tax) contributions.
6. I’m 63 (turning 64 during the year). Can I make a $450,000 non-concessional contribution representing my cap for this year, and the next two years without satisfying a work test?
If you’re under the age of 65, you can bring forward up to two years’ worth of non-concessional contributions, which means you can make up to $450,000 in super contributions in one year, representing your non-concessional (after-tax) cap over a three-year period.
If you’re aged 63 or 64, you can take advantage of the ‘bring forward’ rule without satisfying the over-65 work test rules that would normally apply to contributions that cover future years. What this means is: even though the contribution of $450,000 in year 1 represents some of your cap for year 3 (when you’re age 65), you don’t need to satisfy the work test in Year 1, at the time of making the super contribution.
Note: This specific treatment for those aged 63 or 64 does not mean that you can carry the bring-forward rule beyond the age of 65. What this treatment means is that you can beef up your super contributions before you turn 65, even though you’re bringing forward your caps from a year, or years that relate to when you would have already turned 65.
7. What happens when I turn 65?
The bring-forward rule is not available if you’re aged 65 or over. The maximum an individual aged 65 or over can contribute is $150,000 (for the 2013/2014 year) in a single financial year, and they must also satisfy a work test. If a person is aged 65 years or over and exceeds the $150,000 non-concessional cap, then the excess contributions are subject to a whopping 46.5% penalty tax.
8. What happens if I turn 65 during a financial year?
If an individual is 64 years or less on 1 July of a financial year, then they can take advantage of the bring-forward rule during that entire financial year. What this means is: an individual turning 65 during a financial year can make a $450,000 non-concessional contribution in the financial year that they turn 65, assuming they have not previously triggered a bring-forward that covers this financial year. See also Facts 9 and 10.
9. Okay, but what if I make the contribution after turning 65, even though I am under 65 on 1 July?
If an individual is 64 years or less on 1 July of a financial year, then they can take advantage of the bring-forward rule during that entire financial year. If you were 64 years on 1 July of the financial year, and after turning 65 during that financial year, you decide to make a super contribution, then you must satisfy the work test before contributing. The work test involves working 40 hours over a 30-day period in the financial year in which you make the contribution. I explain the work test in the article For over-65s: Ten super tips when making contributions.
Note: If you were 64 years on 1 July of the financial year, the bring-forward rule is available; and if you make the non-concessional contributions before turning 65 during that financial year, then you do not have to satisfy a work test.
Important: If an individual is 65 years or over on 1 July of a financial year, then the maximum annual non-concessional contribution is $150,000 (for the 2013/2014 year) for that financial year, for such an individual – the bring-forward rule is no longer available.
10. Great, so does that mean that I can make a single super contribution up to $450,000 after turning 65, because I was under 65 on 1 July?
The situation we refer to is an exception, but yes, an individual who is 64 years or less on the 1 July of the financial year, can make non-concessional contributions up to three times the amount of the non-concessional contributions cap in that financial year. For the 2013/2014 year, the annual non-concessional cap is $150,000, which means an individual who satisfies this exception can make up to $450,000 in non-concessional contributions that financial year. In such a specific circumstance, if you make the non-concessional contributions (including triggering the bring-forward rules during that year) after turning 65 during the financial year, then you must you satisfy the work test.
Note: If you make the non-concessional contributions before turning 65, then you don’t have to satisfy the work test.