SUPER ALERT! On 3 May 2016, the federal government announced an IMMEDIATE cut to the non-concessional contributions cap, including a cessation of the bring-forward rule. Australians are now subject to a lifetime non-concessional cap of $500,000, rather than the annual cap of $180,000 (and the bring-forward rule allowing up to $540,000 over a 3-year period for under-65s). Although this change has immediate effect, from 3 May 2016 (7.30pm), it is still subject to legislation and subject to the Coalition winning the July 2016 Federal Election. Note that the non-concessional contributions caps explained in the article below no longer apply from 3 May 2016 (subject to legislation).
Q: Under the 2-year bring-forward of non-concessional contributions, if a person makes an after-tax contribution of $180,001 when age 64 during the 2015/2016 year, can he continue to contribute the balance of the $540,000 anytime during the next 2 years without having to satisfy the work test?
A: In this response, I explain how the bring-forward rule works when making non-concessional (after-tax) super contributions, and how these special rules operate if you’re aged 63 or 64, and an explanation of the work test for over-65s.
The short answer to your question is ‘no’: you cannot continue making super contributions beyond the age of 65, unless you satisfy a work test, although special contribution rules apply when an individual is aged 63 or 64.
In addition, anyone aged 65 or over can only make non-concessional contributions up to the annual cap each year, before penalty tax applies, or, alternatively, the individual withdraws the excess non0concessional contributions.
The special rules that apply when an individual is aged 63 or 64 mean that ‘yes’, an individual can bring-forward up to 2 years of non-concessional contributions in the year that they turn 63 or 64, but that doesn’t mean they can make super contributions beyond age 65 without satisfying a work test. Further, the bring-forward rule operates only when a person is under the age of 65.
Note: I suggest you also read the SuperGuide articles Turning 65: Maxing out the after-tax contributions cap and Super contributions: Turning 65 part-way through the year, explaining a strange quirk in the work test rules where an individual is under the age of 65 at the start of a financial year, but makes a super contribution after they turn 65 in that same financial year.
For the benefit of other readers, I will now provide a fuller response and explain how the ‘bring forward’ rules work for all age groups under the age of 65. The response I provide is of a general nature and you will need to confirm your personal circumstances with the ATO, or an accountant/adviser.
Bring-forward rules – a quick summary
The annual non-concessional (after-tax) contributions cap is $180,000 (for the 2015/2016 year) but individuals under the age of 65 can ‘bring forward’ up to 2 years of non-concessional contributions. In other words, an individual can contribute up to $540,000 in one year (for the 2015/2016 year), representing the contributions cap for three years.
If you’re under the age of 65, as soon as an individual contributes more than $180,000 (for the 2015/2016 year) in a financial year, say, $190,000, or even $180,001, then such an amount automatically triggers the bring forward rules for the following two years. For example, if Bill makes a non-concessional contribution of $190,000 in the 2015/2016 year, then he can make up to $350,000 in non-concessional contributions in total over the following financial years (2016/2017 and 2017/2018), taking the amount over the 3 years to $540,000.
Note: The annual non-concessional cap for the 2015/2016 year is $180,000 which means by using a bring-forward you could make a super contribution of up to $540,000 during the 2015/2016 year. If you trigger the bring-forward during the 2015/2016 year, then the maximum amount you can contribute over the 3-year period (2015/2016, 2016/2017, and 2017/2018) is $540,000 due to triggering the bring-forward in the 2015/2016 year.
The following paragraph is an edited extract from SuperGuide’s Your 2015/2016 guide to non-concessional (after-tax) contributions, where I provide three examples of how the ‘bring forward’ rules can work:
…Let’s look at three examples:
- A $540,000 non-concessional contribution in one year: If you make a $540,000 non-concessional (after-tax) contribution to your super fund during the 2015/2016 year, say on 15 March 2016, you’re bringing forward two years of contributions for the purposes of the non-concessional contributions cap. You then cannot make another non-concessional contribution until July 2018 (that is, the 2018/2019 year).
- A $300,000 non-concessional contribution in one year: If you make a $300,000 after-tax contribution during the 2015/2016 year, say on 15 March 2016, that only brings forward one year of contributions, but it means you trigger the bring-forward rules for the next two years. You then can only make another $240,000 in non-concessional contributions during the two-year period that ends on 30 June 2018.
- A $210,000 non-concessional contribution in one year: If you make a $210,000 after-tax contribution during the 2015/2016 year, say on 15 March 2016, the $30,000 above the annual $180,000 cap triggers the bring-forward rules, which means over the next two years, you can make only $340,000 in non-concessional contributions.
When you’re aged 63 or 64
By making a non-concessional contribution that is greater than the annual cap, you automatically trigger the bring-forward rules when you’re under the age of 65.
Special rules apply if you’re aged 63 or 64 and you want to make a non-concessional contribution in a financial year that is greater than $180,000 (for the 2015/2016 year). The difficulty for an individual aged 63 or 64, who intends to contribute up to the maximum allowable in the following 2 years, is that they will reach the age of 65 after one year (if aged 64), and after two years (if aged 63). The super rules indicate that anyone aged 65 or over who wants to make a super contribution in a financial year, must satisfy a work test in the financial year in which they intend to contribute.
Note: For an individual who is aged 63 or 64, the bring-forward rules work in the following way: An individual can make up to $540,000 for the 2015/2016 year in a single year representing one or two years of contributions over a period when that person would have been 65, without having to satisfy a work test during those years (because the contribution was made when the individual was 63 or 64, under the bring-forward rules). This rule doesn’t mean that the individual can actually make super contributions as part of the bring-forward rules in those later years. A bring-forward can only be triggered, and utilised, by someone under the age of 65 (or by someone who was 64 on the 1 July of a financial year and makes the super contribution after turning 65 in that financial year – for this exception see SuperGuide article Super contributions: Turning 65 part-way through the year).
Background: Anyone aged 65 or over must satisfy a work test, before contributing. If you’re aged 65 or over (but under the age of 75), you can make super contributions, including non-concessional contributions of up to $180,000 (for the 2015/2016 year) annually, if you’re at least gainfully employed on a part-time basis. In short, you must work for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which you plan to make a super contribution. For more information on contributing to super after the age of 65 see article: For over-65s: Ten super tips when making contributions.
When you’re aged 65 or over
The ‘bring forward’ rules are not available to Australians aged 65 or over. If you’re over the age of 65, and you contribute more than $180,000 in non-concessional contributions for the 2015/2016 year or later years, then expect to get hit with an excess contributions tax, or be prepared to withdraw the excess contributions, and have the earnings on those excess super contributions added to assessable income your tax return.
If you’re aged 65 years or over, what this means is that the most you can make in non-concessional (after-tax) contributions is $180,000 (for the 2015/2016 year) in a single financial year, unless you’re willing to cop penalty tax of 49% on the excess non-concessional contribution, or have the hassle of withdrawing some of those super contributions and paying income tax on the earnings. I explain the implications of exceeding the non-concessional contributions cap and penalty tax in the SuperGuide article Excess contributions rules: A quick summary.