On July 1, 2017 the maximum allowable non-concessional contribution room will reduce from $180,000 pa (or $540,000 under the current bring forward rules, over a rolling three (3) year provision period) to $100,000 pa, or $300,000 under the new three (3) year bring forward provision rules.
While this may not appear to be a significant issue for younger clients, there is a couple of considerations Advisers may wish to look at for clients who are approaching retirement age (55-65) and who are considering retirement over in shorter term.
There is a high probability that a majority of these types of clients will be considered to be ‘empty nesters’. This means that their children have left home and are no longer financially dependent. These clients generally no longer have the increased costs associated with the day to day expenses of raising a family and it is also highly possible that many within this age bracket are debt free (or close to) and have begun to accumulate investment assets in their own personal names, either via way of inheritance or personal savings.
Given they are still working and reasonably fit, there is every chance that they may have accumulated wealth, due to accessibility restrictions within superannuation environment, in their personal names in case of a 'rainy day' or simply to ensure that they continued to retain access to the funds at any time.
The issue Advisers may begin to see with some of these clients is that the new reductions to the non-concessional contribution caps will impact the level of funds individuals are able to contribute to the concessionally taxed superannuation environment in the final years leading up to their retirement.
Where clients have an excess amount of funds accumulated in their personal names, especially if aged above 60 years of age, (i.e. above $350,000 for an individual or $700,000 for a couple), Advisers may wish to consider utilising the current bring forward provisions of up to $540,000 prior to June 30, 2017 as follows:
John and Mary are aged 63 and 62 respectively and plan to retire once John turns 65 on April 26, 2018. Currently they hold $960,000 in a personal term deposit following the sale of their investment property two years ago and have accumulated $20,000 in a bank account as a cash reserve. They would like to keep $10,000 in their cash reserve just in case. John currently has $472,851 in super and Mary $327,562. John and Mary’s current Marginal Tax Rate (MTR) is 32.5% each.
Example 1 – John and Mary’s Adviser decides to recommend contributing funds to super prior to June 30, 2017.
Current investment total - $980,000
Less Non Concessional contribution to Super for John - $485,000 (using 3 years bring forward provisions)
Less Non Concessional contribution to Super for Mary - $485,000 (using 3 years bring forward provisions)
Balance - $10,000
Super Balance – John $957,851 | Tax on earnings (assume 7% return) - $10,574
Super Balance – Mary $812,562 | Tax on earnings (assume 7% return) - $8,532