Where are those new bring forward rules?

They were designed to tie in with the (already legislated) change to move the age at which a work test (or work test exemption) applies for most contributions from 65 to 67.

The relevant Bill has been on the agenda for the Senate for some time but never seems to make it to the top of their to do list. The longer it is delayed, the greater the risk that the new rules won’t be backdated to 1 July 2020.

That obviously puts a number of clients in a tricky position. What options do they have?

What is best for someone who is turning 67 in early 2021 who had a total superannuation balance of $800,000 at 30 June 2020 and has just sold a major asset so is keen to maximise their non-concessional contributions? 

If they work on the basis that the rules won’t change, the maximum non-concessional contribution for them is $100,000 even if they also have a total superannuation balance of $800,000. This is because they are not allowed to use the bring forward rules at this age.

But if the new rules are legislated and backdated to 1 July 2020, $300,000 would be possible.

What if the 66 year old ran the gauntlet and decided to contribute $300,000 now anyway? Would they create a major compliance headache for their fund if the new rules don’t come in?

Actually no. And here’s where it’s important to understand the specific rules that we’re dealing with.

The bring forward rules are all about contribution caps – not a person’s eligibility to contribute. Someone who is 66 is actually allowed to make any non-concessional contribution they like. In fact, it could theoretically be millions of dollars if they really wanted. The reason no-one does this is that of course it will create an excess non-concessional contribution.  That excess comes with serious tax consequences – which, generally speaking, we’d all like to avoid.

But it’s not illegal and so there is no SIS breach to report.

So what would happen if our hypothetical 66 year old decided to contribute $300,000 today and the new bring forward rules were not legislated?

First, they would not be able to simply refund the excess contribution to themselves once it became clear that the rules were not going to change this year. This option is only available when the contribution is actually illegal. For example, if an individual who is over 67 makes a contribution without meeting a work test (and without being eligible for a work test exempt contribution), the contribution breaches SIS and the trustee is obliged to give it back to the contributor within 30 days of becoming aware of the breach. In a quirky way, people who break the law have an easier path to resolving the problem than our hypothetical 66 year old!

Instead, in our case, the member would have to wait until the usual process of determining excess contributions played out – lodge returns, receive a notification from the ATO and then go through the excess contribution refund process.

They would pay normal personal income tax on the “associated earnings” less a 15% tax offset. Associated earnings is basically, a notional amount of interest calculated using an artificially high interest rate (currently it’s over 7% pa – an interest rate most of us only dream about). Even worse, the interest is backdated to 1 July 2020.

The fund would refund both the excess $200,000 plus 85% of this notional earnings amount to the ATO. Eventually the money (after taxes had been deducted) would make its way to the member.

But that’s it. No hellfire from the ATO for using rules that didn’t eventuate – the harsh tax regime is considered enough. For some people, it may actually be worthwhile.

We cover the way in which the bring forward rules work, what happens when they are indexed and many practical examples and contribution strategies in the Heffron Super Companion. Click here to subscribe.