Why non-concessional contributions pay

You can’t point to too many areas of superannuation that have contained any semblance of stability in recent years.

But for all the huffing and puffing, changes to the law and threats to do so, politics and power plays, one area of superannuation has stayed relatively constant. That area is non-concessional contributions.

The headline level of $150,000 has been steady, while concessional contributions were cut from $100,000 to $50,000, and then to $25,000 (but go back up to $35,000 for the over 60s from July 1).

Sure, inflation should have taken them higher by now. And, somewhere down the track, they will be lifted in line with increases to the concessional contributions rate. But, for now, at least they haven’t been cut dramatically.

They don’t garner the same focus that concessional contributions do. And that’s largely because they’re a lot more “optional” than concessional contributions, which most people have made for them compulsorily.

So, what are they and why would you consider them?

The basics

Non-concessional contributions are contributions made with after-tax dollars. They are contributions for which you are not claiming a tax deduction elsewhere (such as the self-employed claiming for concessional contributions).

They might be straight cash that you have lying around, the proceeds of the sale of assets or money received from an estate. In any case, they aren’t taxed on the way into super because they have been previously taxed.

(Concessional contributions haven’t been previously taxed. This includes the 9% Superannuation Guarantee contributions and most other contributions for which a tax deduction will be claimed, either by a business or the individual personally.)

There is a general limit of $150,000 a year for everyone that is able to contribute. If you’re under 65, then there are few restrictions. If you are over 65, then you generally need to meet the “work test”, which is 40 hours in a 30-day period during the financial year.

What counts as NCCs?

NCCs can be personal contributions not claimed as a tax deduction, spouse contributions, contributions for a child (except those made as employer contributions and amounts transferred from foreign super funds).

NCCs also flow over from excess concessional contributions (CCs). That is, if you exceed your concessional contributions amount, the excess automatically becomes an NCC.

The pull-forward rule

And unlike the rules for concessional contributions, you can actually use future years’ limits in the current financial year.

This is known as the “pull forward” rule. It allows you to contribute, potentially, this year’s NCC limit, plus the next two years’ worth to use in the same year.

That is, you could put in $150,000 for the FY13, which ends later this week, then put in another $300,000 for the FY14 and FY15 years. That would be $450,000 worth of contributions for the current financial year. In that example, you would not be able to make another NCC until July 1, 2015, which would then count towards the 2015-16 financial year.

Note: This often won’t make sense at this time of year. In fact, there is a far better strategy. If you are considering putting a large amount of NCCs into your super fund, and given there is only a few days left of this financial year, it will usually make sense to contribute up to $150,000 for the FY13 year then, after the new financial year starts on July 1, use the pull forward rule to put in $450,000 into super, to cover the years of FY14, FY15 and FY16.

And these limits are, of course, per member. If you and your partner want to put large licks of NCC cash into super, you could potentially put in $300,000 now ($150,000 each) and then another $900,000 after July 1 ($450,000 each), for a total of $1.2 million for the fund in a period of just more than a week at this time of year.

Why wouldn’t you want to?

The Labor Government has said that it is intending to tax individual super accounts that generate more than $100,000 worth of income each year at 15% a year.

The government estimates that this will largely only impact on super accounts worth more than $2 million. I disputed this assertion in this column (Busting the super reforms myths).

This was announced prior to the budget. However, it is increasingly looking like this will not be passed into legislation, for several reasons. The Opposition has said it will support other aspects of the Government’s super reforms, but also has stated that aspect of the laws need to be removed. The Government subsequently said it would take that proposal to the next election.

And the industry says the rules are simply going to be unworkable. See this column (Super: What the Coalition will do).

But if you believe that Labor is likely to be returned on September 14, then this needs to be taken into consideration. While NCCs are untaxed, the income they generate generally will be.

NCCs – the real reason to contribute

While NCCs aren’t taxed on the way into super, the earnings they generate are. So, why would you make these contributions.

It still comes down to super not being taxed as heavily as earnings in your ordinary name. If you have $150,000 in your own name earning 5% a year ($7,500), you will lose up to $3,487.50 of that in income tax.

If that $150,000 is earning the same return in a super fund, then it will lose no more than $1,125 in income tax.

That’s each and every year. Compounding is, at its essence, the most powerful thing about super.

And NCCs should, if you can make the most of them, can become a very powerful part of your future.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• The Government has introduced into Parliament the Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Bill 2013 and the Superannuation (Excess Concessional Contributions Charge) Bill 2013, allowing individuals to withdraw any excess concessional contributions from their superannuation fund without penalty from July 1. “The government’s reforms will ensure that individuals are taxed on excess concessional contributions in the same way as if they had received that money as salary or wages and had chosen to make a non-concessional contribution,” Minister for Superannuation Bill Shorten said.
• Deloitte superannuation partner, Russell Mason, says that although industry funds have taken steps to better compete with DIY super funds, including offering ASX200 (direct investment) options, they still have a long way to go. “SMSFs offer things that can be described as off-platform assets — geared assets that traditional retail and industry funds, at this stage, simply can’t offer,” Mason said, according to media reports. “I think they’ve got a long way to go to fully counter SMSFs,” he said.
• Exchange-traded funds (ETFs) are growing in popularity among self-managed super funds (SMSFs), with 47% of the 96,500 ETFs bought in 2012 purchased through SMSFs, according to a new report by BetaShares and Investment Trends. “The main reason for that is that ETFs are really being adopted as a low-cost and transparent way of getting exposure to various asset classes and really as building blocks for portfolio construction,” managing director of Betashares, Alex Vynokur, reportedly said. “So, from the perspective of SMSFs, the ETF allows them to execute their strategy and diversify their portfolios in a cost-efficient way,” he said.