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Super contribution rules when turning 65

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A commonly asked technical question by advisers concerns personal super contribution issues in the financial year when the client turns age 65. Mark Gleeson has the answers.

Understanding the rules when your client turns 65 allows advisers to maximise contributions and not create any excessive taxes for the client.

You can use the steps below to identify when your client can contribute and how much they can contribute. 

Step 1 - Can they contribute? 

Personal super contributions can be made prior to the client’s 65th birthday regardless of whether the work test is satisfied.

Hence, if the work test will not be satisfied in the financial year that the client turns age 65, the contribution must be made prior to their 65th birthday. 

If aged 65 or over at the date of contribution, the work test must have been satisfied at some prior time in the financial year of contribution.

Upon satisfying the work test, the client can make contributions until the end of the financial year.  

Generally, once they turn age 75 (or more specifically, after 28 days following the end of the month in which they turn age 75), the contribution cannot be made. 

Step 2 - How much in non-concessional contributions (NCC) can be made? 

If the client is less than age 65 at 1 July of the financial year, the three-year cap can be used; that is, up to $450,000 NCC can be made during this three-year period. 

If the three-year cap is already triggered, the client’s NCCs are restricted to the unused portion of the NCC cap.

The three-year cap is triggered if more than $150,000 NCCs are made for a financial year. 

If aged 65 or more on 1 July of the financial year, an amount up to $150,000 NCC can be made within that financial year. 

Case study 1 

Jim, not working, turns age 65 on 15 April 2013. He wants to know his options for contributing to super. He is not currently in a three-year cap for NCCs. 

Applying step 1 above, Jim can contribute to super on or before 14 April as he is still age 64. If he waits until 15 April or later, the work test must be satisfied within the 2012/13 financial year and prior to the date that the contribution is made. 

Applying step 2, as Jim was under age 65 on 1 July 2012 and he has not currently triggered a three-year cap, he can contribute up to $450,000 in the 2012/13 financial year.  

Case study 2 

Carol, still working, turned age 65 on 23 September 2012. She has already made $150,000 NCCs this financial year.

Carol’s aunt is likely to pass away in the next 12 months and she anticipates an inheritance of approximately $300,000, at which point Carol wants to retire. 

As Carol has reached age 65, the work test applies for all contributions. 

If Carol makes no further contributions this financial year, she can only contribute $150,000 of the inheritance next financial year (assuming she meets the work test when the contribution is made). 

However, Carol makes a $1,000 NCC for the current financial year, to bring her total contributions to $151,000.

This action triggers the three-year cap and allows a further $299,000 to be contributed over the next two years (once again, assuming the work test is met).

Accordingly, Carol can contribute the inheritance money in 2013/14 (while she is eligible to contribute) and remain within her $450,000 cap.  

As Carol is aged 65 or more on 1 July 2013, the largest single contribution she can make is $150,000, even though she has triggered her three-year cap.

To ensure the super fund accepts $299,000, Carol makes separate contributions of $150,000 and $149,000.  

Deliberating triggering the three-year cap allows Carol to make an additional $149,000 NCCs. 

Watch the indexed cap 

Currently, the $150,000 NCC cap is set at six times the $25,000 concessional contributions cap and the $450,000 NCC cap is set at three times the $150,000 NCC cap.

The concessional contributions cap is expected to increase to $30,000 on 1 July 2014.

Accordingly, the $150,000 and $450,000 NCC caps would increase to $180,000 and $540,000 respectively.

This represents a significant 20 per cent increase in the NCC caps. If someone has triggered the $450,000 NCC cap, they do not immediately benefit from the indexation. 

Case study 3 

Elizabeth, age 55, makes a $200,000 NCC in 2013/14 and triggers her three-year $450,000 NCC cap.

In 2014/15, Elizabeth hears that the three-year cap has increased to $540,000 and decides to make another $340,000 NCC to fully utilise the indexed cap.

However, Elizabeth exceeded her $450,000 cap by $90,000 and incurs $41,850 excessive contributions tax (46.5 per cent x $90,000).

To ensure no cap breaches, Elizabeth should only make another $250,000 NCC in 2014/15.  

Summary  

Advisers must ensure clients remain within the relevant caps and understand the significant tax penalties if the rules are breached. Table 1 summarises the contribution rules when turning age 65.  

Mark Gleeson is technical services manager, advice and distribution at OnePath.