In the years since the introduction of contribution caps (generally from 1 July 2007), the maximum amount you may contribute to your superannuation has changed quite a few times. As the 2013/14 financial year sees us in the midst of another period of change, it is timely to consider what level of contributions you can make to superannuation now and in coming years, and at what rate those contributions will be taxed. Also, as mistakes can and will occur, we will consider whether remedies are available if the maximum limits are exceeded.
In general the two types of contributions are:
■ concessional contributions, and
■ non-concessional contributions.
Concessional contributions are payments made to a superannuation fund by you or others, such as employers, for your retirement benefits. A tax deduction is usually able to be claimed by you or the entity paying the contributions. Conversely, concessional contributions are included in the taxable income of the fund (ie they are subject to tax).
Employer contributions include those required to be made by legislation (superannuation guarantee) or employment award obligations. Contributions made under an arrangement (salary sacrifice) between you and your employer are also concessional contributions.
With respect to your personal contributions you may only make concessional contributions if you meet certain tests which indicate you are predominantly self-employed.
Non-concessional contributions are not taxed on receipt by the superannuation fund. Similarly, no tax deduction is available to you, as contributor. In other words, non-concessional contributions are paid using money that has already been taxed.
A number of types of contributions fall under the heading of non-concessional contributions. For example, Government super co-contributions and contributions arising from capital gains on the sale of business assets are classified as nonconcessional contributions, but are not included under the standard limits for non-concessional contributions.
Concessional and non-concessional contributions, up to specified limits, are permitted to be made by or on behalf of individuals each year. Those specified limits are called contribution caps. The main contribution caps are the concessional contributions cap and the non-concessional contributions cap.
The concessional contributions cap has been temporarily increased to $35,000 for the 2013/14 financial year for those aged at least 59 years on 30 June 2013 (ie if you turn 60 or more in the 2013/14 year). For all others, the concessional contributions cap is $25,000 for the year.
For the 2014/15 financial year, the concessional contributions cap will be $35,000 for those aged at least 49 years on 30 June 2014 (ie if you turn 50 or more in the 2014/15 year). For all others, the concessional contributions cap will remain at $25,000 each year, with indexation in increments of $5,000, being applied in line with inflation. Indexation has been halted by the Government but it is expected to recommence from 1 July 2014.
Concessional contribution caps
The non-concessional contributions cap is six times the standard concessional contributions cap and is, therefore, currently set at $150,000 (ie 6 x $25,000 = $150,000). Any increase in the concessional contributions cap after 30 June 2014 will result in a corresponding increase in the non-concessional contributions cap. For example, if the concessional contributions cap was to increase to $30,000 then the non-concessional contributions cap would also increase to $180,000 (ie 6 x $30,000.)
If you are under age 65, the ‘bring forward’ provisions allow you to bring forward two years’ worth of contribution limits and contribute up to $450,000 in one year. If you are considering this strategy, please discuss it with your financial planner first as there are a number of ‘traps’ that could exist which may see you exceed your non-concessional contribution limit and the penalty for exceeding the cap could be severe.
Contribution age limits
Your age at the time contributions are intended to be made impacts the ability of superannuation funds to accept those contributions. In some instances, you must have worked for at least 40 hours in a 30 day period (work test) in the year contributions are made.
The various age limits for making contributions to superannuation are detailed in the table below:
Recent changes to superannuation have eased the very significant penalties which were previously applied to excess concessional contributions.
Unfortunately, no relief has been provided to the potentially heavy penalties for exceeding the non-concessional contributions cap. Any amount in excess of the non-concessional contributions cap will be taxed at the rate of 46.5 per cent – almost half the excess.
The following rules apply to excess concessional contributions:
■ The amount will be taxed in the fund at the rate of 15 per cent.
■ Any excess concessional contributions will be included in your personal income tax return for that relevant year.
■ You will receive a 15 per cent tax offset for the amount of excess concessional contributions included in your income tax return, as compensation for the tax already applied to the contributions in the superannuation fund.
■ Interest may be payable on the resulting tax adjustment.
■ You may elect to have your superannuation fund release up to 85 per cent of the excess concessional contributions (ie 100% – 15% tax paid).
■ The superannuation fund will pay the released amount to the ATO.
■ The amount paid will be included as a credit in your income tax return.
■ After allowing for the additional tax and interest, the surplus will be paid to you.
■ Amounts not withdrawn will apply to the non-concessional cap.
Taxation of contributions
As mentioned previously, non-concessional contributions are not taxed upon receipt by the superannuation fund, but excess non-concessional contributions are taxed at the rate of 46.5 per cent.
Concessional contributions are generally taxed in the fund at the rate of 15 per cent. An exception to that rate applies to higher income earners (ie if you have an ‘adjusted taxable income’ in excess of $300,000) following recent Government changes. At least a portion of the concessional contributions made by, or on behalf of those classified as, higher income earners are taxed at the rate of 30 per cent.
To calculate the adjusted taxable income if you are a high income earner, the amount of concessional contributions is added to your taxable income (and possibly some fringe benefits) to determine if that income (your adjusted income) exceeds $300,000. If, prior to the addition of the concessional contributions, your income was less than $300,000, only the amount in excess of $300,000 will be subject to tax at the rate of 30 per cent. That tax will be calculated by the ATO and an assessment will be issued to the relevant superannuation fund.
Maximising contributions to superannuation can provide significant advantages, from both a retirement benefit and taxation perspective, whilst penalties for exceeding the permitted contribution caps can result in a significant tax penalty and, as a result, a reduction in retirement benefits.
Therefore, it is recommended you check with your financial planner before making significant contributions to superannuation, so as not to waste the opportunities which exist and not to risk exceeding your limits.
If you would like to discuss your super contributions further, please do not hesitate to contact our friendly and qualified staff. Call Leenane Templeton today!