Super contributions cap
Concessional contributions to superannuation are taxed at 15%. The most common concessional contributions are those made to comply with the superannuation guarantee (SG), those made as part of a “salary sacrifice” arrangement or personal contributions where an individual claims a tax deduction (typically for those who are self-employed).
From 1 July 2012 the concessional contribution cap is $25,000 per annum (no exceptions). There is no rule to prohibit contributions over the cap but they will be considered ‘excessive’ and taxed at 31.5% (on top of the 15% contributions tax in the fund). Of course, if your assessable income is over $180,000 per annum the total tax of 46.5% is the same as receiving the contributions as income.
However it can be much worse if non-concessional superannuation contributions have also been made in the same year up to the cap of $150,000 (or up to $450,000 if two years contributions are being brought forward). This is because the excess concessional contribution is treated by the ATO as a non-concessional contribution so the tax ends up being 93% (15% + 31.5% + 46.5%). The additional 46.5% tax applies as a result of exceeding the non-concessional contributions cap.
Paying the piper
The ATO does not view the Excess Contributions Tax (ECT) as a penalty. It is simply viewed as a higher tax rate for concessional contributions in excess of $25,000 per annum.
However there is a once-off refund option for excess contributions up to $10,000. This may result in a lesser amount of tax being paid as the excess contribution is assessed using normal marginal tax rates instead of a flat 31.5%.
Where breaches of the contributions cap have occurred the ATO will issue a notice of assessment in due course. Tax payers have the option to pay the tax personally or have the ECT paid from their superannuation fund account.
What about the minimum super guarantee?
In relation to high income earners, employers are only obliged to pay the superannuation guarantee on earnings up to a certain level. This amount is indexed annually and for the 2012/13 financial year it is $45,750 per quarter ($183,000 per annum) which amounts to $16,470 in super guarantee contributions – well below the concessional contribution cap.
Some employers will pay up to this maximum obligation, others may pay up to $25,000 but there is no requirement to pay more than $25,000 per annum.
In fact concessional superannuation contributions in excess of $25,000 per annum have a direct impact on the level of non-concessional contributions that can be made tax effectively.
Who is affected?
If you or your employer have been making concessional contributions over $25,000 in recent years (likely to be those over age 50) you should immediately review your plans.
You are most likely to be affected if:
- You are salary sacrificing
- You were using the transition to retirement strategy where you salary sacrifice and replace the foregone income with pension income, or
- You have more than one employer so have more than one stream of contributions being paid on your behalf.
Managing concessional and non concessional contributions is a critical issue for anyone seeking to boost their retirement savings. But the rules are complex and without advice it is not too difficult to find out you have inadvertently breached a threshold.
Keep your own records. Employers must show SG and salary sacrifice contributions on pay slips so a simple spreadsheet could help you track what they will be paying into your super. A more accurate method would be to use online access to your superannuation account to identify the contributions actually received.
For those operating a “Self-Managed” superannuation fund it is likely that you will have greater clarity around current contribution levels – particularly if it is your business that is making the contributions. However some changes may be required as a result of the new thresholds.