Superannuation contributions: Are the caps merely a super con?

Under the superannuation rules, the annual superannuation contributions caps were designed to be indexed in line with movements in average wages. Wages have obviously increased since July 2007 (when the new contribution rules were introduced), but since July 2007, the concessional (before-tax) and non-concessional (after-tax) caps have not been increased for the 2008/2009, 2009/2010, 2010/2011, 2011/2012 years or for the 2012/2013 year. Further, the contributions caps will not be increased for the 2013/2014 year.

No change in contributions caps

Has the Government made a mistake? Well, in policy and ethical terms I certainly think so, but in legal terms, no.

Let me explain the Government’s ‘smoke and mirror’ superannuation contribution policy decisions in two parts.

Part one: The first super con

Under 50s: In July 2009, the Government froze the contributions caps at July 2007 levels, and then legislated that the $25,000 concessional contributions cap (which had been halved from $50,000 effective 1 July 2009) was to be indexed in $5,000 increments. What this means is that when wages had increased to a level that would deliver a $5,000 increase in the concessional cap, that is a whopping 20% increase in wages over time (since 1 July 2009), then the cap would be increased.

50 years and over: Until June 2009, Australians aged 50 years or over were permitted to make up to $100,000 a year in concessional contributions. In the May 2009 Federal Budget, the ALP government halved the concessional cap to $50,000 (effective 1 July 2009), which the Government deemed to be a transitional cap which would then revert to $25,000 from July 2012. The transitional concessional contributions cap of $50,000 for those aged 50 years and over remained available until 30 June, 2012, although it was not an indexed cap.

All Australians: The non-concessional (after-tax) contributions cap, which was frozen at July 2007 levels, and was then to be indexed in $15,000 increments in line with any $5,000 increase in the concessional (before-tax) contributions cap, has remained at $150,000 for the past 6 financial years. If you’re under the age of 65, you have the opportunity to bring forward the annual non-concessional cap from future years, and make up to $450,000 in one year, representing your cap for the current year and the following two years (more on this later).

Part two: the second super con

All Australians: As part of the 2011/2012 Mid-Year Fiscal Outlook (released in November 2011), the Government announced that the concessional (before-tax) and non-concessional (after-tax) caps would be frozen (again!) for the 2012/2013 and 2013/2014 years. The Government claims that the concessional contributions cap will then increase to $30,000 for the 2014/2015 year and the annual non-concessional contributions cap will increase to $180,000 for the 2014/2015 year.

Hmmm… the caps have been frozen since July 2007, effectively refrozen in July 2009, and then frozen again in 2012, and for the 2013 and 2014 years, which means the indexation rules will not have been applied for more than 7 years. Now, that’s a quadruple con!

50 years and over: In May 2010, the Government announced that it intended to make the $50,000 cap a permanent fixture for certain individuals, taking effect from July 2012, when the transitional $50,000 (non-indexed) cap ended. In May 2012, the Government reneged on this promise and announced that over-50s would be subject to the $25,000 concessional contributions cap (which is to remain frozen at this level until July 2014). The Government has announced that the $50,000 cap for over-50s with less than $500,000 has been deferred until July 2014, but I have not heard a whisper about this policy since the announcement.  The question to ask is: has the introduction of a special over-50s cap been deferred or destroyed?

Beware penalty tax

It is very important to keep track of your super contributions because if you exceed the caps explained above, you will be hit with penalty tax.

Exceeding concessional contributions cap: If you make concessional (before-tax) contributions in excess of the $25,000 cap, then the excess contributions will be subject to a penalty tax of 31.5% (in addition to the 15% contributions tax). Further, the excess concessional contributions also counts towards your $150,000 non-concessional (after-tax) contributions cap.

For example, Bradley is 45 and during the year he inadvertently makes $50,000 in concessional contributions to his super fund, due to a delay in his super fund processing his tax-deductible super contributions from the previous year. The $25,000 in excess of his $25,000 concessional cap is subject to an additional 31.5% tax, that is, $7,875. The total tax payable on the $25,000 excess contribution is 46.5% ($11,625) — 31.5% plus the 15% contributions tax imposed on concessional contributions.

Exceeding non-concessional contributions cap: Likewise, if you make non-concessional (after-tax) contributions in excess of the $150,000 cap (or bring forward cap of $450,000) then the excess contributions will be subject to penalty tax of 46.5%.

Working the ‘bring forward’ rule

Despite the obscene penalty tax regime applicable to superannuation contributions, there is some flexibility when taking advantage of the non-concessional contributions cap. Although the after-tax cap is $150,000 (for the 2012/2013 year), you can bring forward up to two years of contributions, which means you can make a contribution of up to $450,000 in one year. You must however be under the age of 65 to take advantage of this option.

Note: If you’re under the age of 65, and you choose to make an after-tax contribution of more than $150,000 you automatically trigger the ‘bring forward’ rules for the following two years. For example, if our friend Bradley (refer earlier) chooses to make a $150,000 non-concessional contribution, then his excess before-tax contributions of $25,000 that now also count towards his non-concessional cap, mean that the ‘bring forward’ rules are triggered. The rules mean that three years of contributions are then affected. Bradley can make up to $275,000 in non-concessional contributions without exceeding his limit (assuming he doesn’t exceed the before-tax contributions cap again) in the following two years.

If, instead of $150,000, Bradley makes a $450,000 non-concessional contribution during the 2012/2013 year, then he has fully utilised his non-concessional (after-tax) cap for the next three years. Bradley, however, faces another problem. The excess concessional contribution of $25,000 now forms part of his after-tax contributions which means he exceeds his non-concessional contributions cap by $25,000. The $25,000 excess concessional contribution that also counts towards his non-concessional cap, is now hit with another 46.5% in tax. This amounts to a total tax bill of $23,250 (93%) from his innocent concessional contribution (in my view) of $25,000.

Ouch! Bradley doesn’t have much left from the $25,000 after two rounds of penalty tax! The only remotely positive aspect to this scenario is that Bradley can request that his super fund pay the penalty tax on any excess contributions.

The scenarios above are complicated but worth a second read to appreciate how easy it is to exceed the contributions caps and how perverse the financial penalties are for such unintentional breaches.

Note: From 1 July 2011, individuals who breach the concessional contributions cap by up to $10,000 can request that these excess contributions be refunded to them. You can only make this request if you have breached the concessional caps for the first time.

Warning: this is a technical paragraph. Let’s take Bradley’s story one step further. Like most Australians, Bradley does not discover that his super fund delayed processing his super contribution until 2 years later, when he eventually receives the excess contributions assessment from the ATO. Bradley’s sad tale continues as follows:

  • In the year when he unknowingly doubled up on concessional contributions, he also made a $150,000 non-concessional contribution.
  • Due to the $25,000 excess concessional contribution, which was also counted towards his non-concessional cap, it automatically triggered the bring-forward rule.
  • What this meant is that in the following two years, he could make a maximum of $275,000 in non-concessional contributions, and no more. Bradley believed he had only made $150,000 in non-concessional contributions in that first year, and had not triggered the bring-forward rules.
  • So, in the following year, he made a $450,000 non-concessional which he believed represented his cap for the next 3 years. Unfortunately, by doing this Bradley has exceeded his non-concessional cap by $175,000, and this excess non-concessional contribution will be subject to whopping 46.5% tax of $81,375.
  • Excess contributions tax of $11,625 in year one, and a massive excess contributions tax assessment of $81,375 for year two. Outrageous!

Warning: If you’re aged 65 or over, you do not have access to the ‘bring forward rules’. If you exceed the $150,000 non-concessional contributions cap, your excess contributions are immediately subject to the penalty tax. If you’re aged 63 or 64, there is however a unique window of opportunity. You can take advantage of the bring-forward rules without satisfying the over-65 work test rules even though your contributions may represent a period for when you are aged 65 or over. I explain this scenario in more detail in other articles on the SuperGuide website.

© Copyright Trish Power 2009-2014

Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.

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