- What is counted as a concessional contribution?
- Concessional contributions cap*
- How are concessional contributions treated tax-wise?
- LISC available for 2012/2013 year only, due to proposed repeal of legislation
- Income tax cuts make super tax-effective for more Australians
- What if I exceed my concessional contributions cap?
- Okay, that’s the theory, how do the rules work in real life?
- Ten tips when making super contributions
Superannuation contributions can be divided into two types — concessional (before-tax) and non-concessional (after-tax). Each type of super contribution is subject to a contributions cap. A contributions cap sets a limit on the amount of contributions you can make in any one year.
If you exceed the cap, your excess contributions can be returned to you and will be subject to your marginal tax rate plus an interest charge. Alternatively, you can choose to keep the excess contributions in your super account, then your excess contributions will be subject to penalty tax. Excess concessional contributions were treated more harshly in earlier years (see later in the article).
This article explains all of the important rules that apply to concessional contributions. If you’re seeking information about non-concessional (after-tax) super contributions then refer to our other article Your 2014/2015 guide to non-concessional (after-tax) contributions.
In short, for the 2014/2015 year, there are 2 concessional contributions caps you need to be aware of when considering contribution strategies, namely:
- $30,000 cap for anyone aged 48 or under as at 30 June 2014
- $35,000 cap for anyone aged 49 years or over as at 30 June 2014.
I outline the concessional caps for the 2014/2015 and previous years in the table below.
Background: For the 2013/2014 year, the general concessional cap was $25,000 and this cap had been in place for many years. The cap should have increased to $30,000 for the 2012/2013 year and 2013/2014 year (due to the indexation rules applicable to the contributions caps), but the Federal Government froze the contributions caps for the 2012/2013 and 2013/2014 years. The general concessional cap has now increased to $30,000 for the 2014/2015 year. Since 1 July 2013 onwards, over-60s have been subject to a higher cap of $35,000 (unindexed): more specifically, if you were aged 59 years or over as at 30 June 2013, then your concessional cap was $35,000. Since 1 July 2014, over-50s are now subject to the higher cap of $35,000 (unindexed): more specifically, if you are aged 49 years or over as at 30 June 2014, then your concessional cap for the 2014/2015 year is $35,000.
What is counted as a concessional contribution?
Concessional contributions, also known as before-tax contributions, include your employer’s compulsory Superannuation Guarantee contributions, additional employer contributions, and any salary sacrificed contributions that you arrange for your employer to deduct from your before-tax salary.
Note: You need to be mindful of your concessional cap of $30,000 (or $35,000 if 50 years and over) when considering any salary sacrifice strategy. Your employer’s SG contributions count towards the cap, which means that anyone making additional contributions under a salary sacrifice arrangement needs to check that they don’t exceed the increased concessional contributions caps in place for the 2014/2015 year.
Concessional contributions cap*
|Income year||Under 50||50 years to 59 years*||60 years and over**|
|* If you were 49 years of age or older as at 30 June 2014, then your concessional contributions cap for the 2014/2015 year is $35,000. **If you were 59 years of age or older as at 30 June 2013 then you were eligible for the higher concessional cap of $35,000 for the 2013/2014 year.|
|Income year||Under 50||Transitional cap for over-50s|
How are concessional contributions treated tax-wise?
For most Australians, concessional (before-tax) contributions are hit with a contributions tax of 15 per cent, which means making such contributions is only tax effective if you pay more than 15 cents in the dollar tax on your personal income (noting that, apart from zero tax, the lowest marginal tax rate is now 19% plus Medicare levy) . The employer claims a tax deduction when making SG contributions or when making contributions under a salary sacrifice arrangement. An individual can choose to use a salary sacrificing arrangement as a way to pay less tax by reducing the amount of personal income that is taxable (although the concessional contributions are subject to 15% tax within the fund).
Note: Since 1 July 2012, if you earn more than $300,000 a year, then your concessional super contributions (including your employer’s SG contributions) will be subject to a higher contributions tax of 30%, rather than 15%. For more information on this extra tax measure for high-income earners see SuperGuide article Double contributions tax for high-income earners.
If an individual intending to make the concessional contributions is not an employee, then he or she can claim a tax deduction for those super contributions in his or her tax return, subject to lodging the appropriate form with his or her super fund.
If you pay less tax on your wages and salary (and other income), than the 15% contributions tax that is payable on concessional contributions, and the 15% tax on super fund earnings, then making concessional super contributions may not be a tax-effective option.
LISC available for 2012/2013 year only, due to proposed repeal of legislation
For the 2012/2013 year however, super became more tax-effective for Australians paying less tax on their personal income than the 15% tax on concessional contributions. For that year only, the government refunds any contributions tax paid on concessional (before-tax) contributions, such as your employer’s compulsory Superannuation Guarantee contributions, if you earn less than $37,000. You can expect a refund of the contributions tax deducted from your super account, paid directly to your superannuation account by the federal government. The federal government calls this refund of super tax, the Low Income Super Contribution (LISC). (I explain the Low Income Super Contribution, including the rules for eligibility, in our SuperGuide article Superannuation tax refund: 10 things you should know).
Note that the Liberal government intends to abolish the LISC (because it was funded by the Mineral Resource Rent Tax). Draft legislation was knocked back by the Senate in March 2014, but the government has indicated that the LISC will not apply to future financial years, subject to legislation being passed in parliament. We will update this article when the legislation revoking the LISC is passed.
In my opinion, the LISC is an excellent policy because before the 2012/2013 year (and from the 2013/2014 year onwards), if you pay income tax on your wages and salary and other income that is less than the 15% contributions tax paid on concessional contributions and the 15% tax paid on super fund investment earnings, then you have no real income tax advantages when investing via a superannuation fund. Your employer’s super contributions would be hit with 15% tax, and earnings on your super fund’s investments would be taxed at 15% tax. If you were paying a lower rate of income tax than 15%, then super is not tax-effective, and even worse, you are being penalised tax-wise by having a super account. The one important exception is if you were eligible to take advantage of the government’s co-contribution scheme. (For the 2014/2015 year, the federal government places up to $500 of tax-free super money into your super fund when you make a $1,000 after-tax contribution. See the SuperGuide article on Co-contributions: Cashing in on the co-contribution rules (2014/2015).
Income tax cuts make super tax-effective for more Australians
Note: From the 2012/2013 year onwards, the former ALP federal government introduced tax cuts to offset the increase in the cost of living expected from the imposition of the carbon tax on Australia’s biggest polluting companies. The tax cuts mean a higher tax-free threshold of $18,200, and higher marginal tax rates for incomes above $18,200 and below $80,000. What this means is that for those earning more than $20,542 (for the 2014/2015 year), they will be paying 19% income tax plus Medicare levy, compared to 15% tax on super fund investment earnings, which means making concessional super contributions has become more tax-effective for more Australians. Although the Liberals intend to repeal the carbon tax legislation, they have indicated that the tax cuts remain in place.
TFN alert: If your super fund doesn’t have your tax file number, your concessional (before-tax) contributions, including SG contributions, are subject to an additional tax of 31.5 per cent, which means you end up paying 46.5% tax on your concessional contributions. That would be a pointless exercise! Check that your super fund has your tax file number.
What if I exceed my concessional contributions cap?
If you’re considering making concessional contributions to a super fund you need to be aware of the following issues:
- size of your concessional contributions cap
- amount of Superannuation Guarantee contributions your employer is making for the year
- timing of your super contributions, and your employer’s contributions
- submitting the correct form by a certain time, if you’re planning to claim a tax deduction for the contribution (applicable to self-employed or those substantially self-employed)
If you exceed your concessional cap from the 2013/2014 year onwards, the federal government allows you to withdraw any excess concessional contributions made from 1 July 2013 from your super fund. These excess concessional contributions will then be taxed at your actual marginal tax rate, plus an interest charge (as would happen for income tax paid late to the ATO), rather than the top marginal tax rate. If you’re already on the top marginal rate, then your super contributions will be subject to an interest charge only.
Note: The excess concessional contributions also count towards your non-concessional (after-tax) cap, and this special rule has caused financial chaos for Australians trying to do the right thing and save pro-actively for their own retirement. Any contributions in excess of the non-concessional cap for the 2012/2013 year or earlier years are hit with the top marginal tax rate (45% plus Medicare levy) within the super fund, even when your individual marginal tax rate could be as low as zero or 19% (or 15% for the 2011/2012 and earlier years).
Fortunately, in the 2014 Federal Budget, the government announced that any super contributions made by an individual that breached the non-concessional (after-tax) contributions cap could be withdrawn from the super fund without penalty. In addition, any earnings related to those excess super contributions can also be withdrawn, but would then be subject to the individual’s marginal tax rate. Note that the super fund earnings connected to the excess contributions would then also form part of your regular income and be subject to your marginal tax rate.
Warning: This more lenient approach only applies from the 2013/2014 year, and any excess concessional contributions made in previous financial years are still hit with the top marginal tax rate (45% plus Medicare levy) within the super fund. Also note, that effective from 1 July 2011 until 30 June 2013, individuals who have breached 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. From 1 July 2013, you are permitted to withdraw all excess super contributions made on or after 1 July 2013.
Note: Even under the more lenient rules applicable from July 2013, if you choose to leave the super contributions in your super fund, then those excess contributions will be subject to the top marginal rate (45% plus Medicare levy).
Background: The risk of exceeding the concessional cap is much greater ever since the concessional caps were halved from July 2009, and then halved again for over-50s from July 2012, and the opportunities to contribute greater amounts later in life are more limited than a few years ago. If you have exceeded your contributions cap in previous years (before the 2013/2014 year) then expect heftier penalties. For example, if you exceeded your concessional cap for the 2012/2013 year, then the excess concessional contributions will be hit with penalty tax of 31.5%, in addition to the 15% tax payable on contribution. Again, the excess concessional contributions also count towards your non-concessional (after-tax) cap.
For more information on how the excess contributions tax rules work see the SuperGuide article Excess contributions: Happy ending to a horror story.
Okay, that’s the theory, how do the rules work in real life?
Let’s look at two individuals — Robert (age 46) and Joan (age 61).
Robert: Robert is 46 and earns $90,000 plus his employer’s 9.5% SG contributions of $8,550 (total package of $98,550). Robert was planning to salary sacrifice $30,000 for the 2014/2015 year and make the most of his contributions cap. Ah, but what about Robert’s employer contributions of $8,550? If Robert proceeds with his strategy he will exceed his cap by $8,550. Any excess contributions above his cap of $30,000 will be subject to the top marginal tax rate (45% plus Medicare levy) within the super fund, unless he chooses to withdraw the excess contributions. If he chooses to withdraw the excess contributions, then they will count towards his assessable income and be subject to his marginal tax rate plus an interest charge.
Assuming Robert doesn’t want to go through the hassle of applying for a refund of his super contributions (or leaving the excess super contributions in the fund, but copping the extra super tax), the maximum that he can salary sacrifice for the 2014/2015 year is $11,450, after allowing for his employer’s SG contributions of $8,550.
More precisely, Robert can make before-tax contributions in excess of his $30,000 cap, but if he does, then the excess contributions are hit with 45% tax plus Medicare levy if retained within the fund, or if withdrawn from the super, then the excess contributions will be subject to his marginal tax rate of 37%, which includes the 15% tax already paid on contribution, plus an interest charge.
Joan: Joan is 63 and earns $120,000 a year running her own fashion business. She also receives income from a transition-to-retirement pension (TRIP). A popular strategy for many over-55s is to take a TRIP which enables you to access your super benefits while you’re still working, and then continue contributing to your super fund. The benefits of such a strategy mean the following:
- if you’re aged 60 or over, you receive tax-free pension payments (if 60 or over), or
- if you’re under the age of 60, you receive concessional taxed pension payments, and
- you can then reduce taxable employment income by entering into a salary sacrificing arrangement, or, if self-employed, by making tax-deductible super contributions.
Before the Government halved the over-50s contributions cap (from $100,000 to $50,000 from July 2009), Joan salary-sacrificed $100,000 (the cap in place before the Government halved the limit) into her super fund, and withdrew tax-free pension payments from her TRIP to replace the employment income (adjusted for the tax that would have been deducted), thereby reducing her tax bill while boosting her super account. Unfortunately, the cut in her annual concessional cap to $50,000 (for over-50s) from July 2009 until June 2012, meant that Joan has had to rethink her TRIP and concessional contribution strategy, dramatically. She still used the strategy for these years but the mix of pension income and business income had to be adjusted.
For the 2012/2013 year, when Joan’s annual concessional cap fell to $25,000, Joan headed to her accountant to ensure she didn’t breach the reduced contributions cap, and to determine whether the salary sacrificing and TRIP strategy was still worth pursuing in her circumstances.
From the 2013/2014 year, Joan’s concessional cap has increased to $35,000 (special cap for over-60s, and now expanded to over-50s for 2014/2015 year), which means the TRIP and concessional contribution strategy has become slightly more tax-effective than when her concessional cap was only $25,000.
Ten tips when making super contributions
If you’re under the age of 65, you don’t have to be working to make super contributions. If you’re aged 65 or over, however, you must satisfy a work test to make super contributions. I explain the work test and the other contribution rules for over-65s in my article: For over-65s: Ten super tips when making contributions.
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