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 (see table below). 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 are likely to be subject to penalty tax.
In a retrograde step for Australian super savers, the contributions cap for concessional (before tax) contributions has been halved to $25,000 for over-50s (previously $50,000 and had been set to increase to $55,000 before the Federal Government changed its mind on the contributions caps). The concessional contributions cap for under-50s is also $25,000 for the 2012/2013 year.
Note: The $25,000 cap for under-50s that was in place for the 2011/2012 year should have increased to $30,000 for the 2012/2013 year (due to the indexation rules applicable to the contributions caps) but the Federal Government has frozen the contributions caps for the 2012/2013 and 2013/2014 years. The concessional cap (applicable for those 50 years and over) that was supposed to be in place for the 2012/2013 year, has been deferred for two years. What this means is that for the 2012/2013 and 2013/2014 years, the maximum amount of concessional contributions that anyone can make (and not be charged excess contributions tax) is $25,000 a year. From July 2014 (but not before), those aged 50 or over, with account balances of less than $500,000 will then be able to make up to $50,000 in concessional contributions each year.
Despite these silly changes to the contribution caps, Australians can still make the most of the tax incentives associated with the super system by making regular contributions. Set out below is a rundown on how rules applicable to concessional contributions operate, and some tips on what to consider when making contributions.
Concessional contributions cap
|Income year||Cap||Cap for over-50s|
|Income year||Cap||Transitional cap for over-50s*|
Non-concessional contributions cap
|Income year||Cap||Bring-forward rule|
*If you’re aged 65 or over, you must satisfy a work test to make super contributions. You cannot make super contributions beyond the age of 74.
**The table also contains the non-concessional contributions caps. For information on these types of contributions see SuperGuide article Your 2012/2013 guide to non-concessional (after-tax) contributions.
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.
If you’re self-employed, or not employed, or you only receive a small proportion of your income from an employer (the 10% rule), then you can make concessional contributions that you claim as a tax deduction in your individual tax return. You must lodge a notice of intention to claim a tax deduction with your super fund.
Note: You need to be mindful of your concessional cap of $25,000 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 concessional contributions cap in place for the 2012/2013 year.
How are concessional contributions treated tax-wise?
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. The employer claims a tax deduction when making SG contributions or when making contributions under a salary sacrifice arrangement. An individual using a salary sacrificing arrangement benefits tax-wise by paying less tax on the reduced personal income (although the contributions are subject to 15% tax within the fund).
If an individual intending to make the concessional contributions is not an employee, then he or she can claim a tax deduction for those contributions in his or her tax return.
Is super tax-effective for everyone?
If you pay less than 15% tax on your wages and salary and other income, then making non-concessional super contributions may not be a tax-effective option
Before the 2012/2013 year, if you paid less than 15% income tax on your wages and salary and other income (that is you earnt less than $37,000 in a a year), you had no real income tax advantages when investing via a superannuation fund because 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 tax than 15% on your personal income, then super was not tax-effective. The one important exception is where you were eligible to take advantage of the government’s co-contribution scheme. (For the 2012/2013 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 my article on co-contributions: Cashing in on the co-contribution rules (2012/2013).)
From the 2012/2013 year onwards, super becomes more tax-effective for Australians paying less than 15% income tax on wages and salary. The government intends to refund 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 in our article Super tax refund for lower-income earners starts July 2012).
Note: From the 2012/2013 year onwards, the Federal Government has 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 2012/2013 year), they will be paying 19% income tax, compared to 15% tax on super fund investment earnings, which means making concessional super contributions has become more tax-effective for more Australians.
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!
What if I exceed my concessional contributions cap?
The risk of exceeding the concessional cap is much greater 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 more limited.
If you exceed your concessional cap for the 2012/2013 year, then the excess concessional contributions are hit with penalty tax of 31.5%, in addition to the 15% tax payable on contribution. The excess concessional contributions also count towards your non-concessional (after-tax) cap.
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.
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 $85,000 plus his employer’s SG contributions (total package of $92,650). Robert was planning to salary sacrifice $25,000 and make the most of his contributions cap. Ah, but what about Robert’s employer contributions of $7,650? If Robert proceeds with his strategy he will exceed his cap by $7,650. Any excess contributions above his cap of $25,000 will be subject to 15% contributions tax PLUS 31.5% excess contributions tax (or as a first offence, he can arrange for the refund of the excess contributions). Assuming Robert doesn’t want to pay excess tax (or go through the hassle of applying for a refund), the maximum that he can salary sacrifice for the 2012/2013 year is $17,350, after allowing for his employer’s SG contributions of $7,650.
More precisely, Robert can make before-tax contributions in excess of his $25,000 cap, but if he does, then the excess contributions are hit with penalty tax of 31.5%, in addition to the 15% tax payable on contribution.
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 concessional cap to $50,000 (for over-50s) from July 2009 meant that Joan has had to rethink her TRIP and concessional contribution strategy, dramatically. She still used the strategy but the mix of pension income and business income had to be adjusted.
From 1 July 2012, when the contributions cap for over-50s is now $25,000, Joan is heading to her accountant to ensure she doesn’t breach the reduced contributions cap, and wther the TRIP strategy is still worth pursuing in her circumstances.
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.