Non-concessional superannuation contributions are more popularly known as after-tax contributions. You may even hear them called ‘undeducted’ contributions. Such super contributions are subject to a contributions cap, which sets a limit on the amount of non-concessional (after-tax) contributions that you can make in one year (1 July through to 30 June). If you exceed the cap, your excess contributions are likely to be subject to penalty tax.
The non-concessional cap remains at $150,000 for the 2013/2014 year (1 July 2013 to 30 June 2014), which is the same non-concessional contributions cap that was in place for the 2012/2013 year, and for the 2011/2012 year, and for previous years right back to the 2008/2009 year (see table at the end of this article).
The Federal Government has indicated that it expects the non-concessional cap to increase to $180,000 for the 2014/2015 year (in line with the expected increase in the concessional cap for the 2014/2015 year). The FG hopes you don’t notice but the contributions caps have never been adjusted in line with inflation as promised, and the FG has frozen the contributions caps since they were originally introduced in July 2007. The FG has promised (although they have broken this promise twice before) that from the 2014/2015 year, the non-concessional contributions cap will be indexed in line with increases in the concessional (before-tax) cap – six times the level of the (indexed) concessional cap. (I explain the concessional contribution rules in my article: Super concessional contributions: 2013/2014 survival guide). If the FG keeps its promise, then you can expect the non-concessional contributions cap to rise to $180,000 from thee 2014/2015 year.
TFN alert: Your super fund must have your tax file number (TFN) on record before you can make non-concessional contributions to a super fund. If your fund doesn’t have your TFN, you can’t make after-tax contributions.
No tax on non-concessional contributions
Non-concessional contributions are sourced from your after-tax income, which means the full contribution reaches your superannuation account, and no tax is deducted when the contribution reaches your super fund. No tax is deducted from a non-concessional contribution because you haven’t claimed a tax deduction, or received any other type of tax concession, before making these contributions.
Any earnings that a super fund earns on those contributions are usually taxed at a much lower rate than would be the case for earnings outside the super fund. Super fund earnings are taxed up to 15 per cent compared to marginal tax rates of up to 45 per cent (for 2013/2014 year) on individual earnings outside the super environment.
Continue reading about non-concessional contributions to find out the answers to the following questions:
- Is super tax-effective for everyone?
- Can I contribute more than $150,000 during the 2013/2014 year?
- What if I don’t use my non-concessional cap for one or more years?
- Does the annual non-concessional cap apply per couple, or per individual?
- So, does that mean I am subject to excess contributions tax if I contribute more than $450,000?
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 year), you had no real income tax advantages when investing via a superannuation fund because 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 was if you were eligible to take advantage of the government’s co-contribution scheme. (For the 2013/2014 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 Co-contributions: Cashing in on the co-contribution rules (2013/2014)).
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 will 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, including the rules for eligibility, in our SuperGuide articles Super tax refund for lower-income earners starts July 2012 and Superannuation tax refund: 10 things you should know). Note that the Liberal Party intends to abolish the LISC if it wins government.
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 2013/2015 year), they will be paying 19% income tax, compared to 15% tax on super fund investment earnings, which means making non-concessional super contributions has become more tax-effective for more Australians.
Can I contribute more than $150,000 during the 2013/2014 year?
If you’re under the age of 65, you can bring forward up to two years’ worth of non-concessional contributions, which means you can make up to $450,000 in super contributions in one year, representing your non-concessional (after-tax) cap over a three-year period.
Making a non-concessional contribution that is more than the annual non-concessional cap is known as a ‘bring forward’. The maximum bring forward for the 2013/2014 year is $450,000. When you contribute more than $150,000 in non-concessional contributions in one year, you automatically trigger the bring-forward rules for the following two years. Let’s look at three examples.
- A $450,000 non-concessional contribution in one year: If you make a $450,000 non-concessional (after-tax) contribution to your super fund during the 2013/2014 year, say on 15 March 2014, you’re bringing forward two years of contributions for the purposes of the non-concessional contributions cap. You then cannot make another non-concessional contribution until July 2016 (that is, the 2016/2017 year).
- A $300,000 non-concessional contribution in one year: If you make a $300,000 after-tax contribution during the 2013/2014 year, say on 15 March 2014, that only brings forward one year of contributions, but it means you trigger the bring-forward rules for the next two years. You then can only make another $150,000 in non-concessional contributions during the two-year period that ends on 30 June 2016.
- A $180,000 non-concessional contribution in one year: If you make a $180,000 after-tax contribution during the 2013/2014 year, say on 15 March 2014, the $30,000 above the annual $150,000 cap triggers the bring-forward rules, which means over the next two years, you can make only $270,000 in non-concessional contributions.
Tip: The ‘bring forward’ rules are not available to Australians aged 65 or over. If you’re aged 63 or 64 however, you can take advantage of the ‘bring forward’ rules without satisfying the over-65 work test rules (see article: For over-65s: Ten super tips when making contributions) that would normally apply to contributions that cover future years.
What if I don’t use my non-concessional limit for one, or more years?
You must use it or lose it when it comes to the contributions caps. You can’t play catch-up with the annual non-concessional cap, or the bring-forward rules — a ‘bring forward’ can only relate to contributions for future years, not past years. If you fail to utilise your non-concessional cap for one or more years, then the cap for those years is gone forever. Fortunately, the annual non-concessional cap remains in place until you’re 74, so if you don’t take advantage of the annual cap for a few years, you still have an annual cap until the age of 74.
Note: If you’re aged 65 or over, you must satisfy a work test to be able to make a super contribution, and you cannot take advantage of the bring forward rules. See end of article for more information.
Does the annual cap apply per couple, or per individual?
The annual non-concessional (after-tax) contributions cap applies to each person, which means a couple can make up to $300,000 in non-concessional contributions for the 2013/2014 year, or up to $900,000 if they take advantage of the bring forward rules.
So, does that mean that I’m only subject to excess contributions tax if I contribute more than $450,000?
If you’re aged 65 or over, the maximum that you can contribute as non-concessional (after-tax) contributions is $150,000 for the 2013/2014 year, which means that any contributions over this amount are hit with a penalty tax of 46.5 per cent. The penalty tax is imposed on the individual rather than the super fund although you must apply for an amount equal to the tax liability to be withdrawn from your super fund account.
If you’re under the age of 65, and you contribute more than $150,000 in non-concessional contributions for the 2013/2014 year, then you trigger the bring-forward rules. You would only be subject to penalty tax if you exceed $450,000 in non-concessional contributions in one year, or you exceed the amount you can contribute under the bring-forward rules in the following two years after triggering the bring-forward rules. (For more information on the bring-forward rule see the SuperGuide article Bring forward rule: 10 facts you should know).
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.
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.