If you plan to make superannuation contributions to a super fund, you need to be mindful of the contributions caps for both concessional (before tax) contributions and for non-concessional contributions. You also need to understand the financial (or other) consequences of exceeding those contributions caps.
If you exceed your concessional (before-tax) contributions cap…
A concessional super contribution is a before-tax contribution to a super fund. Your employer, or you (if you make a tax-deductible super contribution), gain a tax deduction for making the super contribution. Salary sacrificed contributions also count towards the concessional cap; with you reducing your taxable income under a salary sacrifice arrangement, while your employer claims the tax deduction for the super contribution (as the employer would also claim a tax deduction if the money was paid as salary, rather than redirected to a super fund).
Two contributions caps apply to concessional contributions, and the applicable cap depends on your age. The general concessional contributions cap is $30,000 for the 2015/2016 year, and applies to anyone aged 48 years or younger as at 30 June 2015. The temporary higher concessional cap of $35,000 for the 2015/2016 year applies to anyone aged 49 years or older as at 30 June 2015. For more information on the general rules applicable to concessional contributions, see SuperGuide article Super concessional contributions: 2015/2016 survival guide.
Since July 2013, the consequences of exceeding your concessional cap generally involve extra income tax rather than onerous penalty tax, and also some administrative inconvenience. Your excess concessional contributions will count towards your personal assessable income and you will have to pay income tax at your marginal income tax rate on those excess concessional contributions from your personal savings, since they are treated as part of your regular income. The ATO will apply a 15% tax offset when processing your tax return, to recognise the 15% contributions tax already deducted from the excess concessional contributions.
Note: You will also incur an excess concessional contributions charge on the increase in income tax payable, to recognise the delay in paying income tax on this income.
Payment of extra income tax: You can choose to withdraw part or nearly all of your excess concessional contributions to pay the extra income tax. You can withdraw up to 85% of your excess concessional contribution. If you don’t withdraw the excess concessional contribution or leave some of the excess concessional contribution in your super fund, this excess amount then counts towards your non-concessional contributions cap, and may be up for potential penalty tax.
For information on how the notification process and payment process works in relation to excess concessional contributions, see SuperGuide article Excess contributions: what happens if I receive an ATO assessment? Excess contributions tax: What happens if I receive an ECT assessment?
Background: In the past, a quirk of the excess contribution rules meant that some super contributions would end up being subject to a whopping 93 per cent tax because the excess contributions were treated as excess concessional (before-tax) contributions, which were then counted towards your non-concessional (after-tax) contributions cap, and which could then also cause an individual to exceed the non-concessional cap. Confused? Luckily, the scary penalties have not applied since July 2013 (but still apply to super contributions made before July 2013). I explain the old rules in the second half of the article, because anyone who exceeded the contributions caps before July 2013 are still subject to the old rules on those earlier super contributions. For more information on how the government could be so silly to maintain such a draconian excess contributions tax policy until June 2013, see SuperGuide article Excess contributions tax: The most ridiculous super policy ever? .
If you exceed your non-concessional (after-tax) contributions cap…
A non-concessional super contribution is a super contribution made from after-tax income, or made from assets or income that are not taxable. In turn, when a non-concessional contribution is made to a super fund, no tax deduction is claimed by the individual making the super contribution, and contributions tax is not deducted by the super fund.
The annual non-concessional (after-tax) contributions cap for the 2015/2016 year is $180,000. If you’re aged under 65 years of age you can take advantage of the bring-forward rule, which means you can bring forward 2 years’ worth of super contributions in one year, and that translates into potential non-concessional super contributions of up to $540,000 for the 2015/2016 year, before you would exceed the non-concessional cap. For more information on the general rules applicable to after-tax contributions, see SuperGuide article Your 2015/2016 guide to non-concessional (after-tax) contributions, and for specific information about the bring-forward rule, see SuperGuide article Bring-forward rule: 10 super facts you should know
Since 1 July 2013 (the start of the 2013/2014 financial year), excess non-concessional contributions can now be withdrawn from a super fund without financial penalty, although the super fund earnings associated with those excess contributions count towards your assessable income and will be subject to your marginal income tax rate.
Warning: If you choose to leave your excess non-concessional contributions within your super fund however, then your excess super contributions made on or after 1 July 2014 will be subject to the top marginal tax rate (47 per cent plus Medicare levy of 2 per cent) even when your marginal tax is lower. Excess non-concessional contributions made during the 2013/2014 year (from 1 July 2013 to 30 June 2014), and that you choose to keep in the super fund, are subject to the top marginal tax rate applicable for that year (45 per cent plus Medicare levy).
How the excess contributions tax rules work for the 2012/2013 year and earlier years
Before July 2013 (and this still applies for any super contributions made during the financial years before July 2013), the consequences of exceeding one or both caps could be financially devastating. Since 1 July 2013 however, if you exceed your concessional (before-tax) contributions cap or non-concessional (after-tax) cap, the consequences are generally administrative inconvenience and a small financial charge.
If you exceeded your concessional cap for the 2012/2013 year, or earlier financial years, then your excess concessional contributions were hit with excess contributions tax of 31.5 per cent, in addition to the usual 15 per cent contributions tax payable on the contributions. What this meant, is that excess contributions were hit with a tax rate of 46.5% (equivalent to the top marginal tax rate for that year of 45% plus Medicare levy).
Note: The government did show some mercy after much complaining from the super industry and complaints from commentators like myself, by allowing a first-offence waiver. From 1 July 2011 and until 30 June 2013, individuals who exceeded the concessional contributions cap by up to $10,000 could request that the excess contributions were refunded to them. You could only seek a refund if you had exceeded the concessional cap for the first time, and you exceeded the cap by no more than $10,000.
Warning: Another sting for the super saver is that those excess concessional contributions also count towards your non-concessional (after-tax) contributions cap. Before July 2013 (and still applies for the financial years before July 2013), if you exceeded your non-concessional contributions cap, the excess non-concessional contributions were hit with the top marginal tax rate plus Medicare levy (which was then 46.5 per cent), even when your marginal tax rate was much lower. This hefty tax continues to potentially also apply from the 2013/2014 year onwards, but you can avoid the penalty tax by withdrawing the excess non-concessional contributions.
You can find more information about the excess contributions rules in the SuperGuide article Excess contributions: What happens if I receive an ATO assessment?, and the hefty penalties in place before July 2013, in the SuperGuide article Excess contributions tax: The most ridiculous super policy ever?