UPDATE: In the May 2012 Federal Budget, Treasurer
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 was halved to $25,000 for under-50s, from the 2009/2010 year (previously $50,000, and had been set to increase to $55,000), and remains at $25,000 for the 2011/2012 year. The $25,000 cap is likely to increase for the 2012/2013 year, due to the indexation rules applicable to the contributions caps.
The transitional concessional cap (applicable for those 50 years and over), was halved to $50,000 from 2009/2010 year and remains at $50,000 for the 2011/2012 year. Under the current laws, the transitional cap will revert to $25,000 from the 2012/2013 financial year, although the Labor Government has announced that it intends to permanently retain the $50,000 cap for over-50s, subject to some strict conditions (for more information on this prospective change see article Super contributions: What’s going on with the over-50s concessional cap?).
The halving of the concessional caps (and the dodgy indexation policy for deciding when to increase the caps) has had a flow-on effect for the non-concessional (after-tax) contributions cap. The after-tax contributions cap will remain at $150,000 for another year, and going forward will be indexed in line with increases in the concessional cap – six times the level of the (indexed) concessional cap. I discuss the rules applicable to non-concessional contributions in my article, Your 2011/2012 guide to non-concessional (after-tax) contributions.
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 | Transitional cap for over-50s** |
| 2011/2012 | $25,000 | $50,000 |
| 2010/2011 | $25,000 | $50,000 |
| 2009/2010 | $25,000 | $50,000 |
| 2008/2009 | $50,000 | $100,000 |
| Non-concessional contributions cap* | ||
| Income year | Cap | Bring-forward rule |
| 2011/2012 | $150,000 | $450,000 |
| 2010/2011 | $150,000 | $450,000 |
| 2009/2010 | $150,000 | $450,000 |
| 2008/2009 | $150,000 | $450,000 |
*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.
**Transitional provisions in place (until June 30, 2012) for anyone aged 50 or over on or after July 1, 2007. The existing law states that from July 1, 2012, the contributions cap for all age groups is $25,000 plus any $5000 increments to the $25,000 limit due to indexation since July 1, 2009. The Government has announced that the $50,000 (indexed) limit will remain in place for Australians who have less than $500,000 in their super account (yet to be legislated – see Super contributions: What’s going on with the over-50s concessional cap?).
What is counted as a concessional contribution?
Concessional contributions, also known as before-tax contributions, include your employer’s compulsory Superannuation Guarantee 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 (or $50,000 if aged 50 or 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
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.
Note: For the 2011/2012 year, if you pay less than 15 cents in the dollar in income tax, that is your taxable income is less than $37,000, then concessional contributions may not be the most tax effective option to save for retirement. Individuals paying less than 15 cents in the dollar are usually better off making after-tax super contributions (see separate article: Your 2011/2012 guide to non-concessional (after-tax) contributions).
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 cap was halved from July 2009, and the opportunities to contribute greater amounts later in life more limited.
If you exceed your concessional cap for the 2011/2012 year, then the excess concessional contributions are hit with
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 2011/2012 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) has meant that Joan has had to rethink her TRIP and concessional contribution strategy, dramatically. She can still use the strategy but the mix of pension income and business income had to be adjusted.
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
Hi, a quick question if I may
I turned 50 back in January 2010. How much can I contribute into super in this (09/10) tax year? On one of the previous pages there was a mention of needing to be 50yo back in 2007. Is the case? If so then I believe my limit is $25,000 not $50,000 – please tell me I’m wrong and I can contribute 50K
Thanks, Tom
Hi Tom
Your question is a popular one, and fortunately I have answered this question already on the Superguide website. Generally speaking, if an individual is aged 50 or over at the end of the financial year, then the concessional contributions cap applicable will be the transitional $50,000. I explain this rule in more detail in the following article (click on link)
http://www.superguide.com.au/boost-your-superannuation/concessional-contributions-turning-50-is-all-about-timing
Note: I am providing information rather than giving you advice on your personal circumstances.
Regards
Trish
The Government announced on 2 May 2010 that from 30 June 2012 the limit for those 50 and over will remain at $50,000 per person per year for those with an account balance of less than $500,000.
What if you have more that the $500,000 in your super fund.
Hi Michael
Thanks for your email. The Government has not yet made laws on this issue. There is a currently an exposure draft on the proposed change.
The original announcement indicated that if someone has $500,000 in their super account, then the concessional cap will be $25,000 (or whatever the indexed amount of $25,000 is from July 2012).
The article below briefly explains the proposed policy:
http://www.superguide.com.au/superannuation-basics/over-50s-contributions-cap-of-50000-now-permanent-for-some
Regards
Trish
What happens to someone who is under 50 and is on a salary of, say, $400,000 per year. Their compulsory 9% super guarantee would be $36,000 and would exceed the concessional contributions cap of $25,000. Are they still hit with the 31.5% excess contributions tax, just beacuse their employer paid the compolsuory 9% into super?
Hi Stu
Thanks for your comment. There is an upper limit to how super guarantee an employer has to pay. See links: http://www.superguide.com.au/superannuation-basics/upper-limit-on-sg-contributions and http://www.superguide.com.au/superannuation-basics/superannuation-guarantee-what-is-the-maximum-sg-that-my-employer-must-pay
If you have multiple employers however (such as a director on multiple boards) then exceeding the concessional cap is a distinct possibility.
Regards
Trish
Does the $500,000 balance in a fund capture all types of funds and amounts in pension funds? For example what if a person had $500,000 and took $250,000 as a tansition-to-retirement pension, leaving the remainder in a super fund. Can they continue to contribute the max. $50,000 pa concessional cap, (assuming they are over 60 of course)?
Hi Stuart
Thanks for your questions. I have received a lot of questions about the concessional cap for over-50s and although there is an exposure draft available on the proposed rules, there is no legislation as yet. In the June newsletter, I will be including an article on the main questions asked by readers on this topic.
Trish
Hi Stuart – Please see the following articles that answer yours and other questions around this topic.
http://www.superguide.com.au/boost-your-superannuation/super-contributions-over-50s-concessional-cap-10-q-as
http://www.superguide.com.au/boost-your-superannuation/super-contributions-what%E2%80%99s-going-on-with-the-over-50s-concessional-cap
Regards
Trish
Hi Trish. I turned 50 in March 2011. What is my concessional cap for the 2010/2011 year and also for the 2011/12 year?
Hi Tim – Please see the following articles that answer yours and other questions around this topic.
http://www.superguide.com.au/boost-your-superannuation/super-contributions-over-50s-concessional-cap-10-q-as
http://www.superguide.com.au/boost-your-superannuation/super-contributions-what%E2%80%99s-going-on-with-the-over-50s-concessional-cap
Best wishes
The SuperGuide team
Hi Trish, happened on your site looking for confirmation of super caps for 2011/2012. Very impressed.
My particular area of concern is about the admin side of running a SMSF. I have no problem with concepts, trustee duties etc. Where I run aground is handling things like PAYG returns, withholding tax, Quarterly activity statements etc. I find the ATO somewhat worse than useless in these areas as they confidently give advice that is patently wrong and when challenged the individual eventually admits he has no idea on the correct procedure.
Do you know of a book/publication that covers this area. The ATO publication case studies/examples do not seem to cover our situation ie under 60 on Transition to Retirement Pensions.
Thanks AD
Hi Andrew
Thanks for your email.
Superannuation Australia runs a service that may assist you but it costs $200 or so dollars.
I’m also aware that a book is coming out in March called SMSF handbook or something like that, that is a manual-style of book to assist with some of the issues you mention.
I am also releasing an updated DIY Super For Dummies in January which covers a lot of this information but perhaps not to the level that you may seek.
Grant Abbott also has a couple of books out there although they are usually focused on specific strategies rather than the day-to-day running of a fund.
Regards
Trish
Dear Superguide Team,
I have made a non-concessional payment into my accumulative superannuation fund and this is now showing as a tax free amount. Please could you advise if I still will be paying 15% tax within my superfund on this non-concessional amount.
Thank You, Glynis
Hi Glynis
Thanks for your email.
Non-concessional contributions are not subject to the 15% ‘contributions’ tax, but any earnings on those super contributions will be subject to 15% earnings tax . The earnings (after earnings tax has been deducted) will form part of your super account’s taxable component.
You can also find articles on these topics on the website.
Hope this helps
Regards
Trish
Great information and written in a way that I can understand.
However I would like to check on the subject of “excess contributions be refunded “.
Looking at the following ATO page, it notes that “This proposed change is not law as it has not been passed by parliament or received royal assent.”
http://www.ato.gov.au/individuals/content.aspx?menuid=0&doc=/content/00200258.htm&page=3&H3
Can you confirm whether this has been passed?
I am in a situation where I am to receive a very large incentive bonus which will push my annual earning for the 2011/12 FY to around $250k which matches the limit as I am 48. Hence I am weighing up the risk to salary sacrifice some of the incentive bonus that will keep me under the $10k limit.
Hi Phil
Thanks for your comment and sorry for the delay in responding.
The legislation for allowing a refund of up to $10,000 in excess contributions for a first ‘offence’ has not yet passed into law .
Here’s some background:
http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=2274
http://blog.topdocs.com.au/smsf-borrowing/refund-of-excess-concessional-contributions-draft-legislation/
Regards
Trish
Hi Trish
what is the latest news on the timing of assessing the $500K threshold? I am 54 yrs old. My super balance, as you say, has been going up and down. A year ago it was definitely under $500K and I expect on 30 June 2012 it should stay over $500K ( if Greece can hold it together a bit longer!) .
Hi Steve
As announced in the 2012 Federal Budget, the $50,000 cap for over-50s will not be available for the 2012/2013 and 2013/2014 years, even if you have less than $500,000 in super. The concessional cap for everyone will be $25,000.
If you are aged 50 years or over, you can still access a $50,000 concessional contributions cap for the 2011/2012 year, regardless of the size of your super balance.
Regards
Trish
Trish,
I’m over 50 and my super balance was $456K at the start of the financial year. It is now around the $510K mark which includes a total of $35K in periodic concessional contributions I’ve made during the year. I wanted to make a final contribution ($15K) before 30 June 2012. At what point does the $500K limit apply – the start of the year or the date I make the contribution? What happens if my balance is over $500K when I make my final contribution and my balance drops and is under $500K at 30 June? Could I be penalised on half of the $50K I put in or am I OK?