Your 2010/2011 guide to non-concessional (after-tax) contributions

Non-concessional contributions are more popularly known as after-tax contributions. You may even hear them called ‘undeducted’ contributions. Such contributions are subject to a contributions cap, which sets a limit on the amount of 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 2010/2011 year, and in future years 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: 2010/11 survival guide).

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 on individual earnings outside the super environment.

Note one: Under current laws, if you earn less than $37,000 in a year (for the 2010/11 year), you have no real income tax advantages when investing via a superannuation fund, unless you’re eligible to take advantage of the government’s co-contribution scheme. The federal government places up to $1,000 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 (2010/2011).

Note two: The Labor Government has announced that they intend to make super more tax-effective for Australians earning less than $37,000 by returning any contributions tax paid on concessional (before-tax) contributions, such as your employer’s compulsory Superannuation Guarantee contributions. This tax refund, payable to a member’s super account, will take effect from 2012/2013 year (for more information see Super tax refund for lower-income earners is a winner. I explain taxable contributions, that is concessional contributions, in our ‘Super concessional contributions: 2010/2011 survival guide’.

Can I contribute more than $150,000 during the 2010/2011 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 cap is known as a ‘bring forward’. The maximum bring forward for the 2010/2011 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 2010/11 year, say on 15 March 2011, 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 2013 (that is, the 2013/2014 year).
• A $300,000 non-concessional contribution in one year: If you make a $300,000 after-tax contribution during the 2010/11 year, say on 15 March 2011, 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 2013.
• A $180,000 non-concessional contribution in one year: If you make a $180,000 after-tax contribution during the 2010/2011 year, say on 15 March 2011, 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 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 have an annual cap until the age of 74.

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 2010/2011 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 2010/2011 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 2010/2011 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.

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.

Related articles:

1. Super concessional contributions: 2010/2011 survival guide
2. Watch the (contributions) caps when super sailing
3. Contributions caps relate to financial years, not calendar years
4. Concessional contributions: Turning 50 is all about timing
5. Jump in contribution limits for 2009/2010 year