- How does the lower concessional contributions cap work?
- How does the lower $25,000 concessional cap affect defined benefit fund members?
- What were the concessional contributions caps for the 2016/2017 year?
- Why was the concessional cap for over-50s cut by two-thirds, and potentially three-quarters?
- Why was the $35,000 concessional cap introduced?
- What do I consider to be an appropriate over-50s concessional cap?
- Why do I believe the concessional contributions cap is a political football?
A single annual concessional (before-tax) contributions cap of $25,000 applies to all ages for the 2018/2019 year when making superannuation contributions, which was the same cap that applied for 2017/2018 financial year. Before July 2017, much higher concessional caps applied.
A concessional contribution is a before-tax super contribution, and can include an employer’s Superannuation Guarantee contribution, a salary sacrificed super contribution, or for the self-employed or not employed, a tax-deductible super contribution.
Background: Taking effect from 1 July 2017, the Coalition government scrapped the over-50s concessional (before-tax) contributions cap of $35,000, and replaced it with a $25,000 cap. The government also cut the general concessional contributions cap (for under-50s) to $25,000, from its previous level of $30,000. Since 1 July 2017, there is no longer an aged-based contributions cap; rather a single annual cap of $25,000 applies to all age groups. The changes to the concessional contributions became law in November 2016 (passed both houses of parliament on 23 November 2016 and received royal assent on 29 November 2016), and the changes took effect from 1 July 2017.
Note: The $35,000 and $30,000 caps still applied for the 2016/2017 financial year (see later in this article for how these caps work). The move to a lower universal concessional cap of $25,000, took effect from 1 July 2017.
How does the lower concessional contributions cap work?
The annual $25,000 concessional contributions cap applies for the 2018/2019 year, and also applied for the 2017/2018 year.
The annual $25,000 concessional cap is to be indexed periodically, in $2,500 increments, rounded down to the nearest multiple of $2,500. Indexation will be in line with the annual increase in full-time average weekly ordinary time earnings (AWOTE).
Important: In scrapping the over-50s concessional cap and cutting the general concessional cap, the Coalition government has offered one concession. From 1 July 2018 onwards, if you fail to use your annual concessional contributions cap of $25,000, then you can carry forward the unused portion for up to 5 years, PROVIDED YOU HAVE A TOTAL SUPERANNUATION BALANCE OF LESS THAN $500,000. For more information on the ability to carry forward unused concessional contributions cap amounts and to make catch-up contributions, see SuperGuide articles Super opportunity: Catch-up concessional contributions from July 2018 and Concessional contributions: Catch-up rules now apply (10 Q&As).
Note: Before 15 September 2016, the start date for the 5-year concessional contributions catch-up opportunity was 1 July 2017, but the start date was deferred by 12 months, to 1 July 2018. The government has stated that the deferral of this concession is a budgetary decision, to partially offset the cost of re-introducing an annual non-concessional contributions cap, rather than a lifetime limit that the government had initially announced.
Introducing a $25,000 concessional cap for all Australians, means that the cap applicable to over-50s is less than a quarter of what the cap was 10 years ago. Even for the 2016/2017 year, the annual concessional contributions cap for over-50s of $35,000, was less than a third of what the cap was 10 years ago (see later in this article for a history of the decline of the concessional contributions cap).
For more information on the concessional contributions rules, see the following SuperGuide articles:
- Super concessional (before-tax) contributions: 2018/2019 survival guide
- Concessional contributions cap: A quick guide (10 Q&As)
- Salary sacrifice and super: A guide for employees and employers
- Superannuation and employees: 10 facts about your super entitlements
- Employees can now make tax-deductible super contributions (since July 2017)
- Super opportunity: Catch-up concessional contributions from July 2018
- Concessional contributions: Catch-up rules now apply (10 Q&As)
- First Home Super Saver Scheme a fizzer, again!
How does the lower $25,000 concessional cap affect defined benefit fund members?
For a funded defined benefit fund member, the amount of their “notional taxed contributions” for a financial year, counts towards the person’s concessional contributions cap. Note that other contributions made to the funded defined benefit fund, that are not included in notional taxed contributions, do not count towards the person’s concessional contributions cap.
According to the explanatory memorandum (Chapter 4) accompanying the legislation introducing the lower concessional cap, notional taxed contributions are “broadly equivalent to the contributions that would have been required in that year to fund the individual’s expected final benefits. Notional taxed contributions are only calculated for defined benefit schemes to the extent that the schemes hold assets and are subject to tax”.
Transitional rules apply for certain defined benefit interests that an individual held on 5 September 2006 or 12 May 2009: if an individual’s notional taxed contributions exceed the concessional cap for a financial year, they will be deemed to equal the cap for the financial year.
Note: For members of unfunded defined benefit schemes, and members of constitutionally protected funds, super contributions and other certain amounts will now count against a fund member’s concessional contributions cap. Previously (before July 2017), such contributions didn’t count toward the concessional cap of fund members from these 2 types of super funds. The calculation of concessional contributions for members of unfunded (untaxed) schemes, and also for members of constitutionally protected funds, differs from the calculation for funded (taxed) defined benefit schemes. A different calculation method is used, although again such a calculation will ensure that if a fund member exceeds the cap, it will be deemed that the contributions equal the concessional cap. If you belong to such a super fund, check with your super fund about how your concessional contributions are counted from 1 July 2017 onwards. Also note that the inclusion of such contributions towards your concessional cap may limit your ability to make further concessional contributions to other super fund accounts for the 2017/2018 and 2018/2019 years, and future years.
For more information on how the 2018/2019 concessional contributions cap applies to members of unfunded defined benefit schemes and constitutionally protected funds, see SuperGuide article Latest super changes: ATO Guidance Notes and Law Companion Rulings and click on LCR 2016/11.
What were the concessional contributions caps for the 2016/2017 year?
Over-50s: For the 2016/2017 year, the annual over-50s concessional cap of $35,000 was applicable to a person aged 49 years or over on 30 June 2016. For the 2015/2016 year, the $35,000 concessional cap was applicable to a person aged 49 years or over on 30 June 2015.
Under-50s: For the 2016/2017 year, the annual concessional cap for under-50s was $30,000, and was applicable to a person aged 48 years or under on 30 June 2016. For the 2015/2016 year, the $30,000 concessional cap was applicable to a person aged 48 years or under on 30 June 2015.
For more information on the concessional contributions caps, see SuperGuide articles Super concessional (before-tax) contributions: 2018/2019 survival guide and Super contributions caps for the 2018/2019 year (and 2017/2018 year).
Why was the concessional cap for over-50s cut by two-thirds, and potentially three-quarters?
More than 10 years ago, for the 2006/2007 year, Australians aged 50 years or over were permitted to make up to $105,113 in concessional contributions (for the 2006/2007 financial year). Taking effect from July 2007, the concessional (before-tax) contributions caps were re-calibrated by the then Liberal federal government.
From 1 July 2007 through to 30 June 2009, Australians aged 50 years or over were permitted to make up to $100,000 a year in concessional contributions, and this special transitional $100,000 cap was to apply only for 5 years. Australians aged under the age of 50 had a concessional contributions cap of $50,000, and those aged 50 years or over would have the $100,000 cap for 5 years, and then be subject to a $50,000 cap.
From July 2007 onwards, the rules were very different from pre-July 2007 rules. Instead of indexing the concessional cap each year, in line with average weekly earnings, the federal government restarted the limits for concessional caps, and the caps were designed to only increase in $5,000 increments. The transitional $100,000 cap for over-50s was not indexed. At the same time, the federal government removed tax on benefit payments from super funds for over-60s. Restarting the contributions limits and introducing stepped indexation of contributions caps was designed to stop Australians from pouring too much money into super.
In the May 2009 Federal Budget, the then ALP government halved the over-50s concessional cap to $50,000, and then in the May 2012 Federal Budget, the over-50s concessional cap was halved again to $25,000. Tough luck for any older Australians hoping to make catch-up super contributions once the mortgage had been reduced, and the kids had left home.
But wait, the then federal treasurer Mr Swan announced that he had only deferred the over-50s concessional contributions cap for two years. What this supposedly meant 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, applicable at the time) is $25,000 a year.
Due to the outcry over this cut in the over-50s concessional cap, Mr Swan proposed instead that from July 2014, those with account balances of less than $500,000 would then be able to make up to $50,000 in concessional contributions each year. Does this proposal sound very similar to the super rules recently legislated by the current Coalition government; where it will allow an individual to catch up to 5 years’ worth of the annual concessional cap if the individual has not used up the $25,000 cap each year AND has less than $500,000 in super? For more information on this opportunity, see SuperGuide article Super opportunity: Catch-up concessional contributions from July 2018).
From July 2014, the ATO was expected to have some whiz-bang online reporting facility that would make it easier to find out the size of your account balance at a certain date, to enable those with account balances of less than $500,000 to access the higher concessional cap from July 2014. In any case, the proposed $50,000 cap for those with less than $500,000 in super, and with a proposed start date from July 2014, was canned due to the diabolical administration issues with the policy. I fear history will repeat itself with the current Coalition government’s new law to allow catch-up concessional contributions over 5 years, if a person has less than $500,000 in super.
Interestingly, there is no mention of a whiz-bang online reporting facility for the catch-up concessional contributions provisions taking effect from July 2018 – see SuperGuide articles Concessional contributions: Catch-up rules now apply (10 Q&As) and Contributions caps: What’s going on with the catch-up concessional contributions rule?). Instead, you need to track the contributions yourself in conjunction with your myGov account (for information about myGov, see SuperGuide article Coping with myGov: Why the government wants you to go online).
Why was the $35,000 concessional cap introduced?
Due to the debacle over trying to administer who had less than $500,000 in super, instead, from July 2013, the former ALP federal government introduced an over-60s cap of $35,000 which was expanded to over-50s from July 2014.
So, for over-50s, why have we moved from a $105,113 concessional cap (applicable until June 2007) to a $35,000 cap, and now a $25,000 cap? The short answer is: politics! Although the Liberal party introduced the $100,000 fixed cap for over-50s from July 2007, the former ALP government believed that only ‘rich’ people took full advantage of the concessional contributions cap.
The incremental reductions in the concessional contributions cap were always about politics, not policy and this ‘itsy bitsy’ approach to long-term retirement policy is prevalent on both sides of politics. Before the 2016 Federal Election, the Coalition government had been sounding out the industry (and leaking to media) the possibility of a $20,000 concessional contributions cap, but instead announced a reversion back to a universal concessional cap of $25,000, which took effect from July 2017.
What do I consider to be an appropriate over-50s concessional cap?
My view on the concessional contributions cap is that we should have a straightforward annual $50,000 concessional cap for everyone over 50, which is also subject to an overarching indexed lifetime concessional cap of an amount to be determined with industry consultation, although I am leaning towards $1.5 million or so (which is definitely not an account balance cap, but a lifetime contributions cap); allowing for earnings on these super contributions to grow these initial contributions into a healthy super account, and that can hopefully provide for a comfortable retirement. Noting again, that I also consider that both the annual cap and the lifetime limit should be indexed each year.
Allowing a $50,000 annual concessional cap, and subjecting it to a lifetime limit, allows for those workers, including women, who may have had time out of the workforce, or who have financial commitments for many years that don’t allow the flexibility of making concessional contributions. Very few people will fully utilise the concessional cap each year, but for those that do, my suggestion for an overarching lifetime limit will balance the level of concessional contributions such individuals make.
I first suggested this lifetime limit several years ago, and although successive governments have and are attempting versions of lifetime caps, none currently balance the needs of Australians to secure a decent retirement lifestyle, with the prevailing politics of the day.
For a comprehensive guide on how the concessional (before-tax) contributions cap currently works, see SuperGuide article Super concessional (before-tax) contributions: 2018/2019 survival guide.
Why do I believe the concessional contributions cap is a political football?
And for those who are still in the mood to read more about the changes to the concessional caps, here’s a political timeline evidencing why I believe the concessional contributions cap has become about politics and short-term electoral gain, and will continue to be the case until we elect leaders who understand retirement income policy:
- May 2009 Federal Budget: Halving of over-50s contributions cap from $100,000 to $50,000 taking effect from July 2009, with the over-50s cap reverting to $25,000 from 1 July 2012. Before the 2009 Budget changes were released, the ALP federal government had announced in March 2009 that the concessional cap of $50,000 was to be increased to $55,000 from July 2009. If the federal government had been sincere about only halving the before-tax limit, the concessional cap should really have been $27,500 from July 2009. The then federal treasurer Mr Swan, not only more than halved the caps, he froze the indexation of the caps for the 2009/2010 year.
- Cut in non-concessional cap: Before the 2009 Budget changes were released, the ALP federal government had announced in March 2009 that the non-concessional (after-tax) contributions cap was to increase to $165,000 for the 2009/2010 year, and the bring-forward cap was to increase to $495,000 from $450,000. (If you take advantage of the bring-forward rules, then you can make up to three years of non-concessional contributions in one year, representing your non-concessional cap for the current year and following two years.). By stating that the annual non-concessional cap was to remain at $150,000 the federal government had effectively cut the cap by $15,000 for the 2009/2010 year, and the bring-forward cap cut by $45,000, and started the indexation period from the 2009/2010 year, which meant any increase due to indexation wouldn’t happen for a few years. This ‘swifty’ was not mentioned anywhere in the 2009 Budget documents.
- May 2010 Henry Tax Review and May 2010 Federal Budget: The ALP federal government’s response to the Henry Tax Review included announcing that Australians aged 50 or over retain the $50,000 cap for concessional (before-tax) contributions, subject to satisfying certain conditions. The concessional cap for over-50s was supposed to revert to $25,000 (or the indexed amount if applicable) from July 2012, but the federal government publicly stated that it appreciated the harshness of removing the opportunity for mature Australians to play catch-up with super contributions. I wrote at the time that cutting the concessional contributions cap for over-50s was always bad policy because for many Australians, reaching the age of 50 and beyond is often the only opportunity that we have to make substantial contributions to super due to other financial commitments in our younger years; such as mortgage repayments, raising children and school fees. The special condition was that to continue to access the $50,000 concessional cap, your superannuation account balance must be less than $500,000.
- 2011/2012 Mid-year Economic and Fiscal Outlook: In November 2011, Mr Swan announced that the concessional caps would not be indexed until July 2014, further restricting the opportunity for Australians to contribute to super.
- 2012 Federal Budget: Effective from July 2012, Mr Swan removed the over-50s concessional cap until at least July 2014.
- 2012/2013 Mid-year Economic and Fiscal Outlook: In April 2013, the ALP federal government announced a concessional cap for over-60s of $35,000, to take effect from July 2013, and which was expanded to over-50s from July 2014.
- No indexation of the over-50s concessional cap. The over-50s concessional cap is not indexed which meant that under the current rules, there would have been a single concessional cap of $35,000 (most likely from the 2017/2018 year).
- 2016 Federal Budget/2016 Federal Election. The re-elected Coalition (Liberals and Nationals) government has now abolished the over-50s concessional cap, and cut the general concessional cap to $25,000, since 1 July 2017.
Remember this: In July 2006, the concessional contributions cap for over-50s was $105,113. In June 2009, over-50s were permitted to make up to $100,000 a year in concessional contributions. At the end of June 2012, a mere three years later, the maximum amount that a person aged 50 years of over could contribute as concessional contributions (including compulsory Superannuation Guarantee contributions) was $25,000 a year, and only increased to $35,000 for over-50s from July 2014 (although over-60s had a concessional cap of $35,000 from July 2013). The over-50s concessional cap of $35,000 is not indexed and would have absorbed into the general concessional cap when that cap reached $35,000 (probably from July 2017). Instead, now we have a lower, universal concessional cap of $25,000, which took effect from July 2017, and continues to apply for the 2018/2019 financial year.