Newsflash! Superannuation changes are now law passing both houses of parliament on 23 November 2016 (and receiving royal assent on 29 November 2016).
The current $180,000 after-tax cap, and the 3-year $540,000 bring-forward cap will remain in place until 30 June 2017 (that is, it continues to apply for the 2015/2016 and 2016/2017 years). Continue reading this article to find out more.
On 15 September 2016, Treasurer Scott Morrison and Minister for Revenue and Financial Services Kelly Dwyer issued a joint media release announcing that the proposed $500,000 lifetime cap on non-concessional contributions (planned to take effect from 3 May 2016) is now scrapped as a policy (for information on this scrapped $500,000 lifetime cap, see the end of the article).
Instead, the government has replaced the lifetime cap with an annual $100,000 cap (now law), taking effect from 1 July 2017. If you are seeking information on the $100,000 cap that is applicable from 1 July 2017, see SuperGuide article New $100,000 cap: Cut to non-concessional contributions cap.
Important: If you trigger the bring-forward rules during the 2015/2016 or the 2016/2017 years, and you don’t fully utilise your bring-forward cap before 1 July 2017, then your bring-forward cap will be subject to transitional rules. For more information about the transitional rules, see SuperGuide article Bring-forward rule: 10 super facts you should know.
What are non-concessional (after-tax) contributions and what are the limits?
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 an annual limit on the amount of non-concessional (after-tax) contributions that you can make.
The current legislated rules impose an annual cap of $180,000 for one year (1 July through to 30 June), and the Coalition government has introduced an annual non-concessional contributions cap of $100,000 from 1 July 2017.
Note: Until 15 September 2016, the federal government had hoped to impose a lifetime cap of $500,000 taking effect from 3 May 2016, and backdating the contributions that counted towards the non-concessional contributions cap to 1 July 2007 (for information on this now-scrapped policy, see the section at the end of this article).
For your reference, the annual non-concessional contributions cap of $180,000 for the 2016/2017, and 2015/2016 years remains in place, which was the same limit that applied for the 2014/2015 year. (See table below for contribution limits for the past 10 years).
Note: If you are under the age of 65, you can contribute up to $540,000 in non-concessional contributions for the 2016/2017 year, and likewise this was available for the 2015/2016 and 2014/2015 years. This opportunity to take advantage of the non-concessional cap for future years, in the current financial year, is known as the bring-forward rule (see later in this article for an explanation of the bring-forward rule, or see our SuperGuide article Bring-forward rule: 10 super facts you should know, and for how the bring-forward rule will operate from July 2017, see SuperGuide article New $100,000 cap: Cut to non-concessional contributions cap).
Non-concessional contributions cap for 2017/2018 year, for 2016/2017 year and previous years
|Income year||Cap||Bring-forward cap*|
*If you’re aged 65 or over, you must satisfy a work test to make super contributions (see SuperGuide article Over-65s work test: How does it operate again?). You cannot make voluntary super contributions after turning 75. For more information on the over-75 rule, see SuperGuide article Super contributions beyond the age of 75.
**Note that if your total superannuation balance is equal to, or more than, $1.6 million, you will not be able to make non-concessional contributions on or after 1 July 2017. For more information see SuperGuide article New $100,000 cap: Cut to non-concessional contributions cap.
No tax on non-concessional contributions
Non-concessional contributions are sourced from your after-tax income or non-taxed 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 derives from those contributions are usually taxed at a lower rate than would be the case for earnings outside the super fund, depending on your level of taxable personal income. Super fund earnings are taxed up to 15 per cent compared to marginal tax rates of up to 47 per cent plus 2% Medicare levy (for 2016/2017 year) on individual earnings outside the super environment.
Note: The top marginal tax rate includes a temporary extra tax of 2% for anyone earning $180,000 or more from the 2014/2015 year, taking the top marginal rate to 47% (or 49%, including 2% Medicare levy), until the top marginal tax rate reverts to 45% plus Medicare levy from 1 July 2017. (For more information on this extra income tax, see SuperGuide article Temporary Budget Repair Levy: More income tax for high-income earners until June 2017.)
Can I contribute more than $180,000 during the 2016/2017 year?
The non-concessional contributions cap for the 2016/2017 year is $180,000. If you’re under the age of 65 however, you can bring forward up to two years’ worth of non-concessional contributions, which means you can make up to $540,000 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 2016/2017 year, and for the 2015/2016 year is $540,000. When you contribute more than $180,000 in non-concessional contributions in one year, and you are under the age of 65, you automatically triggered the bring-forward rules for the following two years. The ‘bring forward’ rules are not available to Australians aged 65 or over.
Note: From 1 July 2017, a lower annual NCC cap of $100,000 will be introduced which means the bring-forward cap will be a maximum of $300,000 (from 1 July 2017). If you trigger a bring forward during the 2015/2016 year, or the 2016/2017 year, then you need to be aware of the transitional rules applicable from July 2017. For more information about the transitional rules for the bring-forward cap, see SuperGuide articles New $100,000 cap: Cut to non-concessional contributions cap and Bring-forward rule: 10 super facts you should know.
Does the annual cap apply per couple, or per individual?
The annual $180,000 NCC cap and the $540,000 bring-forward cap, applies to each person, which means a couple could potentially make up to $1.08 million in non-concessional contributions for the 2016/2017 year, assuming neither member of the couple has triggered the bring forward rule in the previous 2 years, and both individuals are under the age of 65 at the start of the financial year. For more information on the bring-forward rules, see SuperGuide article Bring-forward rule: 10 super facts you should know.
Note: From 1 July 2017, a lower annual NCC cap of $100,000 will apply, and likewise a lower bring forward maximum of $300,000 will apply. For more information about the proposed $100,000 annual NCC cap, see SuperGuide article New $100,000 cap: Cut to non-concessional contributions cap .
TFN is a must, and count your contributions carefully
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.
Exceeding your non-concessional contributions cap: If you exceed the non-concessional contributions cap at any time on or after 1 July 2013, you have the opportunity to withdraw your excess contributions from your super fund and earnings on those contributions will count towards your personal taxable income, plus you will have to pay a small charge for those earnings reflecting the delay in the ATO recouping income tax on that income for that financial year. The alternative is to leave your excess non-concessional super contributions in the super fund, and pay penalty tax of 49% within your super fund on those excess non-concessional contributions. In other words, if you choose to retain your excess contributions in your super account, then the excess non-concessional contributions will be subject to penalty tax of 49% (and 47% from 1 July 2017). For more information on excess contributions, see SuperGuide article Excess contributions rules: A quick summary.
So, does that mean that I’m only subject to excess contributions tax if I contribute more than $180,000?
For an individual who is aged 65 years or over, any non-concessional contributions over the $180,000 annual cap could be hit with excess contributions tax of 49%. For an individual under the age of 65, any NCCs over the $540,000 bring-forward cap, could be hit with a penalty tax of 49%.
The alternative in both scenarios is to withdraw the excess contributions, which eliminates the requirement to pay 49% excess contributions tax.
If you choose to keep the excess contributions in your super fund, then the penalty tax of 49% 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 exceed the $180,000 NCC cap (if aged 65 years or over), or exceed the $540,000 bring-forward cap, you will need to consider the excess contributions rules. For more information on the excess contributions rules see SuperGuide article Excess contributions rules: A quick summary.
Is super tax-effective for everyone?
If you pay less tax in percentage terms on your wages and salary (and other income) than the 15% earnings tax payable by your super fund on investment earnings, then making non-concessional super contributions may not be a tax-effective option.
The one important exception is if you are eligible to take advantage of the government’s co-contribution scheme. For the 2016/2017 year, as occurs for the 2015/2016 and 2014/2015 years, 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. For more information, see the SuperGuide article Cashing in on the co-contribution rules (2016/2017 year).
Important: Note that super fund earnings will still be subject to 15% tax, which means anyone paying less than 15% tax on personal income has to decide if making super contributions, such as non-concessional contributions, is a tax-effective strategy.
Income tax background: From the 2012/2013 year onwards, the former ALP federal government 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 2016/2017 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. For more information on personal income tax rates, see SuperGuide articles Australian income tax rates for 2016/2017 and 2015/2016 years, No tax in retirement because you SAPTO (updated rates) and Income tax cut for 2016/2017 year, and for 2017/2018 year.
When does the $100,000 non-concessional contributions cap apply, and will it increase?
The lower $100,000 NCC cap applies from 1 July 2017. Note that if you a total superannuation balance equal to, or more than $1.6 million, you will not be able to make non-concessional contributions on or after 1 July 2017.
The annual $100,000 NCC cap will be indexed in $10,000 increments, in line with indexation of the concessional (before-tax) contributions cap, which is then indexed in line with increases in the average weekly ordinary times earnings (AWOTE). The indexation of the $100,000 cap is based on 4 times the indexed increase in the $25,000 concessional (before-tax) cap. The concessional contributions cap will be indexed in $2,500 increments, which we anticipate means that the $100,000 after-tax will be indexed in $10,000 increments (4 x the concessional cap increment). What this means is that the cap will not increase annually (unless AWOTE increases by 10% in one year) but will only increase when indexation of the $25,000 concessional cap totals $2,500 or more. For more detailed information about the $100,000 annual NCC cap, see SuperGuide article New $100,000 cap: Cut to non-concessional contributions cap.
Background: Currently, the non-concessional contributions cap is also indexed in line with increases in the concessional (before-tax) contributions cap, although the non-concessional (after-tax) contributions cap is always six times the level of the (indexed) concessional cap. (Currently, the concessional cap is indexed in $5,000 increments, but from 1 July 2017, it will be indexed in $2,500 increments. I explain the concessional contributions rules in the SuperGuide article: Super concessional contributions: 2016/2017 survival guide and the post-July 2017 concessional contributions rules in the SuperGuide article Concessional contributions caps to be slashed from July 2017).
History: For the 2013/2014 year and each financial year back to the 2008/2009 year, the annual non-concessional contributions cap was $150,000 (see table earlier in this article). The non-concessional cap increased to $180,000 from the 2014/2015 year, in line with increases in average wages over time. Note that since the non-concessional cap was first introduced in July 2007, the 2014/2015 year was the first time the non-concessional cap had been adjusted (likewise with the concessional contributions cap). Until the 2014/2015 year, the contributions caps had never been adjusted in line with wage increases as promised. Instead the former ALP federal government froze the contributions caps from when they were originally introduced in July 2007, until the end of the 2013/2014 year. The Liberal government has now abolished the annual cap of $180,000 taking effect from 1 July 2017,and from 1 July 2017, have replaced it with a smaller annual cap of $100,000.
Whatever happened to the $500,000 lifetime NCC cap planned from 3 May 2016?
If you’re still wondering what happened to that $500,000 lifetime cap that Treasurer Morrison was banging on about, it is no longer going to happen. The policy was scrapped and then mixed into the humble pie that the Liberal backbenchers are baking for the treasurer.
The policy the treasurer planned to impose was: Taking effect from 7.30 pm on 3 May 2016, a $500,000 lifetime cap would have applied to non-concessional contributions, and all non-concessional contributions made since 1 July 2007 would be included in that lifetime cap. And if you had made more than $500,000 in non-concessional contributions (NCC) from 1 July 2007 through to 7.30 pm, 3 May 2016, then you would be deemed not to exceed your lifetime cap. If you then made further NCCs however, post 3 May 2016, you would exceed your lifetime cap and the extra contributions will be subject to the excess contributions rules.
The $500,000 lifetime cap is not going to apply. Instead the $180,000 annual cap applies for the 2016/2017 year, and an annual $100,000 cap will apply from 1 July 2017 (for the special conditions of this new cap, see our special SuperGuide article New $100,000 cap: Cut to non-concessional contributions cap).
Background: On 3 May 2016, the federal government announced an IMMEDIATE cut to the non-concessional contributions cap, including a cessation of the bring-forward rule). Although this change was intended to have immediate effect, from 3 May 2016 (7.30pm), it was also subject to the Coalition convincing its backbenchers and the independent MPs that this proposed change to the after-tax contributions cap was fair and not retrospective. If Treasurer Morrison had had his way, the annual $180,000 non-concessional contributions cap, which was applicable in previous financial years and for most of the 2015/2016 year, would no longer apply from 3 May 2016. Australians were to have a lifetime non-concessional contributions cap of $500,000, rather than the annual cap of $180,000 (and the bring-forward rule allowing up to $540,000 over a 3-year period for under-65s would no longer available).
At the time of the government announcing this retrospective policy, I wrote: Good luck with that! I also wrote that the super industry and many Liberal MPs were opposed to this measure, so the final details may change.
I am pleased to write that Treasurer Morrison had no luck with his $500,000 lifetime retrospective cap: not only did the final details change, the entire policy has been scrapped, although the replacement policy is more complex.
As reported at the time, and mentioned earlier in this article, on 15 September 2016, the federal government announced that the proposed $500,000 lifetime cap on non-concessional contributions was now scrapped, and would be replaced with an annual $100,000 non-concessional cap (now law). The start date for the annual non-concessional cap is 1 July 2017, which means that the $180,000 annual non-concessional cap remains in place until 30 June 2017, and the bring-forward rule allowing up to $540,000 in non-concessional contributions, also remains in place until 30 June 2017. For more information on the new cap, see SuperGuide article New $100,000 cap: Cut to non-concessional contributions cap.
Additional 2016/2017 Contributions Guides
Click on the links below to access SuperGuide’s other contributions guides: