Louise Biti provides tips to avoid unintentional breaches of the caps for superannuation contributions.
Contributions to superannuation are subject to contribution caps. Tax penalties apply if the caps are exceeded. The rules may appear simple but a number of traps can trip up the unwary.The cap on concessional contributions started on July1, 2007, but the non-concessional cap started earlier with a $1million cap applicable from May 9, 2006, to June 30, 2007. The Australian Taxation Office believes that approximately 3000 super fund members breached this transitional cap – and they will receive tax assessment notices to pay penalty tax of 45.5 per cent on the excess contributions.
THE CONTRIBUTION CAPS
Contributions are divided into two categories: concessional contributions and non-concessional contributions. Some contributions, such as the Government co-contribution, are not included in either category. The caps on contributions are indexed on July 1 each year but only increase in multiples of $5000. This meant we did not see an increase on July 1, 2008. We were going to see an increase on July 1, 2009, but proposals in the Federal Budget have removed the increase and halved the concessional caps. The table below summarises the classification of contributions and the cap amounts.
THE PENALTIES
If the caps are breached the following tax penalties apply:
• Concessional cap – the member will pay 31.5 per cent tax on the excess contributions (in addition to the 15 per cent deducted within the fund). The member can choose to deduct the tax from a superannuation fund or pay it from other personal sources. The gross excess contribution also counts towards the non-concessional cap.
• Non-concessional cap – the member will pay 45.5 per cent tax on the excess contributions. The member must deduct the tax from a superannuation fund. They can choose which fund as it does not have to be deducted from the fund that the excess contributions were paid into.
HOW THE AGE RULES WORK
Age rules apply to both contribution categories. For example, clients age 50 or older have a higher (non-indexed) concessional contribution cap, while clients under age 65 can use the “bring-forward” rule to make higher non-concessional contributions in a single year. In most cases, these rules are easy to apply, but traps arise when determining the appropriate limits in the year a person turns age 50 or 65.
Concessional contributions
If a member is age 50 or older on June 30, he/ she can use the higher limit of $100,000 ($50,000 from July 1, 2009) for concessional contributions in that financial year. This is a transitional limit and only applies until June 30, 2012. For example: Bart was born on April 25, 1960, which means he turned 50 in the 2009/10 financial year. Bart’s concessional contributions are measured against the $50,000 cap. In the 2009/10 year, concessional contributions up to $50,000 can be made either before or after his birthday without breaching the concessional contribution cap.
Non-concessional contributions
If a member is under age 65 on July 1, he/she can use the “bring-forward” rule. This allows non- concessional contributions in that year to total up to three times the non-concessional contribution cap. If this rule is triggered, non-concessional contributions over a three-financial-year period (starting with that financial year) are limited to three times the cap for that first year. If the limit increases in either of the following two years, the member cannot benefit from the indexation.
For example: Colin was born on May 18, 1945, which means he turns 65 in the 2009-10 financial year. As he was only age 64 on July 1, 2009, he can use the “bring-forward” rule to make non-concessional contributions in 2009-10, up to $450,000 without creating an excess contribution. But what if Colin only contributes $200,000 in 2009-10? He will trigger the “bring-forward” rule if he contributes more than $150,000, allowing him to use the rule over the next two years even though he is over age 65 in those two years.
He just needs to ensure that his total non-concessional contributions between July 1, 2009 and June 30, 2012, do not exceed $450,000. Therefore, in 2010-11 he could make further non-concessional contributions of up to $250,000 (subject to work test rules). If the non-concessional contribution cap increases on July 1, 2010 Colin’s remaining limit still stays at the $250,000. He does not benefit from the indexation.
One further complication is that once Colin reaches age 65, no single contribution can exceed $150,000 so he may need to split the amount into two or more contributions. All contributions can be made to the same fund provided they are made on separate days. If Colin makes non-concessional contributions of $150,000 or less in 2009-10 he will not trigger the “bring-forward” rule and his contributions in each individual financial year cannot exceed $150,000 (or the relevant contribution cap for that year). The work test rules apply once he reaches age 65.
TIPS TO AVOID EXCESS CONTRIBUTIONS
• Check details of non-concessional contributions that clients have made in the previous two financial years to determine whether the “bring- forward” rule is already in play.
• If clients salary sacrifice to superannuation, review the total concessional contributions before the end of a financial year to ensure the limit is not exceeded. Make sure you allow for any Superannuation Guarantee paid on bonuses and pay rises.
• If a client turns age 50 or 65 check what limit applies for the year.
• Clients may wish to take advantage of the higher concessional caps before July 1, 2009.
Louise Biti is a Director of Strategy Steps, an independent company providing strategy support to financial planners: www.strategysteps.com.au
