The time is approaching when another financial year draws to an end. As we all bid farewell to 2011/2012, some will also say goodbye to superannuation’s transitional concessional contributions cap, which is due to elapse on 30 June 2012.
According to section 292-20 of the Income Tax (transitional provisions) Act 1997, the transitional cap applies if you are 50 years or over on the last day of the financial year, between 1 June 2007 and 30 June 2012. From the 2009/10 financial year to present, the transitional cap it set at $50,000, and unlike the standard concessional cap of $25,000, it is not subject to indexing.
Are you eligible?
In determining the eligibility to use the transitional cap for a respective year, it is the age of the individual on the last day of that financial year, and not their age at the time the contribution is made. Therefore an individual that will turn 50 on 30 June 2011 will be eligible contribute up to $50,000 of concessional contributions in the 2011/12 financial year without incurring liability for excess contributions tax. This is the case even if the contribution in that year occurred at the time that individual was still 49 years old.
On 1 July, the cap for those aged over 50 will revert back to the standard concessional cap. However this may not be the case for all. The government has announced that from 1 July 2012, individuals aged 50 or over with total superannuation balances below $500,000 can continue to make up to $50,000 in concessional contributions in the 2012/13 financial year and subsequent years.
Eligibility will be based on self-assessment and it will be the responsibility of the individual to calculate their superannuation account balance and any contributions made within the year. This policy announcement is currently being discussed within the Government’s Superannuation Roundtable forum and is yet to receive royal assent. Changes to the policy and information regarding its implementation will be subject to the outcome of the consultation.
Window of opportunity
Therefore until legislation has passed, and certainly for those with super balances above $500,000, current concessional contribution limits for individuals aged over 50 will be halved. A short window of opportunity exists between now and 30 June to maximise their contributions into their super fund. This may be achieved by salary sacrificing amounts for employees, or a contribution to the superfund by self-employed where a deduction is claimed for the amount of the contribution. Any unused portion of the transitional cap will be forfeited and cannot be carried forward. Therefore, the ‘use it or lose it’ mentality applies.
Importantly, as is the case with the standard concessional cap, the transitional cap includes all contributions that are included in the assessable income of the fund. Individuals must therefore be aware of all other contributions into the fund for that year that are classified as concessional contributions to avoid incurring excess contributions tax.
Concessional contributions are defined in section 292-25(2) of the Income Tax Assessment Act 1997 and include the superannuation guarantee, salary sacrifice, self-employed contributions where a deduction is claimed, and allocations from reserves in excess of what is reasonable. Making a contribution without regard to what has already been (or will be) contributed to the superfund may lead to the caps being breached and incurring excess contribution tax.
Example
An individual aged over 50 with a super account balance of $600,000 wishes to take advantage of the transitional contribution cap before 30 June and would like to salary sacrifice $50,000 into their super fund.
While they are eligible to contribute up to $50,000, they will need to take into account any compulsory super guarantee amounts that have been contributed within the year, and ensure that the salary sacrifice amount on top of the superannuation guarantee does not together exceed the $50,000 cap. Any amount up to the cap that remains after all contributions are made will not be rolled over. At 1 July, their concessional cap will reduce to $25,000.
Even though time may be of the essence when making the most of the transitional cap before 30 June, individuals should be aware of all their fund contributions to ensure this opportunity does not create an unnecessary tax bill. Furthermore, individuals should review their salary sacrifice or personal deductible super contributions going forward to adjust for the reduced caps in the new financial year.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
