Since 1 July 2007, the superannuation system has been graced with contribution limits restricting the amount that can be put into super without penalty. Since their arrival, these limits have been repeatedly discussed and debated, changed and amended – and they continue to create pain and confusion for DIY super trustees.
Knowing your limits
It’s critical that you are aware of your contribution limits to make sure they are not breached, because to breach them results in a tax liability of effectively 46.5%, but easily up to 93%!
There are two broad types of contributions:
- Concessional contributions: Typically made by an employer but also includes tax deductible personal contributions; and
- Non-concessional contributions: Typically personal or spouse contributions for which a tax deduction is not claimed.
Annual limit on concessional and non-concessional contributions
† This may change in 2013 to be $50,000 for account balances less than $500,000 and $25,000 for account balances greater than $500,000, pending approval.
‡ A work test applies over the age of 65.
Note that if you’re aged under age 65, you can bring forward two years’ worth of non-concessional contributions, up to the value of $450,000, and generally make this contribution in one year. You can read more about the bring forward rule here.
Importantly, when a person’s concessional contribution limit is exceeded, the amount of the excess will also spill over into the non-concessional limit – which could provide a nasty sting.
The tax sting
Rosemary is 55 years old and has an agreement in place ensuring she receives annual employer contributions of $50,000, including the 9% compulsory superannuation guarantee.
To assist with her retirement planning, in the 2010/11 financial year she made a $450,000 non-concessional contribution to her super following her husband’s retirement (read more about this strategy in How to move large sums of money into super).
However, in July 2010 her employer had made an unexpected additional concessional contribution of $1,000 – a back payment from the previous year.
Due to this $1,000 contribution, Rosemary breached her concessional contribution cap by $1,000. As a result, she will effectively pay tax at 46.5% on the $1,000, a tax impost of $465.
Unfortunately, this $1,000 excess contribution will also need to be added to Rosemary’s non-concessional limit for 2010/11. And, as she had already used up this limit, she has now breached her non-concessional limit – attracting an additional 46.5% penalty.
So, this $1,000 contribution has attracted $930 in tax!
While this example simply highlights the mechanics of the contribution limits, excess contributions tax notices of around $70,000 are often created by similarly small oversights.
How to avoid breaching your cap
Avoiding the creation of an excess contributions tax liability is always the best way to deal with the problem. Some simple tips to avoid breaching your cap include:
- Keep track of your super contributions by regularly reviewing statements;
- Remember that compulsory super contributions count towards the concessional contribution limit – in addition to salary sacrifice contributions and personal contributions where a tax deduction is claimed (eg. by a self-employed person);
- Before finalising salary sacrifice arrangements, consider the total to be contributed as well as the timing of these payments (eg. late payments from earlier years) – perhaps consider leaving a small buffer; and
- Watch out for additional superannuation contributions made by your employer as a result of a bonus.
What can be done?
On a positive note, if you exceed your contribution limit, there may be ways to manage the problem.
A simple yet important step is to check that contributions have not been made by mistake, or reported incorrectly to the ATO. For example, a rental payment intended to be made to a landlord can easily be made to a super fund in error when using online banking systems. Or alternatively, an employer may have made a super contribution rather than paying directly onto a credit card.
Where such errors have been made, the contribution may be refunded as the intention to make a super contribution did not exist.
If this is not the case and a breach has occurred, it is important to consider whether the offending contribution(s) is one that rightly belongs to the financial year in question.
When someone exceeds their cap, they will be advised in writing by the Australian Taxation Office (ATO) alerting them to this fact before an assessment notice is issued – unfortunately, this is often the earliest that people discover the breach.
It is also important to understand that the ATO does have some limited discretion to either disregard a particular contribution or to allocate it to another financial year.
Looking back at Rosemary’s case, the $1,000 contribution that caused the 93% tax penalty is one that related to a different financial year. As such, Rosemary may consider applying to the ATO to have the $1,000 contribution allocated to the relevant financial year – a successful application may solve the problem.
Where all avenues have been exhausted, there may be nothing left to do other than to pay the penalty. At least some comfort can be taken from the fact that the money to pay this penalty can come from the fund rather than directly impacting your hip-pocket.
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.
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