Super contribution caps

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Easing the rules |  Non-concessional caps

In the good old days (just a few years ago), anyone inching towards retirement age had the strategic option of loading up their superannuation savings with serious lumps of money, and getting a tax break for doing so. Making large contributions to super with pre-tax dollars was a very neat way to reduce taxable income, and for anyone who could afford it, became retirement saving's and tax planning's easy option.

Called 'concessional contributions', these payments to your super fund include the compulsory 9% super guarantee paid by employers, salary sacrificed amounts and personal contributions for which you can claim a tax deduction (like those made by the self-employed).

To even-out the playing field, the government put a cap on the amount people could put into super under these favourable terms, and from July 1, 2007 limited concessional contributions to $50,000 a year. But a further jolt to saving for retirement arrived on July 1, 2009 when this cap was halved to $25,000. These rules applied to people under the age of 50.

There is an exception to the rule, called the 'transitional' cap, for people aged at least 50 at any time up to June 30, 2012. This is designed to ease in the halving of the super contribution caps for people closer to retirement, and is available to a taxpayer who is at least 50 years of age by June 30 in a transitional year. The transitional cap is presently $50,000. This will halve to be the same as everyone else ($25,000) from June 30, 2012, but increase to $50,000 for those aged 50 with less than $500,000 in their fund from June 30, 2014.

Age	Concessional cap
To June 30, 2012
Under 50	$25,000
50 - 74	$50,000
From July 1, 2012
All ages	$25,000
From July 1, 2014
Over 50 and fund balance less than $500,000	$50,000

Don't be caught
The halving of the cap on pre-tax contributions may have dire consequences for anyone who is putting in an effort and has in place, for example, a salary sacrifice arrangement with an employer to bolster super savings in the run-up to retirement. And remember that the 9% super guarantee counts towards the cap.

Exceed this new limit, and any excess contributions will be taxed at 31.5% (on top of the 15% the fund pays) – which certainly takes some incentive away to put more into super, when you'll be facing a tax of 46.5%.

Easing the rules
With the Federal Budget 2011-12 however came a change to the rules around exceeding contribution caps. The government will provide eligible individuals with the option to have excess concessional contributions withdrawn from of their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.

The measure will apply where an individual has made excess concessional contributions of up to $10,000 (not indexed) in a particular year and is only available for breaches in respect of 2011-12 or later years – and only for the first year in which a breach occurs.

This measure makes the super system fairer by allowing those who have breached the cap for the first time, by up to $10,000, the option to have these contributions refunded and taxed at their potentially lower marginal tax rate rather than the 46.5% effective excess contributions tax rate.

The Tax Office also has some discretion regarding penalising taxpayers or not for excess contributions, a discretion that can be made before an assessment is finalised. No doubt this change was made to allow for people who genuinely did not intend to breach the caps to argue their case.

The exception is for those aged 50 or over who have a super balance of less than $500,000, where the concessional contributions cap will be boosted to $50,000 from July 1, 2014. This will allow such people to 'catch up' on their super amount at a stage of their lives when they may be able to increase their retirement savings.

And if you're in business for yourself (as say, a sole trader), don't forget that certain other concessions for personal super contributions can push you over the limit, such as the small business CGT retirement concession that allows the capital gain made from the sale of an eligible asset to be tipped into super (the capital gain is then tax-free). This is counted towards the concessional super contributions cap.

The legal obligation for both the excess concessional contributions tax (at 31.5%) and the excess non-concessional contributions tax (at 46.5%) fall on you personally and not on the super fund, but the payment methods differ. For the excess concessional contributions tax, you may choose to pay personally or for the super fund to pay it.  For the excess non-concessional contributions tax, the super fund must pay the money.

Not all caps are the same
Amounts that exceed the concessional cap are counted towards the 'non-concessional' cap. Non-concessional contributions to super are those made from after-tax income, which are not taxable to the super fund and are not tax deductible to you, and include any voluntary amounts you put into super, as well as spouse contributions.

The cap imposed on these contributions is $150,000 a year, indexed from 2010-11 onwards. But if that limit is exceeded, you face a potential tax rate of 93% on excess contributions (made up of the 15% in the hands of the fund, plus 31.5% for excess concessional contributions, plus 46.5% for the excess non-concessional amount).

But if you are under 65 years old when you breach the non-concessional contributions cap, don't panic just yet – you are automatically entitled to use the 'bring forward rule'. This lets you 'bring forward' the $150,000 (unindexed) caps for the next two years into the current year. So you get a cap of $450,000 for that initial year and won't be punished for contributions between $150,000 and $450,000, as long as your total non-concessional contributions for the three years don't exceed $450,000.

Note that if you seek to make contributions while at least 65 years of age, it will be necessary to pass a 'work test'.

Last reviewed 3/08/2012

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