What Are Super 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.
Today, we have to take into account superannuation concessional caps before adding to superannuation savings.
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.
Concessional Contribution Caps
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.
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%.
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’.
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