Warning: Taxation danger point
ARE you in danger of exceeding at least one of the annual caps on super contributions?
Some fund members are particularly vulnerable given that the Government has halved the cap on concessional contributions from the 2009-10.
The heightened risk of making excess contributions over the coming months may be somewhat of a sleeping issue in superannuation that could turn around and bite many more funds members than in previous financial years.
And the tax office’s urging for fund members to immediately review the level of their contributions makes much sense – particularly for members who regularly make salary-sacrificed or personally-deductible contributions.
The cap on annual concessional contributions – which include employer superannuation guarantee (SG) contributions, salary-sacrificed contributions, and deductible contributions by the self-employed – have been cut from $50,000 to an indexed cap $25,000 for fund members under 50.
And the concessional cap for members over 50 has been reduced from $100,000 to $50,000. This larger cap will be substantially lowered again from 2012-13, to come into line with the cap applying to other fund members.
The cap on non-concessional (after-tax) contributions has not been reduced, remaining at $150,000. (This cap can be averaged over three years – making a contribution of up to $450,000 in a single year possible without exceeding the limit.)
Tax commissioner Michael D’Ascenzo recently identified fund members who were considered most at risk of making excess contributions. These include:
- Employees with salary-sacrificing arrangements in place that have not been reviewed following the halving of the concessional contributions cap. Among those particularly at risk of making excess contributions, according to D’Ascenzo, are employees under 50 (who are subject to the $25,000 non-concessional cap) with “set-and-forget” salary-sacrifice arrangements in place.
- Fund members who contribute to super whenever they have the money yet do not keep a track on the level of their contributions. These would include some self-employed people who are in the habit of making concessional (deductible) contributions whenever they have the cash.
The cost of exceeding the caps is high. Excess concessional contributions are taxed at 31.5% in addition to the standard 15% contributions tax that would have already been paid. And excess non-concessional contributions are taxed at 46%.
Members who overshoot both the concessional and non-concessional contribution caps are taxed at an effective rate of 93% on some excess contributions.
D’Ascenzo says the law gives him “very limited discretion” to disregard or reallocate excess contributions after a tax assessment has been raised.
The prospect of possibly paying 93% tax on some super contributions is rather frightening. Depending upon your circumstances, you may decide that it’s time to reduce your contributions over the next few months.
Read more about excess contributions tax.
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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.