(03) 9020 2905PORTFOLIO POINT: A fix for accidental over-contribution errors in last night’s budget doesn’t mean a free pass. Here’s a must-know guide to the contribution rules.
A win for Eureka Report in last night’s Budget!
The government is going to allow some slack for those who accidentally breach their contributions limit and incur the penalty excess contributions tax rate of 93%. We’ve covered that here (6/4/11). If you want to read the full story, then read James Kirby’s column from inside the Budget lock-up last night. Click here.
But the good news doesn’t give you a free pass to abuse the process. You could still end up paying the 93% tax rate if your breach the limits. The leeway being offered is not huge – $10,000. So today, I’m going to have a good look at the contribution limits and show you what you need to know.
Also in last night’s budget:
- The end of pension drawdown relief has been named. Where it was reduced by 50%, meaning that the minimum pension drawdown of 4% became 2% because of the GFC, the relief is reducing to 25% fo the 2011-12 year. That means the minimum pension drawdown will be 3%. It will be removed after that.
- The higher concessional caps for the 50-50-500 rule (19/5/2010) is to be set at $25,000 above the indexed $25,000 concessional contributions cap. That is, when the $25,000 concessional contribution cap rises to $30,000, the 50-50-500 limit will rise to $55,000.
- Indexation continues to remain frozen for the Government co-contribution. The full benefit is available to those earning less than $31,920 and cuts out completely at $61,920.
- The supervisory levy for SMSFs is set to rise from $150 to $180.
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That super is a great way to save for your future is not in question, despite the neverending and confusing changes to the rules.
The question now – and more importantly than ever – is how to get enough money into super to make it a worthwhile sum to provide for your retirement. The dramatic reductions in contributions limits in recent years have made it far more important for everyone, but particularly the wealthy, to make sacrifices in other parts of their finances, where they may have some flexibility, to get money into super earlier.
It’s often easy to get money into super later in life. When the kids have flown the coop and the mortgage is gone, or going, then there is often ample ability to get money into super. Then you hit the restrictions. Can you get enough into super, or have you left your run too late?
Thanks to the simplification of super in recent years, there are now only two sorts of contributions that can be made. Those limits are “concessional contributions” and “non-concessional contributions”. Each comes with a strict limit that depends on your age.
As I outlined in recent weeks, there can be some very nasty consequences of breaching those contribution limits. In fact, the highest tax rate in Australia (93%) is reserved for those who breach both super contribution limits. In some cases, breaching the limits by a few hundred dollars could lead to $70,000 or so in tax being payable. Click here to see that column (April 4, 2011).
Concessional contributions (CC)
These contributions are essentially money that hasn’t been taxed before it enters super. They include superannuation guarantee (SG) contributions, salary sacrifice and eligible deductible contributions (for example, those contributions made by the self employed for themselves).
These contributions are taxed at only 15% on the way into a super fund, which is why they are considered “concessionally” taxed. The alternative is to receive the money at your marginal tax rate, which could mean losing up to 46.5% (including the Medicare levy) before taking it.
The limit for concessional contributions is $25,000. That applies to everyone under the age of 50. Those over 50 have a “temporary transitional cap” (see below).
Restrictions on eligibility to contribute to super start at age 65. Those aged between 65 and 74 must satisfy a work test (that is, work 40 hours in a period of less than 30 days) in order to be able to have concessional contributions made on their behalf.
Penalty taxes apply if you exceed the CC cap. If you contribute more than your age-based allowance, the penalty tax is 31.5%. That means that the contributions would essentially be taxed at the top marginal tax rate of 46.5% (15% concessional super rate, plus 31.5% penalty tax rate). After being taxed at the top rate, the sum then counts towards your non-concessional contributions limit (see below).
Temporary transitional cap: There is a temporary higher limit for those aged over 50, known as a transitional cap. The transitional cap only applies for the current financial year and the next financial year, meaning it runs out on June 30, 2012. The transitional cap is $50,000.
CC strategies
CC strategies include salary sacrifice and “transition to retirement/salary sacrifice” strategies (see previous columns).
Strategies involving salary sacrifice or TTR/salary sacrifice contributions will make sense in most situations. The s reasoning behind it is that you will usually be charged less tax on your super (at 15%) than the margain tax rate (up to 46.5%), while income received from a transition to retirement pension receives a 15% tax offset, which means you’ll pay no more than 31.5% in tax on the income generation (versus up to 46.5% as your marginal tax rate.)
For those aged 55-59, a super pension receives the tax rebate. For those aged 60 or more, the income from a super pension is tax-free. And that can be just magical.
Non-concessional contributions (NCC)
Everyone (almost) has the same non-concessional contribution cap and that is $150,000 a year.
Anyone 64 or less can make the contributions each year. It is possible to up to $450,000 in a single year by using the bring-forward provisions. This allows you to put in up to three years worth of NCCs to the one year.
If you put in more than $150,000 in a single year, you automatically invoke the bring-forward rule. If you put in $200,000 in as an NCC in one year, then you will be limited to putting in no more than $250,000 in non-concessional contributions over the current financial year and the next two financial years.
There are also age-based rules that apply for NCCs. If you are 64 or less, you can put in $150,000 a year, or use the bring-forward rule to put in up to $450,000 in one year. If you are aged between 65 and 74, you need to meet the work test (40-hours work in a 30-day period) to be able to make non-concessional contribution.
NCC strategy
But these limits are per person. If you have a two-member fund, then you can both use the limit to get up to, potentially, $1.2 million into super in a very short period.
An example: It’s currently May and you’ve got a large sum you want to get into your SMSF and you’ve got two members of your fund – you and your spouse.
Put $150,000 each (total $300,000) into super before June 30. At this point, you won’t have tripped the $150,000 NCC cap (assuming you didn’t go over your concessional contributions cap). Come July 1, you would be able to put in up to $450,000 each into super (total $900,000). This would evoke the bring-forward rule and you would not be able to make any further NCCs to super until the beginning of the 2014-15 financial year.
But in less than two months, you would have got around $1.2 million into super.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.