By Graeme Colley
Last year’s super reforms have certainly changed things if you want to make concessional contributions to super, with tax deductions being available to more people including employees. However, be aware of the $25,000 cap, with contributions over this amount subject to a tax penalty.
The concessional contribution cap of $25,000 applies to any super contributions made for you, or that you claim as a tax deduction. It includes salary sacrifice, superannuation guarantee and any of your pre-tax salary package that is paid to super.
If you have just one source of income then the calculation should be relatively simple, but if you have several jobs or belong to more than one super fund, then monitoring your concessional contributions can be a little more tricky.
And if you do go over the cap there are tax ramifications, which we’ll take a closer look at using Jane as an example.
Jane earned a salary $100,000 last financial year. Her employer paid 9.5% of her salary as compulsory super, totalling $9,500 for the year and remitted at the end of each month. Also, each year she salary sacrifices up to the concessional contributions cap of $25,000. The amount she salary sacrificed last year was $15,500 – paid as a monthly amount of $1,290 and at the same time her compulsory contributions were made.
During the year Jane did some part-time work every Saturday in a friend’s business, with $1,000 paid in superannuation. This meant that Jane’s total concessional contributions were $25,980, which exceeded the $25,000 cap.
Once the ATO has all the information about Jane’s superannuation they’ll work out her excess and send her a determination detailing the amount and the charge that applies. The charge is calculated from the beginning of the financial year in which the excess arose up to the time of her income tax assessment. The ATO will amend Jane’s tax assessment to include the excess, which is taxed at her personal rate less a 15% tax offset to take account of the tax already paid on the contribution by the super fund.
Once Jane receives the determination from the ATO she will have two choices, one of which needs to be made within 60 days.
The first is that she can make an irrevocable election for one of her super funds to release 85% of the excess contributions to the ATO within 21 days of her election. This should provide enough to pay the amended income tax assessment. Anything left over will be applied against any of her other tax liabilities, then any remainder will be refunded to Jane.
The second choice is to pay the penalty tax and leave the excess in super which will also be counted against her non-concessional contributions cap for the financial year in which the excess arose.
This year’s federal budget provides help for those at risk of breaching the cap - but only where the person has a number of employers required to make superannuation guarantee contributions. Where compulsory contributions across all employers are expected to exceed the cap, an election can be made to absent one or more of those employers from paying super. This will help high income earners on more than $263,157 (and who have multiple employers) from exceeding the cap. However, individuals like Jane will be unlikely to access this measure, as part of her concessional contributions comprised salary sacrifice.
The budget changes will help to even things out if you know what’s happening with contributions. But for an unexpected situation like Jane’s, the excess plus penalty charge will apply. People in this situation will need to decide whether to leave the excess in the fund and be counted against their non-concessional cap, or whether to withdraw it – which ultimately is an individual decision.
