Superannuation is an effective way to save for retirement but the amount of contributions you can make to super in each year is limited. Any superannuation contributions made in excess of the concessional and non-concessional caps may have penalty tax applied. So take care with how much you contribute each year.
What is the concessional contributions cap?
Concessional contributions (CCs) generally include contributions your employer makes for you and contributions you make yourself for which you claim a personal tax deduction.
The concessional contributions cap for the 2016/17 financial year is $30,000 for anyone under age 50. This cap is indexed on 1 July in line with movements in Average Weekly Ordinary Time Earnings (AWOTE) but is only increased in $5,000 multiples. A higher cap of $35,000 is available for anyone over age 50, but this cap is not indexed.
However, from 1 July 2017 the cap will be reduced to only $25,000 per year for everyone regardless of age.
What is the non-concessional contributions cap?
Non-concessional contributions (NCCs) generally include your own contributions into super for which you don’t claim a personal tax deduction as well as contributions made by your spouse. But if not managed carefully, excess concessional contributions can also count towards this cap.
The non-concessional contributions cap is $180,000 for the 2016/17 financial year. This will reduce to $100,000 per year from 1 July 2017, slowing down the ability to build savings in superannuation. In addition, contributions can only be made if the balance of your superannuation savings are less than $1.6 million.
Some contributions you make will not count for the non-concessional contributions cap. This includes contributions arising from personal injury payments and up to $1.415 million (2016/17) contributed under small business CGT concessions. Both of these opportunities can help you increase how much you can get into super and continue to apply beyond 1 July 2017.
Bring forward two years of non-concessional contributions
If you want to boost your super and were under age 65 on 1 July, you may be able to ‘bring forward’ the next two years of non-concessional contributions and add this to the cap for the current year to contribute a higher amount but it caps how much you can contributed across the full three-year period.
Harold is age 63 and has inherited money from his mother’s estate. He decides to contribute $450,000 into superannuation on 1 October 2016. This is done by bringing forward the NCC caps for 2017/18 and 2018/19 into the current year. He will not be able to contribute further NCCs before 1 July 2019.
The ‘bring forward’ option is triggered as soon as you make non-concessional contributions in excess of the annual cap.
The reductions in the annual cap from 1 July 2017 will also impact the bring forward rule. For example, if you trigger the bring forward rule in 2017/18 you will only be able to contribute up to $300,000 as non-concessional contributions.
If you turn age 65 during a bring forward period, you can continue to make contributions under this total limit but after your 65th birthday you must make sure you have met the work test requirements for the financial year before making a contribution and each contribution may not exceed $180,000.
Tax on excess contributions
If you exceed either of the contribution caps, tax penalties may apply and you may need to withdraw some amounts. How this works will depend on which cap is breached.
Excess concessional contributions
If you exceed your concessional contribution cap your tax return for that year is amended and the excess contributions are taxed at your marginal tax rate, less 15% for the tax already deducted in the fund. An interest penalty is also applied.
You are personally liable to pay this tax amount but you can elect to withdraw 85% of the excess contributions withdrawn from your superannuation account. If the excess is not withdrawn, this amount also counts towards your non-concessional contribution cap.
Excess non-concessional contributions
The tax rate on excess non-concessional contributions is 49% (including Medicare and the temporary debt repair levy).
You can avoid this tax by withdrawing the excess non-concessional contributions plus associated earnings (as calculated by the ATO). The earnings will however be taxed at your marginal tax rate.
You can see that the high tax rates are a good incentive to keep track of your contributions and not exceed your contribution caps.
We can assist further with an explanation of the caps and how to effectively manage your contributions.
Contact us today!
Investment Options (Aust)
Frank Santagada CFP® Dip FP AFB C.Dec
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