Changes to the superannuation system

There have been many changes to superannuation and related tax laws over the last couple of years. More recently the Federal Budget announcement on 12 May 2009 implemented a number of changes that may have a large impact on your superannuation now and in retirement.

From 1 July 2009, the Federal Government reduced the concessional contribution limit to $50,000 per annum for those aged over 50 years old between 1 July 2007 and 30 June 2012. For those below 50 years old a concessional contribution limit of $25,000 (indexed) per annum now applies. The new concessional caps include employer sponsored contributions. This change has effectively halved the limit for all people who wish to make a concessional contribution.

Concessional contributions include super guarantee, salary sacrifice and personal contributions for which you have claimed a tax deduction.

Issue
With the reduction of the concessional contributions cap, it is important if you are undertaking existing strategies that involve concessional contributions to review your situation and ensure that they remain within this cap.

It is not illegal under the SIS Act to breach contribution caps. However, tax law imposes substantial tax penalties on any money contributed above the caps.

Breaching the concessional contributions cap
If in breach of the concessional contributions cap, you could end up paying 46.5% tax instead of the normal 15%. When funds are received by a super fund, concessional contributions are taxed at up to 15% (by being included in the assessable income of the fund). Where the concessional cap is breached, the ATO will send the client a notice of assessment requiring them to pay an additional 31.5% of any excess.

The client has the choice of either paying the excess tax liability personally to the ATO, or electing to cover the additional tax from their fund. The ATO also sends the client a Voluntary Release Authority, which can be used to meet the payment from their super fund.

The other important consequence of breaching the concessional cap is that any excess concessional contributions are counted towards the client’s non-concessional contributions cap.

Breaching the non-concessional contributions cap
If in breach of the non-concessional contributions cap, again you could end up paying 46.5% tax where normally there is no tax charged. Non-concessional contributions are not taxed when received by the fund. Where the non-concessional contributions cap is breached, the ATO will send the client a notice of assessment requiring them to pay an additional 46.5% of any excess.

In this situation, the client has no choice to pay this amount personally – the ATO also sends the client a Compulsory Release Authority, which must be used by the client to withdraw an amount equal to the tax bill from their fund. This amount may be paid directly by the fund to the ATO, or paid to the client to then remit to the ATO.

Breaching both caps simultaneously – the worst case scenario
Because excess concessional contributions also count toward the non-concessional contributions cap, in some situations, if you make a concessional contribution it will trigger “multiple excess contributions” tax assessments, leading to an overall tax rate of up to 93%.

Consider the example of Jim (age 51), who has already made concessional contributions of $50,000 and non-concessional contributions of $450,000 using the “bring forward” provision. Jim then makes an additional concessional contribution of $20,000.

Jim’s $20,000 contribution is subject to contributions tax of up to $3,000 ($20,000 x 15%). He has then exceeded his concessional contributions cap by $20,000, for which the ATO will send him a tax bill for $6,300 ($20,000 x 31.5%).

However, because Jim’s excess concessional contributions also count towards his non-concessional cap, Jim will have total non-concessional contributions of $470,000 ($20,000 more than his cap). The ATO will then send Jim another tax bill for $9,300 ($20,000 x 46.5%).

As a result of Jim making an additional $20,000 contribution into superannuation, he has created an additional tax liability of $18,600; which is an effective tax rate of 93%.

Superannuation laws are intricate and always changing, to ensure you are up to date contact Baker Affleck Financial Solutions now to arrange a free consultation.