Provided by Mercer: 25/2/08
Plan your super contributions carefully or there could be tax consequences.
Have you heard about ‘after tax’ or non-concessional contribution limits? If you haven’t and you’re looking to make contributions to superannuation now or down the track, read on.
Understanding non-concessional contributions
To understand how non-concessional contribution limits work and why they can harm your wealth, we need to start by explaining after tax contributions or non-concessional contributions. This is where you make a contribution to super from your personal savings, salary or wages on which you’ve already paid income tax at your marginal rate.
Normally, non-concessional contributions aren’t taxed when contributed to your super as you’ve already paid tax on them. (Up to 15 per cent tax is payable only on super fund earnings.)
Non-concessional contributions are a common way to build retirement savings. Previously, it was reasonably common for people nearing retirement to cash in investments (such as shares and managed funds) and even sell an investment property, using the proceeds to make non-concessional contributions to super. This would then fund their retirement income.
Benefits of Better Super
With the introduction of Better Super, you’ll be able to receive super benefits tax free from age 60. We expect the popularity of contributing to super and using it as the main retirement savings vehicle will increase in the future.
There is however, a very large cautionary note. Non-concessional contributions are subject to caps of $150,000 per financial year.
To accommodate larger contributions, people under the age of 65 (at the start of the financial year) may bring forward two financial years’ of non-concessional contributions – thus being allowed to make up to $450,000 of non-concessional contributions in one year. However, you don’t have to make all the contributions at one time; you may stagger them over the three year period.
Exceeding non-concesional limits
The key is not to exceed the $450,000 non-concessional limit as penalties apply if you do. Any non-concessional contributions in excess of these limits will be subject to a penalty tax of 46.5 per cent. Remember, this is on monies that have already been taxed!
To stop you from exceeding these caps, super funds can’t accept a one off member contribution above $450,000 (if you’re aged 64 or less on 1 July in the financial year) or $150,000 (if you’re aged 65 or more on 1 July in financial year and satisfy the work test). Therefore, if you’re making smaller, regular contributions over a period of time it’s your responsibility to avoid exceeding the caps that apply to those contributions. Once you exceed your cap, there’s very little you can do and you’ll be required to pay the penalty tax.
So, how do you pay the penalty if you exceed the limits?
Well, as mentioned, non-concessional contributions in excess of the relevant caps are taxed at 46.5 per cent – and you’ll be personally assessed for this tax. However, you must nominate a super fund to release monies to pay the liability if you still have a super fund that provides accumulation benefits. So, the tax must be withdrawn from your super fund. If you only have super in a defined benefit fund however, you can’t draw on your defined benefit funds for this purpose and will have to pay the penalty tax personally.
The main point is you can no longer wait until the last minute to make large contributions to super. You need to plan early to ensure you’ll be able to save enough in super to fund your retirement income. Trying to make non-concessional contributions to super at the 11th hour could result in difficulties.
Instead, start early and plan ahead so that you can set objectives for your retirement and make additional voluntary contributions to super regularly. Your savings will also benefit from compound interest over time. Of course, while it’s best to plan as early as possible, it’s never too late to speak with a professional financial adviser about your super strategy.
What are non-concessional contributions?
- Personal contributions for which a tax deduction is not claimed
- Spouse contributions (in respect of the receiving spouse)
- Tax free part of an amount transferred from a foreign super fund
- Contributions in excess of the concessional contributions cap
Case Study - John
John is aged 57 at the start of the 2007/2008 financial year. He still works full-time and dabbles in two investment properties, but wants to sell them both and retire at age 60. Eager to contribute the proceeds from the sale of the first property, a one bedroom flat, John contributes $151,000 to super on 1 July 2007. In the 2009/2010 financial year at age 59, John sells the second property and puts $299,000 into super, keeping within his maximum $450,000 limit for the three years.
If you would like to speak with a Mercer financial adviser about your options for contributing to your super, please call us on 1800 633 403.
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
