Taking Advantage of the ‘super’ superannuation transition concessional cap before it is too late!

Simpler Super – Concessional Caps

Back in 2006 the then Howard/Costello government announced what was trumpeted as the ‘Simpler Super’ reforms, chief amongst this was a change in both the way and the amount which individuals could contribute to super from a pre tax perspective. 

Pre tax contributions (concessional contributions) were limited to $50,000 p.a. for persons under 50 years of age, with a transitional arrangement which saw this cap doubled to $100,000 until 1 July 2012 for persons over 50 years of age.  These contributions are taxed at the superannuation contributions tax rate of 15% which, depending on a person’s personal rate of tax can potentially mean a reduction of between 0% and 31.5% personal tax on the amount which is contributed to superannuation. 

The 2009-10 Federal Government Budget saw these numbers halved to $25,000 for persons under 50 and $50,000 for over 50, still with the same transitional period which is due to expire at the end of the current financial year on June 30, 2012.   

While the last two federal budgets have included provisions to potentially retain the $50,000 p.a. limits for people over 50 with superannuation balances of under $500,000 this has not yet been put to parliament or industry stakeholders in any form and with the end of the 2011-12 financial year fast approaching there is little hope for a resolution in time for 1 July 2012. 

Unfortunately, this means we may need to prepare for a future where the maximum a person can contribute into superannuation from their pre tax salary is $25,000 p.a. making the 2011-12 financial year potentially the most important for people over 50 yet.

What contributions count towards the concessional cap?

For most people, the most common type of contribution which will be included in the concessional cap is their employer’s compulsory 9% p.a. contribution, known as the superannuation guarantee contribution.  Measures have recently been put to parliament to increase the compulsory level from the current 9% to 12% p.a. 

For self employed persons who do not receive the employer contribution, they are permitted to make personal tax deductible contributions provided that less than 10% of their total assessable income and reportable fringe benefits come from what is considered eligible employment income. 

The third type of concessional contribution comes in the form of a salary sacrifice arrangement whereby an employee requests that his or her employer direct part of their salary into their nominated superannuation account.  These contributions will reduce the employee’s tax assessable income and provided the contributions are made to a complying fund these will not be subject to Fringe Benefits Tax.   

After the Superannuation Guarantee, salary sacrifice is the most common method employed to make additional contributions.

What are the consequences of breaching the cap?

The penalties for breaching the concessional cap limit are harsh and worth avoiding where possible, contributions above the cap level will be taxed at the 15% contributions tax rate and will also attract an additional 31.5% (to take the total tax to the highest marginal tax rate of 46.5%) and will then be included in the non concessional contributions cap of $150,000 p.a. (with the option to ‘bring forward’ an additional two years). 

Thankfully, as part of the most recent Federal Budget some relief is now allowed and from 1 July 2011 if someone breaches the Concessional Cap for the first time, up to $10,000 of any additional contribution can be refunded on request.

Things to consider

There are a number of factors to consider when considering a salary sacrifice arrangement, including: 

Maximising the potential tax arbitrage

As the superannuation contributions tax limit is fixed at 15% for anyone earning over $37,000 p.a. there is an immediate personal tax advantage by implementing a salary sacrifice arrangement.  

Because the personal tax rate for a person earning up to $37,000 is between 0-15% (excluding Medicare Levy) there may be little or no benefit from a taxation perspective for entering into a salary sacrifice arrangement.

Actively monitoring your concessional contributions

As the end of the financial year approaches it is important to liaise with your payroll department and superannuation fund to determine how much room you have left under the concessional cap to ensure that you do not exceed the cap and potentially trigger an additional 31.5% tax on additional contributions.   

Appropriate Asset Allocation

Especially important for people over 50 is to ensure that you are reviewing the Asset Allocation of your superannuation benefits to ensure that you are maintaining an appropriate mix of assets which are not fully dependent on share markets as you approach retirement.  One way to do this is to switch off any automatic rebalancing with your account and direct the additional contributions into defensive assets such as fixed interest and cash. 

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