Concessional contributions are those made with pre-tax income and can come in many forms, most commonly as
- Superannuation Guarantee contributions made by your employer,
- Salary sacrificed contributions made on your behalf, or
- Tax-deductible contributions if you are self-employed.
Below, we’ve summarised a few important considerations regarding the cap changes that became law on 29 November 2016.
A lower cap will apply from 1 July 2017
As part of the 2016 Federal Budget, the Coalition government announced plans to reduce the annual concessional contribution cap to $25,000 from 1 July 2017. The new cap will now apply to everyone regardless of age.
This will see the lowering of both the over-50s concessional (before-tax) contributions cap of $35,000 and the general concessional contributions cap (for under-50s) of $30,000. However, it’s important to note that the $35,000 and $30,000 caps still apply for the current (2016/2017) financial year.
Making the most of your caps
If you are looking to increase your pre-tax contributions to superannuation, now is a good time to ensure that you are making the most of your concessional contribution cap. This may involve investigating a salary sacrifice arrangement with your employer or reviewing an existing arrangement before the cap decreases in July. But it is equally important to ensure that you take action from 1 July 2017 to plan for the lower cap in the 2017/18 financial year.
Another important change to note is that from 1 July 2017, anyone who is eligible to make voluntary super contributions will also be eligible to make personal concessional (tax-deductible) contributions. Currently, people earning more than 10% of their income as an employee (i.e. salary and wages) cannot make a tax-deductible super contribution, so this recent change should provide greater flexibility with:
- end of year super top-ups by making personal concessional contributions to use up any remaining concessional contribution cap;
- deciding how to contribute bonuses, annual leave, and long service leave; or
- tax-effectively contributing lump sum leave payments received upon termination of employment.
While we will have to live with lower caps from now on, the government will continue the practice of indexing these in line with average wage growth. Therefore, we can expect the caps to increase every few years in increments of $2,500.
Carry-forward concessional contributions
There’s also good news for those with volatile or lumpy income, and those working intermittently. From 1 July 2018 onwards, if you fail to use your annual concessional contributions cap of $25,000, you can carry forward the unused portion for up to 5 years. Carry-forward concessional contributions may assist clients with breaks in employment to make ‘catch-up’ contributions when they return to work.
The provision applies on the condition that your total superannuation balance is less than $500,000 as at 30 June at the end of the financial year immediately preceding the financial year in which the contribution is to be made. Also bear in mind that as this new rule only takes effect from the 2018/19 financial year, you won’t be able to carry forward any unused concessional contributions cap until at least the 2019/2020 financial year.
Exceeding the cap
An important consideration is what happens if you do exceed the concessional contribution cap. Since the 2013/14 financial year, excess concessional contributions have not been subject to excess contributions tax. Therefore, if you do exceed the cap, the amount will be included in your assessable income and taxed at your marginal tax rate. In addition, the ATO imposes the Excess Concessional Contributions (ECC) charge so that a person does not obtain a financial advantage due to the delay in payment of tax on their ECC.
The ECC charge period is calculated from the start of the income year in which the excess concessional contributions were made and ends the day before the tax is due to be paid under your first income tax assessment for that year. The ECC charge rates are updated quarterly on the ATO website, with the current rate being 4.76% (Dec 2016 quarter).
So there’s plenty to think about in managing your concessional contributions this year and the next, so why not ask your financial adviser how you can make the most of the new rule changes?