How much are you putting into your superannuation every year? When was the last time that you verified this? If you are not paying close attention to your super contributions and keeping an eye on the contributions caps, you may soon find yourself paying a hefty ATO tax for tipping too much into your super fund. It will probably wipe out close to 80% of your excess concessional contributions. Let’s see how.
The rules have been changing over the years and many of these have targeted the super contribution limits. The latest rules enacted in 2017 lowered the pre-tax or concessional super contributions to $25,000 annually for everyone. Before this, the threshold stood at $30,000 for those below the age of 50 and $35,000 annually for those aged over 50. It is a radical cut into what you can tip into your super every year and if you are a high income earner, it limits your savings avenue through a fairly tax effective option.
The new superannuation caps also encapsulate the Super Guarantee, the 9.5% of your monthly salary compulsory super contribution that must be remitted by your employer. If you are on a super contribution blitz that includes salary sacrificing the pre-tax salary and other personal contributions, you must also factor in the Super Guarantee in your calculations to get a complete picture of the overall amount that you are putting into your super.
If in doubt, you can log into your super account online or call your super provider to determine how close you are to the contributions caps. In case you are hovering close to the caps and are at risk of exceeding the limits, ensure that you amend your pre-June 30 contributions to stay below the caps and be on side of the ATO rules. That will help you stay clear of avoidable ATO penalties.
In case you contribute more than you should in concessional contributions, the excess amounts will be added to your taxable income and taxed at your marginal rate. For example, if you contribute $30,000 into your superannuation in a particular year, the extra $5000 will be added to your taxable income and taxed at your marginal rate depending on your income. The result will be a few thousand dollars to your tax bill after a $15% tax offset (the excess contributions is taxed at the marginal rate less a tax offset of 15%) for the extra contribution.
Contributing past the super caps also has a spill over on your non-concessional or after-tax contributions. The excess concessional or pre-tax contributions that you make will be rolled over to your non-concessional or after tax contributions. With non-concessional contributions, you can contribute as much as $100,000 annually provided your super balance remains below $1.6 million.
The pitfalls of excess contributions into a super
Apart from the fact that the excess concessional contributions are taxed at the marginal rate (less a 15% tax offset), a contributor who makes excess concessional contributions also has to pay an excess concessional contributions charge (ECC) of 4.77% on the tax liability of the additional contribution. It is important to mention that the ECC charge is updated quarterly so the 4.77% charge applies for the period running from April 2018 to June 2018. The ECC base interest rate is applied on the additional income tax liability.
If after this, the contributor fails to withdraw the extra concessional contribution from their super fund, the excess amount is now regarded as a non-concessional contribution and taxed fully at the marginal tax rate, this time without a tax offset.
How Super Savers Can Avoid Exorbitant Charges from Excess Contributions
The most obvious step is to be more vigilant about how much you are putting into your super fund. You have to track all your contributions and ensure that you are not exceeding the contribution caps. In case you are employed, make sure that your salary sacrifice agreement caps out the contributions at $25,000 per year. Setting a definite amount will more likely keep you on the safe side compared to allocating a percentage of your salary in your salary sacrifice agreement with the employer. The compulsory super requirements which limit employer quarterly super guarantee (SG) payments to not more than $5012.20 or $20,048.80 per year already go a long way in keeping you just below the legal super contribution cap.
Common Mistakes Leading to the Exceeding of Super Contribution Caps
Some of the common mistakes that might lead a contributor to exceed their super caps include the following:-
- One of the most common instances for the exceeding of the concessional super contribution caps is where the employee salary sacrifice agreements with employers have not been modified to reflect the recent change in annual concessional contribution cap from $35,000 (or $30,000 for contributors below the age of 50) to $25,000. This will lead to excess concessional and non-concessional super contributions.
- Excess super contributions are also common where an employee has multiple employers with each making a Super Guarantee into the employee’s super fund account. The total employer super contributions from multiple sources may as well exceed $25,000 but there will be no mechanism through which either the employer or employee can wiggle themselves out of making excess contributions since employers are legally obligated to make a Super Guarantee.
- If the concessional contributions are more than the taxable income, only a portion of the concessional contributions can be used and the balance is regarded as a non-concessional contribution and taxed at the marginal tax rate. If that person has already maxed out on their non-concessional contributions, this could pose a serious problem.
You should also be cautious about the amount of money that you can inject into your super via non-concessional contributions using the “bring forward rule” if your super balance is still less than $1.6 million. If you are a super saver and are worried about being caught off side, talk to an accountant Melbourne professional to help you look at your super contributions and avoid making excess and potentially costly concessional contributions.