Understanding after-tax super contribution rules

SMSF technical expert and columnist for The Australian newspaper
Print This Post A A A

Once you’ve maxed out your concessional contributions to the $25,000 limit, most people can still make after-tax or non-concessional contributions.

In fact, anyone aged under 65 can make super contributions whenever they like.

During a financial year, you can contribute $150,000 in non-concessional contributions.

It’s also possible to make three years of non-concessional contributions in advance. This is an extremely important planning tool for super investors approaching retirement and seeking to maximise their superannuation.

The three-year non-concessional contribution cap isn’t available to you if you’re aged at least 65. However it’s still available in the financial year you have your 65th birthday. Once you hit 65, you have to satisfy a work test before contributions can be made.

Monitor your past contributions

The three year rule begins to apply when you contribute more than $150,000 in a financial year.

This means you need to keep a close eye on where you are in relation to the non-concessional contributions you have made in the past.

Some people contact the Tax Office to find out what data they have stored on their databases. One of the things you are trying to identify is the amount of any personal contributions recorded as non-concessional contributions that have been claimed as a tax deduction that should really be recorded as concessional contributions.

But you need to know what questions to ask them. The ATO has several databases and you need to ask them what contributions have been made in previous financial years and what, if any, tax deduction has been claimed on any of these contributions. From time to time, there can be a mis-match between the ATO databases, and given the tax penalties that can apply to excess contributions, it’s worth your time to ask the ATO this information.

How does it work

Suppose you’re aged 64 on 1 July 2012. Assume that the 2012/13 financial year is the first year in a potential three-year non-concessional contribution period.

If you contribute $450,000 at any stage during 2012/13 then the three-year contribution period will begin. Assume no other non-concessional contributions will be made in the 2012 and 2013 financial years.

The three-year bring forward rule has not been breached because total non-concessional contributions over the three year period is up to $450,000. The good news is that excess non-concessional contribution tax won’t apply.

Clearly, some of these contributions apply for periods of time when you will be over age 65. Does the work test (which applies if you want to make super contributions after age 65 but before age 75) need to be satisfied for the contributions made when the investor was 64? The short answer is no. The super rules don’t insist that you have to satisfy this gainful employment test for contributions made in these situations.

However, let’s now assume that you contribute $250,000 of non-concessional contributions in the 2013 financial year and intend to contribute the remaining $200,000 allowed over the following financial years. In this instance, because contributions will be made in financial years when you were over age 65 at the start of those years, the work test will have to be satisfied and the $150,000 limit will also apply to those contributions.

In effect, the three-year rule applies until you are aged at least 67 at the beginning of a financial year.

The general rule of thumb for those people aged under 67 on 1 July 2012 is as follows – consider the contributions that were made in the previous two financial years. You need to carefully determine in which financial year the three year in advance rule actually commenced. As explained above, getting the relevant data from the ATO can be very helpful.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report

Also from this edition