In 2007, the government made superannuation withdrawals after age 60 free from tax (what a great benefit that has been to all self-funded retirees). However, it also limited the amount of contributions that could be made into a super fund.
Briefly, the types of contributions and the rules that applied to contributions made pre 30 June 2013 were:
i) Concessional contributions
These are contributions made by an employer including super guarantee contributions and salary sacrifice contributions, where the employee diverts their salary from the PAYG tax net into superannuation. It also includes contributions made by self-employed persons, business owners using a family trust who are not employed but rely on trust distributions for income, and retirees who are able to contribute and seek to claim a tax deduction on their contributions.
All concessional contributions are included in the fund’s assessable income and after setting off against any deductions, taxed at a rate of 15%. Tax payable can be reduced by rebates, such as imputation credits.
There is a cap on the amount of concessional contributions that may be made by a member. As at 30 June 2013, the concessional contributions cap for members is $25,000 – a decrease from a $50,000 cap some years earlier. Any concessional contribution in excess of $25,000 becomes an “excess concessional contribution” (ECC).
Prior to 30 June 2013, any ECC was taxed at a rate of 31.5%. With the potential of a 15% tax on concessional contributions inside the fund – the total tax payable was 46.5% – a real deterrent for exceeding the caps except for those earning income above the top marginal tax rate – equal to $180,000 plus for an income year.
ii) Non-concessional contributions
These are contributions made by an individual or on behalf of a spouse where no tax deduction is claimed.
A non-concessional contribution of up to $150,000 may be made in any year. Any amount in excess of this will be an excess non-concessional contribution (ENCC).
However, there is also the ability to use a three-year rule, where non-concessional contributions of $450,000 may be made over a three-year period – including $450,000 in year one. Any amount over $450,000 in the three-year period is an ENCC. The three-year rule only applies to members under the age of 65. Excess concessional contributions are also non-concessional contributions.
For an ENCC, the excess tax rate is 46.5%.
New concessional contribution rules – Post 30 June 2013
The old ECC tax of 31.5% has been abolished from 1 July 2013. In its place, a member will have their excess concessional contributions taxed at their marginal tax rate.
For example, Terry is on a salary package of $105,000 with a marginal tax rate of 38.5% (including Medicare Levy). He has a concessional contributions cap of $25,000 for the 2013-14 financial year. His concessional contributions for the financial year, inclusive of super guarantee and salary sacrifice from his employer, total $50,000.
As a result, his salary package is reduced to $55,000 for PAYG purposes, an effective 34.0% marginal tax rate. However, after he receives his assessment, all $25,000 of the excess concessional contributions are included in Terry’s assessable income for 2013-14. This ensures that they are taxed at his marginal tax rate.
The tax payable on the $25,000 of ECC will be $8,500, however Terry is also entitled to a tax offset equal to 15% of his excess concessional contributions for tax paid by the fund on the concessional contribution — $3,750. As a result, Terry will pay tax on the excess concessional contribution of $4,750 – an effective marginal tax rate of 19.0%.
Some more important points
In transferring pre-tax salary into superannuation and outside of the PAYG system, there is a time advantage when it comes to paying tax. In recognition of this, an excess concessional contributions charge is also being introduced. This charge is effectively an interest cost on the tax payable on the excess contributions, and is currently set at a rate of 5.7% per annum.
Finally, the ECC tax at marginal tax rates plus the ECC charge will be assessed to the individual. However, the individual may elect to have up to 85% of any excess concessional contributions released from the superannuation fund to assist in paying the EEC tax and the ECC charge.
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.