Beware the barbs of the cap
It's surprisingly easy to breach contribution caps and pay the penalty in tax.
Big tax penalties mean now is a good time to check your superannuation account to make sure you won't breach contribution limits by the end of the financial year.
"We are checking our clients' super fund contribution reports - right now, actually," financial planner Kate McCallum says. "With another five months of the financial year, we have a chance to check if there are any surprises that could push them over the $25,000 cap for concessional contributions."
Individuals can contact their super fund, or sign into their online account, to check their contributions for the year so far. There are two types of limit, or cap, on the amount of super contributions you can make in a year. Contributions above these limits attract additional tax known as excess contributions tax.
The first cap of $25,000 applies to "concessional" contributions. These are contributions from money that hasn't been taxed yet, so the money your employer diverts into super on your behalf plus any money you salary sacrifice to super. This cap also captures personal contributions by the self-employed.
People aged over 50 could contribute $50,000, but this ended on June 30, 2012. Make sure you've pulled back your contributions in line with the change.
If you do contribute more than $25,000 in a financial year, you'll incur excess contributions tax at the rate of 31.5 per cent, as well as the usual contributions tax of 15 per cent.
The good news is that people who breach the concessional cap by less than $10,000 have a one-time "get out of jail free" card, where they can have the excess contributions sent back to them.
Non-concessional contributions are those made from after-tax money. An annual cap of $150,000 applies to these contributions. It's important to know that super contributions are attributed to the year in which they are banked by your super fund. McCallum says this is one reason it's surprisingly easy to breach the caps.
The most common scenario for a breach is where an employer transfers a super contribution in July for the quarter ending on June 30, pushing it into the new financial year, she says.
"Employers have up until July 28 to make payments for the prior quarter. If their timing was always consistent, you'd be OK as you'd have 12 monthly payments in any given year," McCallum says. "But we've had several cases where a client has had 13 months worth of payments in one financial year - and where they were maximising their salary sacrifice - so it has resulted in them exceeding the cap."
If you check your account and find you're likely to exceed the concessional cap if you keep contributing at the same rate, reduce your salary sacrifice.
If you're on a high salary, and your employer is paying the super guarantee (SG) on the entire amount, you could breach the limit even without salary sacrifice. In this case, ask your employer to cut back the SG payments and give you the cash instead. They're not legally obliged to pay the SG on a salary that's in excess of $183,000.
If you've made big after-tax contributions in the past two years, it's important to check your account to make sure you don't breach your concessional and non-concessional caps. "That's a nasty 93 per cent tax hit," McCallum says.
- Don't leave it until June to check your super contributions.
- The cap on pre-tax contributions is $25,000.
- The cap on after-tax contributions is $150,000.
- Beware ending up with 13 months of payments in one year.