Don't make a super stuff-up

PORTFOLIO POINT: Time to check your salary sacrifice contributions – before you bust out of your limits.

The vast majority of Australians don’t think too hard about their super contributions. They show up for work, they get paid, and an extra 9% gets sloshed into their super funds.

But for anyone who does actively manage their superannuation contributions – particularly those who use salary sacrifice – you need to ask yourselves a question right now.

Have you reviewed your salary sacrifice agreement yet for this financial year? Have you done it properly?

If you haven’t, a nasty little tax bill could be waiting for you just around the corner. Well, it might take another year or so. But if you don’t act now, it might, very quickly, be too late. There are a number of issues that you need to be aware of and today I’ll run through some of those.

Adjustment for concessional contributions cap reduction

The biggest concern I have for those who are salary sacrificing into super is for those over age 50 who have been pushing up to the previous limits with their super contributions.

From July 1 (as most readers hopefully know), the concessional contributions (CC) cap for the over 50s fell from $50,000 to $25,000 – it’s now the same figure for everyone able to make concessional contributions.

This should go without saying ... but if you’re over 50 and were contributing close to those higher levels for the FY12 year, you need to make your adjustment for FY13 now.

For example, take a 52-year-old earning $120,000 a year. They are receiving $10,800 a year in Superannuation Guarantee (SG) payments from their employer. Last financial year, they were contributing $3200 a month (or $38,400 a year), which took them to a total of $49,200 for the year and safely under the $50,000 CC limit for the over 50s for last financial year.

However, if those salary sacrifice arrangements haven’t been changed, here’s the equation for this year.

Your employer is still going to pay $10,800. Assuming two full months has passed, you’ve contributed an extra $6400 this financial year. By the end of November, you’ll have contributed $16,000 which, when added to the $10,800 that your employer will contribute over the full year, will put you over the $25,000 limit at $26,800.

If you haven’t done so already, you need to figure out how much has already been contributed, how much your employer will be contributing and then figure out the difference to be contributed monthly, fortnight, bi-monthly, or weekly to make sure you don’t exceed the $25,000 CC limit.

Or get your financial adviser (or potentially, your accountant) to help you with the calculations.

Beware dodgy employers

While you’re making salary sacrifice arrangements, make sure your employer isn’t short changing you.

Your employer is only required to make SG payments on your taxable salary. That means that if you do salary sacrifice $10,000 into super, to reduce your salary from $100,000 to $90,000, then they are only required to pay the 9% SG payments on $90,000 (rather than $100,000).

Most employers won’t stoop this low. But some might. Before you enter into a salary sacrifice arrangement, make sure you find out what your employer’s policy is on paying SG. If they don’t pay it on the pre-salary sacrifice salary, then you might want to consider whether you make the salary sacrifice arrangement in the first place. The answer might still be yes (begrudgingly), depending on your personal circumstances. If they only pay, as is legally required, on the post-salary sacrifice amount, then you should consider challenging them on that policy.

They are following the law if they do this, but to me it’s more a question of morals. Governments have talked about changing this rule so that this is not allowed, but it hasn’t happened yet.

Mid-financial year pay rises and bonuses

If you’re deliberately pushing the envelope to get as close to $25,000 as you can, be aware of the mid-year pay rise.

Even a small pay rise can mean that your salary sacrifice payments are going to go over the edge of the CC limit (see below for penalties)

Big pay rises can cause big problems. So can changing jobs for a substantial salary increase in the middle of a year (although you will usually have to redo your salary sacrifice arrangements at this point also). But you need to crunch the numbers whenever your salary changes.

Know when your employer contributes super payments

You also need to take into consideration when your employer makes their final super payment for the financial year.

For periods up to June 30, employers are not required to make the payment until July 28, or four weeks later. Some will make the payment, or most of it, prior to June 30. But because there is no set rule on this, it is essentially up to the individual to monitor.

This can cause all sorts of frustrations, because each employer can work it differently, and it can be as much about the employer paying based on when the business wants the tax deduction (the financial year ending June 30, or the following financial year) that determines when they pay the contribution.

Ask your pay office when they will make the final contribution for the financial year. If you’ve been with your employer for a few years, call you super fund and find out when they have made their final super payments for a given financial year in the past.

If they decide – which they might not have to tell you about – to make the final payment early so they can get the tax deduction for the business, then you will need to take that into account when determining your own salary sacrifice amounts for that financial year.

Excess contributions tax

What happens if you exceed the CC cap (accidentally, deliberately or because your employer made his contribution when it suited him/her)?

Excess contributions tax (ECT), that’s what. And that will mean, for most, you’d have been better receiving the money fully taxed in your own hands and then contributing it to super as a non-concessional contribution.

Contributions that go into super as CCs are taxed at 15%, up to the CC limit of $25,000. Once you exceed $25,000, two things happen to the contribution.

First, they change from being CCs to non-concessional contributions (NCCs). For more on NCCs, see my column Make the most of NCCs.) At that point, they are taxed at the equivalent of the highest marginal tax rate of 46.5%. That is, they are taxed at 15% as CCs, then are taxed a further 31.5% (total of 46.5%) and converted into NCCs.

As an example, let’s take someone that had total CCs for the year of $27,000 (from both SG and salary sacrifice arrangements). The first $25,000 is taxed at 15% as income to the fund. However, the last $2000 is taxed at 46.5%. That means $930 is lost to contributions tax.

The first $25,000 is listed as a CC. The last $2000 goes towards your NCC limit. And if you’re making considerable NCC contributions, this could potentially push you over the NCC limits and into the realm of a tax bracket of 93% -- saved only for very naughty superannuation members (see Taxed at 93%? That’s gotta hurt!)

The only time you pay a marginal tax rate in Australia of 46.5% is if you are earning in excess of $180,000 a year. If you’re earning less than that, you would have been better to have taken the money (at 0% to 38.5% marginal tax rate) and contributed a higher amount to super as an NCC.

The pen is mightier than the sword

If you’re trying your best to get as close to your CC limit as you can, you need to sit down with a pen and paper (even better, a Microsoft Excel spreadsheet) and track what’s going to be paid and when.

You really should have a good idea of when and where contributions are being made and when they’re going to enter your fund. And you should do that now, then review again in April/May of each year to make sure that contributions are tracking as planned.

To watch a video on this subject, click here to see Max Newnham interviewed on Eureka TV.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are highly complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.

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