Tax with Max: Making an extra super contribution

Understanding maximum caps on non-concessional contributions and contributing to super after retirement.

Summary: The general cap on concessional super contributions is $30,000, with a $180,000 cap on non-concessional super contributions. But workers nearing retirement can contribute $35,000 as concessional super contributions.

Key take-out: The increase in the concessional super contributions cap does not change the threshold for non-concessional super contributions, which still have a $180,000 annual limit.  

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Making an extra super contribution

I am 54 years young and about to contribute the maximum annual cap payments to super, both concessional and non-concessional. In my case it’s $35,000 pa concessional contributions and $180,000 in non-concessional. By using the three-year bring forward rule I can contribute $540,000 as I have not previously exceeded any of the $180,000 annual caps. 

I note from ATO information the methodology behind calculating the non-concessional annual limit is a six times multiple of the annual cap. In the example shown they use a six times multiple of the general limit of $30,000 to arrive at the $180,000 limit. 

For all of us slightly ageing workers with a $35,000 annual cap now in place, doesn't that mean our annual non-concessional maximum allowable cap should be six times our cap resulting in $210,000, and a three year limit of $630,000?  I cannot locate any references to how this age-based increased cap change is being dealt with, can you help? 

Answer: When the increase in the concessional contribution limit to $35,000 was announced there was a clear indication that this was to be a special case and not related to the normal concessional contribution limits.

During the Rudd/Gillard government’s terms superannuation contribution limits were an easy target with many changes being made. When the new superannuation system was introduced on July 1, 2007 the general limit that applied was $50,000. There was in addition a $100,000 concessional contribution limit for people aged 50 and over that was meant to apply until June 30, 2012.

Also when the new superannuation system was introduced the non-concessional limit was set at three times the general contribution limit of $50,000. When the Labor party reduced the concessional contribution limits by 50 per cent it had to adjust the multiple to calculate the non-concessional contribution limit to six times.

The increased limit of $35,000 first applied to people aged 59 and over at July 1, 2013 for the 2014 year. At this time the general concessional limit was $25,000. As a part of the introduction of this special increased limit people aged 49 at July 1, 2014 got an increased concessional contribution limit of $35,000 for the 2015 financial year.

The general concessional limit for the 2015 year was $30,000. According to the ATO website the increase in average weekly ordinary time earnings has not resulted in an increase in the general concessional limit for the 2016 year and therefore this remains at $30,000.

The special concessional contribution limit, for people aged 49 or older at July 1, 2015 will be $35,000. This special limit is not subject to indexation and once the general concessional limit reaches $35,000 it will cease. As mentioned before because this is a special concessional limit is not taken into account at all when calculating the non-concessional limit.

Contributing to super after retirement

I am 58, retired and have an industry based superannuation account with a reasonable balance. The super account is in accumulation mode and I do not intend to draw on it for many years yet. Additionally I have property and share investments in my name outside of super. These investments are currently providing me with sufficient income to live on with a little extra to spare.

My taxable income is a combination of net rent, franked and unfranked dividends and interest. I have no net debt. I am in the 32.5 per cent tax bracket and franking credits will provide me with a tax refund this tax year. I understand that even though I am not employed and under 65 I can still make superannuation contributions, either as concessional tax-deductible contributions or as non-concessional contributions.

Is it best to claim a $20,000 deductible contribution, which will be taxed at 15 per cent going in, or do I just make a non-concessional $20,000 contribution? Is there any value in a tax deductable super contribution in this situation when franking credits cover income tax payable?

Answer: There is definitely some benefit in making a tax-deductible concessional contribution, and you should also consider obtaining some tax planning advice as there are a number of strategies that you could be using over the next seven years.

Firstly there is a major benefit in making a deductible super contribution even though someone in this situation would not be paying any tax because of the franking credits included in the dividends that they receive. On the basis that someone is paying tax at 32.5 per cent their income must be in excess of $37,000. For the purposes of illustrating the benefit of making a tax-deductible self-employed super contribution I will assume their income is $60,000.

Tax payable on $60,000, including the Medicare Levy at 2 per cent, will be $12,247. If a saver made a tax-deductible super contribution of $20,000 this would reduce their tax payable amount to $5347. On the basis that they would not have been paying tax because of the franking credits included in their taxable income, which must have been at least $12,247, the tax-deductible super contribution would generate a refund of $6900. This tax refund does come at the cost of $3000 in contribution tax but still leaves the saver better off by $3900.

With the level of income that someone in this situation is generating without drawing on their superannuation they must have considerable amounts invested in both property and shares. It is also reasonable to assume that they also have large amounts of accumulated unrealised capital gains in these investments. If they do not take any action before turning 65, and must sell some assets in the future to help generate income for retirement, there will be nothing they can do to reduce the capital gains tax at that point in time.

An investor in this situation should therefore review their investments and identify those with capital gains that are not producing a reasonable level of income and consider selling these. Residential properties are a great investment when people are in accumulation phase but when they are in retirement, with most residential properties producing a net rental income of less than 3 per cent, they can underperform from an income point of view.

Just as the self-employed super contribution can produce a tax refund, it can also be used to reduce income tax on capital gains that an investor would make if they decided to sell some of their current investments.

A tax-deductible $35,000 self-employed super contribution means an investor can make a capital gain of $70,000, of which only half will be taxable, and their tax saving would be considerable. Using an assumed $60,000 income, tax payable on a capital gain of $35,000 including Medicare Levy would be $24,997.

By making a $35,000 self-employed super contribution an investor would instead be only paying $5250 in contributions tax, and therefore be achieving a tax saving of $19,747. If someone in this situation does nothing in relation to their current investments, and therefore holds them for the rest of their life, they will only be transferring the tax debt to the people who inherit those assets.

Another strategy that someone in this situation should be considering relates to withdrawing lump sums and recontributing them as non-concessional contributions. If an investor’s superannuation is currently made up of mainly taxable superannuation, and they do not use any the strategies open to them, they will be leaving another tax debt for their nondependent beneficiaries of 17 per cent of the taxable superannuation that they inherit.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au