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Concessional Contributions: Know your limit - Big Sky Financial Solutions

Concessional Contributions: Know your limit



Many people have recently received a nasty tax surprise because they exceeded the limit allowed for concessional contributions into their superannuation accounts.

As a result of the current contribution limits, it has become quite easy to breach the caps inadvertently. For example, if you’ve been salary sacrificing into your super since July 2010, or you’ve put a lump sum into super this financial year, it’s a good idea to check where you’re up to at this point - to make sure you’re not going to be over the limit.

To avoid this from happening, it is essential that you are aware of the risk and to discuss any concerns you may have with an experienced financial adviser as soon as possible so that they may be able to assist you.

What are concessional contributions?



Money can go into your super in one of two ways – as a concessional or a non-concessional contribution. If it’s concessional it means you only pay 15% tax, a ‘concession’ to the tax rate you generally pay on most other things, e.g. your salary.

Concessional contributions include the (minimum) 9% compulsory super paid by your employer, as well as any salary sacrifice contributions you might be making.

One of the changes in the 2010 Federal Budget was about annual limits on how much you can contribute to your super account before the current tax concession is removed. For 2010/2011 there is a reduced annual limit on your concessional contributions down by half, to $25,000 pa*.

There are, however, transitional rules for people aged 50 or over (or turning 50 this year) where you can make annual concessional contributions up to $50,000 until 30 June 2012.

What happens if I’m over?



If you exceed the limit, or cap, for your age group you’ll pay more tax. Contributions in excess of the concessional cap are taxed (currently) at 31.5%, including the 1.5% Medicare Levy. Add this to the standard 15% contributions tax and you get a whopping 46.5% excess contributions tax.

Example



Michael is 43 and earns a total package of $92,650, made up of $85,000 salary plus employer SG contributions of $7650. He has been salary sacrificing during 2010/2011 and planned to contribute a total of $25,000 for the year. However his annual employer contributions of $7,650 need to be added to his salary sacrificed amount. If he proceeds with his current strategy he will exceed his concessional contributions limit by $7,650. He’ll also be subject to a total of 46.5% excess contributions tax. Therefore the maximum Michael can salary sacrifice for the 2010/2011 year is $17,350, after allowing for his employer’s SG contributions of $7,650.

What to do next



If you:
  • make regular salary sacrifice contributions
  • receive employer contributions that are higher than the minimum 9%
  • have received a bonus payment during 2010/2011
  • are a high income earner
  • you should review your current arrangements.

Thinking longer term



Bear in mind that the answer may not be as simple as reducing your contribution levels below the annual limit, as this could affect your retirement savings strategy.

You should speak to a qualified financial adviser to explore other, more appropriate strategies for your future.

If you’d like some assistance with understanding how the new limit may affect you – either for this financial year or for subsequent years – please contact Big Sky Financial Solutions on 1300 700 189.

It’s not just about keeping an eye on your tax; this can also affect your longer term retirement planning.

* For 2009/10 but indexed to average weekly ordinary time earnings (increased in $5,000 increments) for future years.

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