If you are confused by the changes in superannuation including the amount you can contribute to your self-managed super fund (SMSF) and everything surrounding it, you are not the only one.
Since the Australian government lowered the superannuation contribution caps from 1 July 2017, I’ve been asked a number of times “what happens if I contribute too much?”
The answer depends on a number of factors, including the type of contributions you’ve made and which cap you’ve exceeded.
The current concessional contributions cap is $25,000 per year. Concessional contributions include:
- Superannuation guarantee (currently 9.5%)
- Pre-tax employer contributions (salary sacrificed contributions)
- Personal deductible contributions
What happens if you exceed the Concessional Cap?
Any concessional contributions over the cap amount will be added to your personal taxable income for the relevant year. You will be assessed on this amount at your marginal tax rate. The ATO will also impose interest at the rate of 4.96% as at September 2018. This is referred to as an Excess Contributions Charge.
It should be noted that if you have a total superannuation balance of less than $500,000, you can effectively increase your concessional cap under the carry-forward provisions from 1 July 2018. If you do not fully utilise your cap in one year, the unused portion will roll forward for up to 5 years, allowing additional concessional contributions to be made in those years.
Non-concessional contributions are after tax contributions made to a member’s superannuation fund. The general non-concessional contributions cap is currently $100,000 per year, but your true non-concessional cap is dependent on your total superannuation balance and your eligibility to access the bring-forward rule (detailed below).
Total Superannuation Balance
From 1 July 2017, if your total superannuation balance is $1.6M or greater, you are no longer eligible to make ANY non-concessional contributions. If your balance falls below $1.6M, you will once again be eligible to make non-concessional contributions.
If you are under 65, you may be eligible to access the bring-forward rule, allowing you to contribute a maximum of $300,000 in one year, provided you make no further non-concessional contributions for the 2 following years.
There are transitional rules for individuals with a Total Superannuation Balance of $1.4M – $1.6M as at 30 June 2017, and those that triggered the bring-forward rule prior to 30 June 2017 but did not fully utilise their bring-forward cap.
What happens if you exceed the non-concessional cap?
You have two options:
- You can leave the excess contributions in your superannuation fund and pay tax on the excess contribution amount at the top marginal rate (currently 47%); or
- You can elect to withdraw the excess contributions.
Under this option, you will also withdraw 85% of the associated earnings. The associated earnings is the deemed income attributable to the excess contributions, as calculated by the ATO. The superfund retains 15% of the associated earnings to cover the earnings tax it will be liable for. You will be liable to pay income tax on the total associated earnings at your marginal rate, and you will receive a 15% tax offset (in recognition of the tax paid by your superfund).
While the penalties imposed for excess contributions under the current rules are far more reasonable than they once were, it is far better to ensure that you do not exceed your contribution caps in the first place.
Speak to our team at BLG Business Advisers to ensure your super contributions are set up to benefit you. Get in touch with us online or by calling (02) 4229 2211 today to get started.