One of the most tax-effective ways to boost your retirement savings is to put additional money into your super – and once you know how the caps on super contributions work, you can take advantage of the available tax concessions.
This makes sense as, by staying within the super contributions caps, you can reduce the amount of tax you need to pay. These limits or caps generally depend on your age and the type of super contributions you make.
Below we take a look at what you need to know about concessional and non-concessional super contributions:
Concessional (before-tax) super contributions
These are super contributions you make before you pay tax on them. They generally include:
- Contributions made by your employer, such as Super Guarantee (SG)
- Salary sacrifice payments you choose to make from your before-tax income
- Personal concessional super contributions – for example, contributions you make if you’re self-employed.
Concessional super contributions are generally only taxed at 15%, which means you could lower your taxable income.
What is the concessional super contributions cap?
Currently, you can make up to $30,000 in concessional contributions in a financial year if you were less than 49 at 30 June 2016, or $35,000 if you were older.
This will now be changed to an annual cap of $25,000 for everyone from 1 July 2017.
What happens if you go over the concessional super contributions cap?
The amount of your excess concessional super contributions is included in your assessable income and you pay an interest charge.
If you do not choose to withdraw your excess concessional contributions from super, the excess will also count towards your non-concessional superannuation contributions cap.
Non-concessional (after-tax) super contributions
These are superannuation contributions you make from sources that have already been taxed. They generally include:
- Super contributions from your take home pay or savings when no tax deduction has been claimed
- Certain super contributions made by your spouse on your behalf.
What is the non-concessional super contributions cap?
Currently you can contribute up to $180,000 a year. Or, if you’re under the age of 65 (any time during the year), you are able to apply the ‘bring-forward’ rule. This allows you to make up to three years’ worth of non-concessional contributions (currently $540,000) at any point during a three-year period.
The Government has reduced the annual cap to $100,000 from 1 July 2017.
Under the new rules, if you’re eligible you’ll still be able to apply the bring-forward rule and contribute up to $300,000 at any time during a three-year period.
In addition, from 1 July 2017 the Government will no longer allow you to make any further non-concessional contributions once your total super balance reaches $1.6 million.
What happens if you go over the non-concessional super contributions cap?
You can choose to withdraw the excess non-concessional amount from super and 85% of an ‘associated earnings amount’, or how much your excess contributions earned while in your super account.
The total amount of associated earnings will then be included in your assessable income for the year and taxed at your marginal rate.
Otherwise, excess non-concessional super contributions will be taxed at 49%.
There are eligibility requirements to keep in mind:
- If you’re aged between 65 and 74 and want to make voluntary super contributions, you need to pass a work test. This means you need to have worked at least 40 hours within 30 consecutive days in the financial year before you contribute further to your super.
- If you’re 75 or over, you won’t be able to make voluntary contributions to super. These eligibility rules don’t apply to your employer’s SG contributions – they can be made at any time, regardless of your age.
For more information about super contributions and how they might impact your financial situation, please contact us.
Source: Colonial First State Investments