It is getting increasingly difficult to know how much to contribute to superannuation.
Sure, we all know that we need super to live off when we retire, but many of us are leaving it later to take an interest and start to build up our balance, and the limits on what we can contribute in any one year are being constantly reduced , meaning we can no longer contribute what we need to retire on over a short time period. We need to be thinking about our retirement now!
With all the different limits in the last few years depending on your age and your superannuation balance, and the reduction of contributions limits generally since 2009, you would be forgiven for being a little bit confused. And if you do happen to get it wrong, the government can take up to 93% of the amount over the limit back in tax. It's no wonder that people are being turned off self managed super as an investment vehicle in favour of something easier to understand. As an example, net inflows into SMSF's have reduced from $21,012 in 2008-9 to $16,870 in 2010-11. This is a 20% reduction over 3 years.
We still believe that self managed superannuation is still a good place to keep your money. And the government has backed us up a little in the latest round of updates by not fiddling with things too much. Hopefully this article can help to provide some clarity around what you can contribute and when.
There have been a few wins lately for superannuation contributions:
1 - Concessional contributions (those which attract a tax deduction outside superannuation) are limited to $25,000 for the 2013 year, regardless of age. Broadly, a concessional contributions can be made by an employer or an entity that the member controls. Individuals need to satisfy more complex rules including that more than 90% of their income comes from running a business (subject to certain paperwork conditions being met), and that the amount of the contribution cannot be greater than taxable income. Concessional contributions are taxed at 15% in the fund (and 30% if the individual making the contribution has income over $300,000 from 1 July 2012).
2 - Non-concessional contributions (after tax contributions) are limited to $150,000 for the 2013 year. However, members under the age of 65 at the start of the income year may bring forward up to 3 years at once and contribute $450,000. A non-concessional contribution is anything that is not a concessional contribution. Non-concessional contributions are not taxed in the fund, and are added to the tax free part of the members balance.
These limits are separate, and either or both limits may be breached in any year, which could have significant taxation consequences for the fund. Importantly, if the concessional limit is breached, any excess also increases the non-concessional contributions in that year, meaning potentially both caps could be breached due to an employer contributing too much in an income year.
Note: All contributions are governed by other rules that affect whether a contribution is a concessional or non concessional contribution, and even whether you can contribute. Some of the rules are listed here:
Age-based limits:
Other limits:
Make sure you keep up to date with all contributions going into all funds. Keep a spreadsheet if you need which tracks the date the contribution was made, the amount, and whether it is a concessional or non-concessional contribution.
Ensure that when you count up your contributions, you include the following often missed items:
As you can see, getting it wrong is easy, which is why the ATO expects to issue over 29,000 ECT assessments in the 2012-13 year, and a further 30,000 refund offers.
The ATO has discretion to disregard or reallocate contributions to another year, however we are seeing the commissioner unwilling to use this discretion, and cases going to the Administrative Appeals Tribunal. Recent case law suggests that the only reason to allow the commissioners discretion is in circumstances that were beyond the member's control, such as an employer contributing amounts relating to previous or future years .
So if a mistake has been made, and I inadvertently caused it or had reason to believe that it could be caused, what are my options?
Up until recently, the only option was to pay the tax. The tax rate is 45% on non-concessional contributions, and 30% on concessional contributions (bearing in mind the fund has already paid 15% contributions tax). So this rate is the same enjoyed by those on the top marginal tax rate. This tax can then be paid by the fund provided a notice to the fund is provided.
From 1 July 2012, however, another option is available. The ATO may offer that you refund the excess concessional contributions up to $10,000, and have them taxed at your marginal tax rate (with an offset for the 15% contributions tax already paid by the fund). This might be a good option if:
However, this option is only available where certain conditions are met:
You should consult a qualified accountant or financial adviser when considering whether to accept or decline the offer, as your amended income may have significant consequences including family tax benefit, child care benefit, child support assessments, and eligibility for other offsets or co-contributions.
Should you need further advice, contact The Accountant Group or The Wealth Creation Group on 1300 TAX 000 and speak with one of our experts today.
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