If you are making regular after-tax contributions (known as non-concessional contributions), or even a once-off lump sum payment, into your superannuation, then you may end up with excess contributions.
(Photo from JESSICA SHAPIRO)
If you do find yourself in this situation, you need to be aware of your options and how they might affect your financial position. First, it’s important to note that excessive non-concessional contributions are not the end of the world. In fact, it’s not even that uncommon.
Tax on contributions
The tax you pay on your super contributions generally depends on whether the contributions were made before or after you paid income tax, you exceed the super contribution caps or you are a high-income earner.
Before-tax super contributions (Concessional)
The super contributions you make before tax (concessional) are taxed at 15%.
Types of before-tax contributions include:
- Employer contributions, such as compulsory employer contributions and salary sacrifice payments made to your super fund;
- Contributions that you are allowed as an income tax deduction
After-tax super contributions (Non-concessional)
The super contributions you make after tax (non-concessional) are not subject to tax.
Types of after-tax contributions include:
- Contributions you or your employer make from your after-tax income
- Contributions your spouse makes to your super fund
- Personal contributions that are not claimed as an income tax deduction
There are many ways you can inadvertently breach your contribution cap, especially when you aren’t keeping up to date with the super rules.
With last year’s reduction of the annual non-concessional cap to $100,000 and the introduction of a zero-dollar cap for super holders with a balance of greater than $1,600,000, it’s never been easier to accidently go over. With that in mind, let’s look at your options should this occur.
Believe it or not, the default option of doing nothing is often commonly used. In this case, the Australian Taxation Office will request a release of the amounts to be paid straight to the ATO.
They will then amend your income tax assessment to include the associated earnings as part of your assessable income, with any tax taken out of the balance and the remainder refunded to you.
It is important to note that the calculations for associated earnings on non-concessional contributions are taken from the start of the financial year in which the cap was exceeded.
This means that even if the cap wasn’t reached until June, your tax will include earnings on that excess as though it was in there for the entire financial year.
Release your excess super
You can elect to release all your excessive non-concessional contributions and 85 per cent of your associated earnings from your super fund of choice. The taxation office will then issue a release authority to the super fund that you nominate, and they will pay this amount directly to the tax office.
Leave your contributions in super
You can choose not to release your excess non-concessional contributions from your super funds, however you will receive an extra tax assessment.
The excess amount is taxed at the highest marginal tax rate, a nasty sting if you aren’t diligent in understanding these rules and following the most appropriate course of action for your circumstances.
Alternatively, once you receive your determination from the taxation office, you have 60 days to choose one of two options.
Stay on top of it
It pays to keep on top of the changing landscape of superannuation before making any personal contributions.
If you do go over your limits, then consider the options most appropriate for you. If you’re unsure of what to do, or just want to ensure you’re not breaching your caps, please seek advice from a professional financial adviser to get the right advice for your situation.
Australian Taxation Office (ATO) website, Tax on contributions,
Sydney Morning Herald, Too much in super can mean extra tax, By Olivia Maragna, on 26 September 2018
The material and opinions in this article are those of the author and not those of AP Group. The material and opinions in the article should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests or resort to professionals for assistance.