Do you understand the differences between concessional and non-concessional SMSF contributions?
Making payments into your self-managed superannuation fund (SMSF) with pre-tax dollars is labelled making “concessional contributions”. These payments to your super fund include the compulsory 9.5% super guarantee paid by employers, salary sacrificed amounts and personal contributions for which you can claim a tax deduction (like those made by the self-employed).
“Non-concessional contributions” are commonly known as after-tax contributions. They are sourced from your after-tax or untaxed income, so the full contribution gets to your super fund with no tax deducted. No tax is deducted because you haven’t claimed a tax deduction, or received any other type of tax concession, before making these contributions.
To avoid any nasty surprises you should understand both types of contributions and the different “contributions caps” that apply. If you go over both, you can end up paying 93% of the amount over both limits in tax!
If you’re aged 48 years or younger on June 30, 2014, you can contribute up to $30,000 a year in concessional contributions for the 2014-15 year (in previous years, this cap was $25,000). If you are 49 years or older at the same date, you can contribute up to $35,000 a year in concessional contributions for 2014-15. This special cap was also available for the 2013-14 year, but only for those who were aged 59 or older at June 30, 2013. See tables below.
Concessional contributions general caps
|Income year||Amount of
Special concessional contributions caps (aged 60 and over or age 50 and over)
|Income year||Cap for those
aged 59 years or over
on June 30, 2013
|Cap for those
aged 49 years or over
on June 30, 2014
|2014–15||see next column||$35,000|
|2013–14||$35,000||see general cap above|
Stick to the limits
If your contributions exceed those caps, the level of contributions above the cap are known as excess contributions. Excess contributions are included in the member’s assessable income and taxed at the member’s marginal tax rate plus Medicare levy. Taxpayers must pay the liability personally or elect to have released an amount up to 85% of the excess concessional contributions from their superannuation account to cover the liability. An excess concessional contributions charge (ECCC) applies to allow for the delay in payment of tax, which is dependent on access to the taxpayer’s tax return and Member Contribution Statement for the year.
A similar approach is to apply from July 1, 2013 for non-concessional contributions that exceed the cap. The government announced in the 2014 Budget that individuals will have the option of withdrawing superannuation contributions in excess of the non-concessional contributions cap made from July 1, 2013 and any associated earnings, with these earnings to be taxed at the individual’s marginal tax rate.
Generally for the income years before July 1, 2013, excess contributions are subject to penalty tax in the form of excess contributions tax. Excess concessional contributions are taxed at 31.5% in addition to the 15% contributions tax already applied in the fund. Excess non-concessional contributions are taxed at top marginal tax rates plus Medicare.
Excess contributions tax is a penalty tax, and is imposed on the individual rather than the super fund, although the tax may be paid from the individual’s super account.
And if you’re in business for yourself (as say, a sole trader), don’t forget that certain other concessions for personal super contributions can push you over the limit, such as the small business CGT retirement concession that allows the capital gain made from the sale of an eligible asset to be tipped into super (the capital gain is then tax-free). This is counted towards the concessional super contributions cap.
The legal obligations resulting from making both excess concessional contributions and excess non-concessional contributions falls on you personally and not on the super fund, but the payment methods differ. For excess concessional contributions, you pay personally via your tax return or have the super fund pay it. For the excess non-concessional contributions tax, the super fund must pay the money.
Not all caps are the same
Amounts that exceed the concessional cap are also counted towards the “non-concessional” cap. Non-concessional contributions to super are those made from after-tax income, which are not taxable to the super fund and are not tax deductible to you, and include any voluntary amounts you put into super, as well as spouse contributions.
The cap imposed on these contributions is $180,000 a year (from July 1, 2014) which is $30,000 more than the cap for the previous income year. It is also indexed from the 2014-15 year onwards, and is to be maintained at six-times the concessional cap (now also indexed). If the excess concessional contribution leads to excess non-concessional contribution it will be subject to more than one type of income tax, being both included in the taxpayer’s assessable income and then subject to excess non-concessional contributions tax as above. The total rate of tax on such a contribution is to set at no more than 95%.
But if you are under 65 years old when you breach the non-concessional contributions cap, don’t panic just yet – you are automatically entitled to use the “bring forward rule”. This lets you bring forward the $180,000 caps for the next two years into the current year. So you get a cap of $540,000 for that initial year and won’t be punished for contributions between $180,000 and $540,000 as long as your total non-concessional contributions for the three years don’t exceed $540,000.
Note that if you seek to make contributions while at least 65 years of age, it will be necessary to pass a “work test”. To satisfy the work test, you must be gainfully employed for at least 40 hours during a consecutive 30-day period each financial year in which the contributions are made. The work test requirement must be satisfied for the year when the contributions are made rather than when contributions are allocated to your super account.