Super Contributions: Tips and Penalty Tax Traps

Written by Kate McCallum, Multiforte 

Many people find the rules on super contributions confusing - not surprisingly, given that they have been subject to much change.

So, to start, here's a quick re-cap on superannuation contributions. 

There are two types of contributions -concessional (before-tax) and non-concessional (after-tax). Each type of super contribution is subject to a contributions cap. A contributions cap sets a limit on the amount of contributions you can make in any one year. If you exceed the cap, your excess contributions are likely to be subject to penalty tax.

This financial year, the concessional contributions cap is $25,000, and for people age 50 plus it is $50,000. The non-concessional cap is $150,000 per annum, with the option to bring forward two future years of contributions and make a $450,000 contribution in one financial year.  

Tips

Here are a few helpful tips that could help you maximise your super contributions.

If you're self-employed, or not employed, or you only receive a small proportion of your income from an employer (the 10% rule), then you can make concessional contributions that you claim as a tax deduction in your individual tax return. You must lodge a notice of intention to claim a tax deduction with your super fund.

If you have reached age 50 years or over on the last day of this financial year, then you are eligible for the higher transitional cap of $50,000. So, for example, if you turned 50 in May 2011, you can still contribute $50,000 to super as a concessional contribution.

Even if you've reached your concessional contributions cap, it can still be worth making contributions to super from your after tax money. Depending on your personal objectives, moving money from a high personal tax rate environment to the tax-concessional super environment can reduce the tax on your earnings by up to 31.5%. And that means that you money can grow faster.

Finally, check your eligibility (or your partner's) for the co-contribution.
The co-contribution is a tax-free super contribution from the Federal Government when you make a non-concessional (after-tax) contribution. Individuals who earn up to $61,920 of income may be eligible for a co-contribution of up to $1,000.  

Traps

Exceeding your contribution caps is often irreversible and very costly. The penalty tax on concessional contributions above the cap (31.5%) means that this money is effectively taxed at the highest marginal tax rate of 46.5%.

Be aware that your concessional contributions include your employer's compulsory superannuation guarantee contributions or personal super contributions made by a self-employed person, as well as any salary sacrifice contributions you elect to make personally.

A common trap is under-estimating the value of your employer's SGC. This is calculated on salary, as well as amounts paid as bonuses, commissions, allowances, loadings or director's fees. If you receive variable payments like bonuses or commissions, you could easily be at risk of exceeding your contribution cap.

Another key trap is failing to count any excess concessional contributions towards your non-concessional (after tax) cap. If you exceed this cap you will pay an additional penalty - another 46.5% bringing the total tax on super contributions to 93%. Ouch.

Here's an example to illustrate. Let's take Anita (age 48), an Executive in a major multinational firm. In July last year, Anita received an inheritance of $380,000 which she contributed to super as an after tax contribution (using the bring forward rules). Anita's company has had a stellar year and so she will receive a significant bonus. As her employer contributes SG of 12 per cent,Anita's total SG contributions will be $45,000. This means she will exceed her concessional cap ($25,000) by $20,000 - and this $20,000 now being counted towards her non-concessional contribution cap.

Anita would like to contribute additional funds as a non-concessional contribution into super. The key question is: how much can she contribute to stay within her non-concessional cap and avoid paying the highest (93%) penalty tax? The answer is not as straightforward as you may first think. If you'd like to know the answer to Anita's question, or you'd like to discuss ideas on what you can you can do to maximise your super, then please contact Multiforte on 8209 1607 or email as they will be happy to help.