By Trevor Geffin
The information contained on this web site is general in nature and does not take into account your personal situation, goals, need or circumstances. You should consider whether the information is appropriate to your specific situation, and act on this general information only after seeking professional advice from a qualified financial adviser.
Any matters we refer to below relating to taxation or law are of a general nature only and are based on our interpretation of laws which exist at the time of writing. This should not be relied upon in place of professional advice. These laws may change from time to time.
Concessional contributions are a type of contribution that is made to superannuation from your pre-tax money. The concessional contribution limit for 2017/18 is $25,000 per annum per person. It is important that you do not breach your $25,000 limit as penalties may apply. Concessional contributions include contributions such as:
- Employer contributions (i.e. your 9.50%)
- Salary sacrifice contributions
- Any other contributions an employer makes on your behalf from pre-tax income i.e. to fund insurance premiums
Concessional contributions will be taxed at 15% by your superannuation fund instead of your marginal tax rate so it is important to ensure that your income is at least above $20,542, otherwise you will be paying tax on income that would have otherwise formed part of your tax free threshold (after accounting for the Low Income Tax Offset).
For a person earning over $250,000 per annum you may be charged an additional 15% contributions tax on all or part of your concessional contributions depending on your earnings. This tax will be applied inside your superannuation fund.
Concessional contributions are a highly tax effective method of accumulating wealth for your retirement. If cash flow permits, maximising these contributions can have a powerful long-term impact on your wealth accumulation.
Please note that from 1 July 2018, if your superannuation balance is under $500,000 as at 30 June 2018, you will be able to carry forward unused concessional contributions for up to five years. This will provide certain superannuation members the ability to catch-up contributions they couldn’t make in previous years if their cash flow improves in subsequent years.
Be aware of timing
When considering your super contributions for the financial year, it is important to remember that contributions don’t count when the payment is sent, they only count once the payment is received by your fund.
You need to give yourself plenty of time before 30 June to allow your contribution to clear in your superannuation fund. Furthermore your employer is entitled to make your super contributions for the quarter ending 30 June 2018 by 28 July 2018, which is in the next financial year. It is up to you to check with your employer the timing of when the contribution will be made.
A Key Change for 2017/18
From 1 July 2017 you are now able to make a lump sum personal contribution to superannuation and claim a tax deduction even as an employee.
Previously this method of contribution was only available for the substantially self-employed, with employees needing to salary sacrifice in order to boost their concessional contributions. This now provides employed persons more flexibility as to how they can access their $25,000 per annum cap i.e. via employer contributions, salary sacrifice or personal contributions. So if you have been receiving employer contributions under the $25,000 per annum cap and have not been salary sacrificing, you will now be able to contribute a lump sum to take advantage of the remainder of your cap whilst claiming a tax deduction.
Example: James earns $180,000 per annum plus super ($17,100). His employer also funds his Life insurance held in his superannuation, equal to $3,000 per annum.
After accounting for his employer contributions and employer funded insurance, James has $4,900 remaining of his concessional contribution limit of $25,000. James has not been salary sacrificing and wants to utilise his whole $25,0000 cap this financial year. He makes a lump sum personal contribution of $4,900 to his superannuation fund and can claim this contribution as a tax deduction.
Important Note: Once your fund receives the contribution it will be recorded as a non-concessional contribution. The superannuation fund will need to receive a Notice of Intention to Claim a Tax Deduction Form to convert it to a concessional contribution.
The superannuation fund will then provide confirmation that the contribution has been recorded as a concessional contribution and can be claimed as a tax deduction. Because of this process it is important that you do not commence any superannuation rollovers (form the fund you contributed to) or lodge your tax return until you have received confirmation that your Notice of Intention to Claim a Tax Deduction have been processed to completion.
Reduce Capital Gains with a Concessional Contribution
If you are eligible to make a concessional contribution to superannuation and have not utilised your $25,000 per annum cap, you can use the proceeds of the sale of an asset in your personal name to make a tax deductible concessional contribution to your superannuation.
As you can now make a personal contribution and claim this as a deduction regardless of your employment situation until age 65, this is now easier to implement than before. This will have the effect of reducing your capital gain for the 2017/18 financial year.
Example: Diane recently sold some shares and made a pre-tax gain of $75,000. She is entitled to a CGT discount of 50% on this gain as she held the shares for more than 12 months, resulting in an assessable gain of $37,500. Diane earns $88,000 per annum, meaning she has a marginal tax rate of 39% (including Medicare Levy). She will also receive employer contributions of $8,360 for the 2017/18 financial year, as a result she has $16,640 of her $25,000 concessional cap remaining.
Diane decides to use $16,640 of her $75,000 gain to make a personal contribution to her superannuation fund. Diane then claims a $16,640 tax deduction, which reduces her assessable capital gain by the same amount. This saves Diane $6,489 of capital gains tax / income tax.
Her $16,640 contribution will be taxed at 15% ($2,496) in her superannuation fund, so her total reduction in tax is $3,993 by using her gain to make a concessional contribution.
Adjust your Contributions
The concessional contribution cap for 2016/17 was either $30,000 or $35,000 per annum per person depending on your age. For 2017/18 financial year the concessional contribution cap has been decreased to $25,000 per annum for each eligible person, regardless of age.
For those with a base salary (excluding super) of $263,157 per annum, your employer contributions may result in more than $25,000 being paid into your superannuation fund. It is important to check with your employer if they will be making excess contributions for you. Your employer is only mandated to pay you up to an equivalent of $20,048.8 for the full financial year, but some employers are still paying 9.50% on your whole salary, it is up to you to verify your arrangements with your employer to ensure you do not breach your limits for 2017/18.
Non-Concessional Contributions are contributions made with post-tax money. The annual non-concessional contribution limit is $100,000 per annum per person. If your superannuation balance is over $1,600,000 immediately before the financial year i.e. on 30 June of the previous financial year, then you cannot make this contribution.
Non-concessional contributions include:
- Personal contributions made by you where you did not claim a deduction i.e. from post-tax money.
- Spouse contributions received by you.
- Contributions received by a child under age 18 (unless related to employment).
- The non-growth portion of transfers from foreign superannuation funds.
- Excess concessional contributions that arise from contributions made before July 1, 2013.
- Excess concessional contributions that arise from contributions made on or after July 1, 2013 that the you do not elect to be refunded.
Non-Concessional contributions are assessed against the non-concessional contribution cap in the financial year that the contribution is allocated by the trustee to your member account. It is important to note for SMSFs, that when the contribution is made and when it is allocated both need to be in the same financial year for the contribution to be counted against the cap for that financial year.
Another effective strategy can be for you to bring forward up to 3 years of contributions by making a lump sum contribution of up to $300,000 (subject to a number of rules) in a single financial year. This is known as the “bring forward rule” and you must be under age 65 on 1 July 2017 to be able to access this benefit. Depending on your superannuation balance, you will have either a two year or three year bring forward i.e. you can make $200,000 or $300,000.
If your balance is close to the $1,600,000 transfer balance cap, then special care needs to be given. For 2017–18, to access the non-concessional bring-forward arrangement:
- you must be under 65 years of age for one day during the first year.
- you must have a total superannuation balance of less than $1.5 million at the end of 30 June 2017.
If your balance is……
- Less than $1,400,000, then your contribution and bring forward available is 3 years and $300,000.
- Above $1,400,000 and less than $1,500,000 then your contribution and bring forward available is 2 years and $200,000.
- Above $1,500,000 and less than $1,600,000 then your contribution is $100,000 and you get have no bring forward.
- Above $1,600,000 – Nil
Example: Sylvia has a superannuation balance of $1,564,000 on 30 June 2017. She wishes to utilise the bring forward provisions to make a $300,000 non-concessional contribution. However Sylvia is only able to make a $100,000 non-concessional contribution because of the size of her balance.
Example: David has a total superannuation balance of $1,424,000. He is eligible to make a non-concessional contribution in 2017-18 of $200,000 After this contribution, David will not be able to make any further non-concessional contributions as his balance will be over $1,600,000.
Example: Angela has a total superannuation balance of $500,000. She is eligible to make a non-concessional contribution in 2017-18 of $300,000 this financial year. Sylvia will be eligible to make further non-concessional contributions again in the 2020/21 financial year.
Spouse Super Splitting
Contribution splitting allows you to split up to 85% of your prior year concessional contributions with your spouse. This is different to a spouse contribution which involves you making a non-concessional contribution to your spouse’s fund on their behalf. Utilising contribution splitting over the long-term can be an effective tool to assist you in:
- Equalising superannuation balances between two spouses.
- Increase the amount that you and your spouse have in pension phase under the transfer balance cap of $1,600,000.
- Splitting superannuation contributions may help to protect against future legislative changes in relation to super.
- Splitting contributions towards the older spouse when there is a big age differential, as a couple you may be able access tax-free superannuation sooner.
- Splitting concessional contributions can be a tax effective method of funding your spouse’s premiums in superannuation, effectively it allows premiums to be funded via pre-tax money, assuming your spouse has no contributions going in.
Other important issues in relation to contribution splitting are:
- Super funds do not have to permit contribution splitting, you need to check with your fund if it is permitted.
- If you have a SMSF, the trust deed needs to permit contribution splitting. If the trust deed does not permit it, then you will need to amend the deed.
- The request to split needs to be made by 30 June of the financial year following the year that contributions were made i.e. you can split your 2016/17 contributions in the 2017/18 financial year and your request to split must be lodged by 30 June 2018.
Spouse Contribution Tax Offset
If your spouse does not work full-time and has not had the opportunity to accumulate much in super, you have an opportunity to boost his/her super by making contributions and you could save some tax as well.
- The maximum tax offset the contributing spouse can receive in a financial year is $540.
- The tax offset is calculated based on the following formula
- 18% x the amount of the eligible contribution
- The maximum eligible contribution for the purposes of this offset is $3,000.
- The tax offset is progressively reduced until it reaches zero for spouses who earn $40,000 or more in assessable income in a year.
- There is no income test for the contributing spouse, only the receiving spouse.
You can make an after-tax non-concessional contribution to your spouse’s superannuation account if your spouse is:
- Under age 65, or if between age 65-69 they will need to have met the work test for the year before spouse contributions can be made. The work test requires the completion of at least 40 hours of gainful employment within a consecutive 30 days period.
- Your spouse must be under age 70 when the contributions are made.
- Your spouse must be your spouse at the time the contribution is made.
- The receiving spouse does not need to be an Australian resident or taxpayer to receive the contribution, but they do need to be an Australian resident if the contributor wants to claim the tax offset.
The contributing spouse…
- Can be any age.
- Must make the contribution from a source of funds in their own name.
- Needs to ensure that if the funds are sourced from a joint account, that they transfer the funds first to an account they control. You must be able to show that you had control of the funds and chose to make the contribution on behalf of your spouse.
You will be eligible for the tax offset if…
- the contributions must be made to a complying superannuation fund or a retirement savings account on behalf of your spouse.
- the contributions must not be deductible to you.
- The receiving spouse’s income* needs to be less than $40,000 and less than $37,000 for the maximum offset.
- you and your spouse must not be living separately or apart on a permanent basis when the contributions are made.
- the contributions must not be made to satisfy a family law obligation to split contributions with your spouse.
- The receiving spouse needs to have a total superannuation balance immediately before the financial year less than the general transfer balance cap, which is currently $1,600,000.
- The receiving spouse’s non-concessional contributions for the financial year cannot exceed their non-concessional contribution limits.
* Income is defined as assessable income plus reportable super contributions plus reportable fringe benefits.
If you put $1,000 into your super fund, the government may also add up to $500 as a co-contribution. This is a simple way to increase your savings. But you need to make your contribution before the end of the financial year. The co-contribution is paid at the rate of 50 cents for every eligible $1 you put in, up to a maximum co-contribution of $500.
Of course with any benefit there are eligibility rules. If you can tick all the boxes below you will be eligible to receive a co-contribution from the government.
- You make personal contributions (after-tax) to a complying superannuation fund.
- Have income* less than $51,813.
- Be under age 71 on 30 June.
- Make a personal contribution^ to your super.
- Be a permanent resident for the full year.
- Lodge an income tax return.
- Earn at least 10% of your income* from working, carrying on a business, or a combination of both.
- Have not exceeded your non-concessional contribution cap for 2017/18.
* Income is generally defined as the sum of assessable income plus fringe benefits paid by your employer and recorded on your PAYG summary plus extra amounts that your employer pays to super above the 9.5% super guarantee.
^ Amounts you salary sacrifice through your employer do not count. You need to make personal after-tax contributions.
If you ticked all the boxes and are eligible, the government will put in 50 cents for every dollar you put into your super account up to a maximum co-contribution of $500. But some limits apply. To get the full $500 your income needs to be below $36,021. The maximum co-contribution is reduced by 0.03333 cents for every dollar that your income is over $813 and nothing is payable once your income reaches $51,813.
Ensure Minimum Pension Payments are Made
If you are in pension phase, it is important that you pay your minimum pension payment each year.
Your minimum pension payment depends on your age and must be paid to you before 30 June 2018. There are a number of implications for not making your pension payment including tax being levied for the financial year as if the fund were not in pension phase and having to commence new pensions. This can also adversely impact Centrelink entitlements and create unnecessary administration.