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Super Contribution Limit Changes – and How to Avoid the Penalties

Super Contribution Limit Changes – and How to Avoid the Penalties

Author: bTa_vantage/Monday, July 30, 2012/Categories: Blog

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The contributions cap for concessional (deductible) contributions for people aged 50 and over will be halved to $25,000 from 1 July 2012. With this in mind, we thought we'd provide a revision of the contribution rules, and outline some of the traps you need to watch to avoid falling foul of the penalty interest rules.

Concessional (deductible) contributions

The government has tinkered with the rules for contribution limits for a number of years, and unfortunately the limit for over 50's will reduce to $25,000 from 1 July, for the 2012/13 financial year. The limit for people aged under 50 remains at $25,000.

Importantly this includes contributions from all sources – including Super Guarantee contributions from your employer.

Non-concessional contributions

The non-concessional cap remains at $150,000 for the 2012/2013 year although, provided you are under 65, you are still allowed to bring forward two years' contributions and make a $450,000 lump sum deposit. That deposit will represent your total non-concessional cap over a three-year period.

Watch the excess contribution penalties

With the concessional contribution limits being halved, the risk of exceeding the cap is greater. And the penalty is certainly worth avoiding; excess concessional contributions attract a penalty tax of 31.5%, on top of the 15% tax on the deposit (which is deducted from your super), and also count towards your non-concessional cap.

There is a rule allowing you to request excess contributions to be refunded to you, provided the breach is less than $10,000, and only for first time offences.

Take care – it's easy to fall victim to the super cap penalties

The unfortunate outcome of changes to contribution limits is that many people with the best intentions will unwittingly exceed the caps, and attract penalty interest.

If anything, the following examples demonstrate the importance of planning your contributions strategy at the beginning of the financial year, and managing the process through out – not simply waiting until June to consider your tax position.

Withdraw and re-contribute

Withdrawing and re-contributing to your super as a non-concessional contribution effectively reduces the taxable component of your super – remembering that super consists of both taxable and non-taxable parts. The result can be significant tax savings for your beneficiaries.

However, if you follow this strategy it pays to plan the timing well in advance, since the re-contribution counts towards your non-concessional cap. We're aware of members who have been caught out assuming that, since the money came from their own super, it wouldn't count towards any cap.

The timing trap

Remember that concessional contributions are not typically deposited into your super on the day the money is debited from your account – your employer has up to 28 days to pay the amount from the end of the relevant quarter. So a contribution made in June 2012 may actually end up counting towards your 2013 cap, and could catch you out if you were planning to make your maximum contributions in 2013.

The 10% rule for self-employed

This example is not so much a penalty, as a potential missed opportunity.

The 10% rule determines whether your contributions are tax deductible, based on the source of your income. If you are self-employed, or only receive a small portion of income from an employer (less than 10% of your annual income), then you can make tax-deductible concessional contributions.
However, this is another example of why it pays to work out how many hours you will work in the year ahead, in advance. If your total income includes more than 10% from an employer (in other words, you received Super Guarantee contributions), then you won't be able to make tax-deductible concessional contributions from your other income – and that could cost you in the long run.

With super rules changing, it's all the better to work out your 2013 financial year strategy in advance. Talk to bTa today.

Disclaimer: This information is generic in nature and provided on a discretionary basis only. You must always seek professional advice regarding its applicability to your own circumstance.

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