June 2012 Newsletter

In this edition:

Welcome

Are you 30 June ready?

2012 End of financial year strategies

Carbon tax: what footprint will it leave on you?

New reporting obligations for building contractors

Super contributions: what are the rules? (Part 3)

>> Read last month's article about different rules for people aged under 65, over 65, and over 75

Claiming a tax deduction for my contributions - that sounds good. Can everyone do it?
Unfortunately, not everyone can claim a tax deduction for the contributions they make to superannuation. This opportunity is essentially reserved for those who receive less than 10% of the following from paid employment:

 Assessable income

+ any reportable fringe benefits

+ reportable employer super contributions
(These are employer contributions the individual could have chosen to receive as salary income.
Salary sacrifice contributions are a good example.)

The sorts of people who are typically able to claim tax deductions for their super contributions are therefore those who

• don't work at all (say they have retired but still have assessable income and therefore wish to claim a tax deduction);
• do work but not via an entity that pays them a salary (for example, those who trade through a partnership or in their own name. It would even include those who work through a trust and don't take superannuation contributions or salary from that trust - they just receive trust distributions);
• work overseas and earn income that is not taxable in Australia.

How much can be contributed?
So far, we have focused on when contributions can be made and whether they are tax deductible. There are also rules on how much can be contributed.
Different limits apply to different types of contribution. Importantly, whenever an individual is checked against these limits, we need to consider all of their superannuation funds and all of their employers (if they have more than one).

Concessional contributions (The limits on concessional contributions currently depend on age):

• for anyone who is still under 50 at the end of the year the contribution is made, the limit is $25,000;
• for everyone else, the limit is currently $50,000. This latter limit is a special concession that is due to end on 30 June 2012. The Government's policy at the moment is that a higher limit will continue beyond 30 June 2012 but only for those who have less than $500,000 in superannuation (and this is a total across all their funds if they have more than one). However, this has not been legislated and in fact a number of important details are still being debated. The position beyond 30 June 2012 is therefore quite unclear at this stage.

The "standard" $25,000 limit above is indexed (ie. it increases over time) but not every year.

Non-concessional contributions

• the normal rule is that individuals can only contribute a maximum of 6 x the standard limit on concessional contributions. As this is currently $25,000, the annual limit on non concessional contributions is $150,000 pa;
• anyone under 65 at the start of the financial year can "bring forward" the next two years' $150,000 pa limits. For example, someone who is 55 could contribute as much as $450,000 in 2011/12. No further non-concessional contributions could then be made until 1 July 2014 ; 
• however making contributions over the $150,000 limit automatically triggers (and locks in) this "bring forward" rule. For example, someone who contributed $151,000 in 2010/11 has automatically locked in a 3 year period from 1 July 2010 - 30 June 2013 during which they may (or may not - it's not compulsory) contribute non concessional contributions of up to $450,000. They cannot change this period - it happens automatically. If they also contributed $450,000 in July 2011 (intending to lock in their 3 year period from that point on), they would be regarded as having contributed $601,000 over the period 1 July 2010 - 30 June 2013 - a figure which is way over the allowable limits.
• anyone who is 65 or older at the start of the financial year is restricted to $150,000 pa – ie, they cannot bring forward future years' limits. For example, say Mary turns 65 on 1 August 2012 and hasn't made any non-concessional contributions for years (ie, we are confident she hasn't already locked in a three year period at some earlier time). She could contribute $450,000 during 2012/13. The one point to watch out for is that it would need to be made before her 65th birthday on 1 August or, if it was paid later in the year, she would have to meet the work test. 
• some special exemptions apply for those making large contributions following the sale of a small business or a transfer from an overseas superannuation fund.

The consequences of exceeding these limits are severe - very high rates of tax apply.

Essentially, "excess" contributions are taxed at the highest marginal tax rate (currently 46.5% including medicare). Sometimes the rate of tax can be even higher. This is because a concessional contribution that goes over the limit (either $25,000 or $50,000 as outlined above) also counts towards the limit on non-concessional contributions.

For example, let's imagine Mary (example above) asked her employer to contribute $55,000 to super for her in 2011/12 (perhaps she misunderstood the limits or perhaps she had a second job and forgot about the contributions paid for her by that employer) and also contributed $150,000 herself that year. The outcome would be disastrous:
firstly, she would exceed the limit on concessional contributions ($50,000) by $5,000 - resulting in a personal tax bill of $1,575 (31.5% x $5,000). The fund will have already paid tax on the contributions at the rate of 15%, so the total tax bill is $2,325 (46.5%);

• next, that $5,000 would count as an extra non-concessional contribution - bringing her total for 2011/12 to $155,000. There would be no extra tax immediately - but the flow on effect is significant;
• by going over $150,000 in 2011/12, Mary automatically locks in a three year period during which she can contribute up to $450,000. That three year period is 1 July 2011 - 30 June 2014;
• unfortunately, she contributed $450,000 in 2012/13. Even if she makes no further non-concessional contributions, her total over the three year period will be $605,000. This represents an excess of $155,000 - a further personal $72,075 tax bill (46.5% x $155,000).

Fortunately there are some new rules which will allow small excess concessional contributions to be refunded in the future and those rules would help Mary avoid such a disastrous outcome but the example highlights the great risks associated with going over the limits.

Some final special "how much" rules
Strictly speaking, the rules governing how much can be contributed to super outlined above don't actually stop people contributing more than the various limits, they just impose special (very high) taxes when it happens. For most people, these taxes are every bit as effective as a legal limit.

 However, there are also legal limits when it comes to non-concessional contributions. Specifically:

• someone who is under 65 at the start of a particular financial year cannot have more than $450,000 made in a single non-concessional contribution during the year (eg one cheque or one electronic transfer etc);
• the equivalent figure for someone aged 65 or older at the start of the financial year is $150,000.

(Both these amounts will be indexed in line with the standard $25,000 concessional contribution limit.)

If higher amounts are contributed in a single transaction, the fund is legally obliged to refund the "excess" within 30 days.

These limits are similar but not identical to the rules described earlier for non-concessional contributions. In fact they are really designed to help people avoid the disastrous tax consequences of "excess" contributions. (The logic here is that it is better to be forced to have some of these contributions paid back than to suffer the tax consequences of leaving them in the fund. Unfortunately, it is generally not possible for superannuation funds to voluntarily refund contributions simply because you realise that you have exceeded your limit and would therefore rather not have made them.)

However, they are not a perfect protection as they are not an exact replica of the tax rules. Perhaps most importantly, these "compulsory refund" rules only work on a transaction by transaction basis and ignore earlier contributions. Mary in our example above would not be protected because looked at individually her contributions are fine - in each year, she was under 65 at 1 July and her fund was therefore allowed to accept non-concessional contributions up to $450,000 in a single transaction. None of her contributions exceeded this limit (even though we can see that she does actually have a tax problem when we look at her contributions overall.)

Similarly, someone who is 55 might make 5 separate contributions for $150,000 in a single year (a total of $750,000). This will clearly exceed the limits and result in very high levels of tax. However, as each individual transaction falls within the statutory limit ($450,000 for someone under 65), the compulsory refund rules do not apply.

Conclusion
Superannuation provides great tax concessions but there are strict rules designed to limit the extent to which each of us can benefit from those concessions. Given the very harsh penalties associated with contributing too much to super (the extra taxes on "excess" contributions), it is generally these rules which receive the most attention. Equally important, however, are the age and work based rules which determine whether or not a contribution can legally be made at all.

If you have any questions please contact us.