Numbers say it all on super
Sydney Morning Herald
Wednesday March 23, 2011
New contribution rules help members with low account balances. Super fund members approaching retirement will be able to put more into their funds under new contribution rules announced by the government last month.From July 1 next year, people aged 50 and over with super balances of less than $500,000 will be allowed to make up to $50,000 of concessional contributions a year. The contribution cap for people younger than 50 is $25,000 a year.Currently there is a temporary arrangement in place that allows people aged 50 and over to make concessional contributions up to $50,000.This so-called transitional cap was due to expire on July 1, 2012.The government has issued a consultation paper outlining its plan and aims to draft a bill later this year.The cap for people under 50 is indexed, so the limit will increase with changes in average earnings.The government says it will not index the cap for people over 50 - it will remain at $50,000.The cap has been a problem for super fund members, with the Minister for Financial Services and Superannuation, Bill Shorten, saying more than 65,000 people breached the cap in the 2009-10 financial year.If a super fund member exceeds the cap they must pay a penalty rate of tax - the 15 per cent contribution tax rate plus additional tax of 31.5 per cent.Where a person has started drawing down their super, those withdrawals will be included in the account balance calculation and indexed.The government's consultation paper says: "This is to ensure the $500,000 account balance threshold is not circumvented by people withdrawing from their super in order to keep their account balances below the threshold."The government is not making any change to non-concessional contributions, which are also subject to a cap. The non-concessional contribution cap is $150,000 a year and is indexed.Industry bodies such as the Association of Superannuation Funds of Australia and the Financial Services Council have welcomed the government's announcement.They have argued for some time that people should be given the opportunity to put higher amounts into their super funds in the years leading up to retirement. It is at that stage of their lives people are free of the financial burdens of child-raising and home-purchasing and have the opportunity to make substantial contributions to their super.Those who have started drawing down their super will also be eligible for the new cap.However, there has been comment that the government's consultation paper includes some highly complex rules relating to the reporting of drawdowns. Funds would have to report all pension payments and lump sum withdrawals to members and the Australian Taxation Office. Funds would have to keep records of cumulative indexed drawdowns for all members over 50.Tax-effective but watch for the trapsSalary sacrifice is a popular way of contributing to super because, being paid out of pre-tax salary, it reduces the amount of taxable income.Salary sacrifice attracts a contribution tax of 15 per cent. It includes all employer contributions, including the 9 per cent super guarantee payments and salary sacrifice.The penalty for exceeding the cap is a 31.5 per cent tax rate on top of the standard 15 per cent contribution tax. Concessional arrangements apply to super fund members up to the age of 75.However, there are a couple of traps in salary sacrificing.If you choose to salary sacrifice, your employer is entitled to make super guarantee contributions based on the reduced salary and the sacrificed contributions can count towards the guarantee obligation.There is no legal obligation for an employer to offer salary sacrifice to its employees; it is entirely at the discretion of the employer and is an arrangement between individual employees and the employer. The upper age limit for salary sacrifice is 75.How to rev it upA super fund member can also make non-concessional, or after-tax, contributions to their super fund.These contributions are usually made out of after-tax salary and are not taxed going into the fund.The Australian Taxation Office website lists a number of sources of non-concessional contributions, including profits from the sale of a business or an asset, an inheritance, amounts transferred from a foreign pension fund and spouse contributions.The non-concessional contribution cap is $150,000 a year and is indexed to changes in average earnings. Non-concessional contributions in excess of the cap are taxed at 46.5 per cent.There is a "bring-forward" provision in the rules for non-concessional contributions that allows a fund member to make large one-off payments into their fund. If you are younger than 65, you can make three years' worth of contributions (a total of $450,000) in one year (and then no contributions for the next two years).Fund members on low incomes may get an advantage by making non-concessional contributions, which attract government co-contributions (concessional contributions do not). If total income is less than $31,290 (the threshold for the 2010-11 and 2011-12 tax years), the government will pay $1 for every $1 the member contributes, up to a maximum of $1000.The co-contribution reduces when income exceeds $31,290 and cuts out altogether when income reaches $61,920.
© 2011 Sydney Morning Herald
