A $50,000 Concessional Contribution Cap

The concessional contribution cap is now officially $25K for every single taxpayer. Or is it ?

Lets look at what happens when a taxpayer allows concessional contributions to exceed $25K in a tax year. Concessional contributions include:
- Employer compulsory super (often 9.5%)
- Salary sacrifice amounts that the employer pays
- For defined benefit fund members the notional contribution amount each year
- The amount a taxpayer personally claims as a tax deduction

Since 2017 taxpayers are permitted (subject to two limits) to claim a tax deduction provided total concessional contributions to all funds in the financial year do not exceed $25K. Prior to this change a taxpayer had to meet the "10% rule" which limited tax deductions for super to employers or self employer persons.

I recently had a discussion with a tax adviser who was adamant that the concessional cap is $25K....Then I showed them how its not really and they were stunned. They just werent looking at it correctly. You know it - You cant see the wood for all the trees. This strategy stuff is what splits tax advisers.

So lets look at Bill and Mary a 60s couple. Bill & Mary each have bank shares which pay a health income. They also have a business that sells widgets that makes a nice amount of income each year. And pays a modest dividend.

Bills taxable income includes
- CBA dividendss of $12,500
- Planned company dividends from Widget Pty Ltd of $14,000
Bill also has a neg geared (factory) property with losses of $12167

Bills planned taxable income is $25000. He expects a refund of $9814
Then he sees Paul@PFI. Bill explains he is close to retirement and really wants to max his super and wished he could contribute more - He has $50K cash sitting ready. He is happy if its non-concessional. Paul then says - Have you thought about making a concessional super contribution ? Bill says - Sorry I cant since Widget Pty Ltd already contributes $25K. Paul explains he can and Bill is surprised. His financial adviser was adamant the cap is $25K.

Paul explains that tax law limits the very character of what a concessional contribution is. A concessional contribution is one for which a tax deduction can and has been claimed. Paul explains the trap. Specific tax laws limit a deduction for super or gifts to the extent of taxable income. Neither can create a tax loss. So Bill cant contribute an unlimited amount as then its not a concessional contribution. It needs planning.

Paul advises two things in consultation with the financial adviser that Bill should contribute $25K to super before 30 June.

Paul calculates Bills expected taxable income is $0. An estimated refund of $10667 will occur.

As well Paul advises Bill that when he lodges (or later amendment by the ATO) that he will face a excess concessional contributions assessment. This will mean:
1. Add $25K to Bills assessable income for the excess contribution. The tax shortfall will be based on Bills marginal tax rate. The shortfall will be $852.20 or a effective tax rate of 3.4% tax on the $25K.
2. Give Bill a credit for the 15% tax paid by the fund. This means Bills refund is now $13,564.80
3. Impose a charge (ECC) on the excess as away to clawback the earnings on the $25K that exceeded the cap. This is a very minor sum - Under $40.
4. Bill has the ability for the excess tax of $852 + the contributions excess charge of $40 = $892 to be paid by release for the fund. So Bills refund becomes $14,417

So how the hell did that work ?

- Bill exceeded his cap by $25K
- His refund increased due to the extra deduction for the super
- The tax on the extra contribution was 15% less $852.20.
- Bill was given a credit for the tax that was paid by the fund again

What the ?

This is because of maths. Bills marginal tax rate is effectively almost 0% so the excess contribution is subject to negligible tax.

Oh and Paul suggests that since Bill & Mary have identical income she do the same. Their cash savings which were earning a pitance in the bank drops by $50K but the super fund balance increases by $42,500 (after tax). Their refunds increase by $7500 and all at the cost of a release from the fund of $1780

So next time someone tells you an excess contribution is taxed - ask what their tax rate is. Bill & Mary just contributed $50K and their refunds went up. The effective tax on $50K was $1780.... Thats a rate of 3.56%

 

“This is because of maths”

amazing

 

What if bill and wife bernadette are surgeons earning 400k per annum ?

 

Paul, you are a magician. You can make tax (almost) disappear!

 

This is sublime. If Bill's taxable income has been 40K instead of 25K, i'm assuming he could have then made a 40K contribution in as well etc. etc.?

 

fortunately we use the Change GPS Tax Calc which is going to have the Super Max Strategy as part of the tax planning strategies for this year.

if you aren't using the Change GPS Tax Calc @Paul@PFI get into it. best tax planning software around.

Will be abke to run a few scenarios modelling supermax along with other strategies

 

Dont assume.

 

What makes 25k the magic number then?

 

My calculation example and the definition of a concessional contribution and the way the excess cap rules work. The standard concessional cap is $25K from all sources. Anything less may carry forward. Anything more is a excess concessional cap issue.

 

regardless of the earnings there is another option though it can only be used once off, in similar way like prepaying interest in advance for a year via Reserving Contribution Strategy
Found a link how it works:
Contributions Reserving Strategy | ESUPERFUND
Needs assistance from an accountant, will need to be executed time-wise correctly, trust deed must allow it, and it can only be utilised once then you would need to continue to use this strategy for the regular $25K CC thereafter (also may only apply to only SMSF, unsure there?).

 

I would argue thats largely ineffective since I assume the surgeons would each seek to maximise contributions every year. A reserving contribution strategy merely brings forward and leaves no capacity next year. Unless both are self employed and this years income is a windfall there would be more risks and costs than benefits.

For high recurring income capacity taxpayers there are other strategies that dont add to contributions. eg The Property Trust that owns the practice offices etc, LRBF for a portfolio that complies with a related party loan etc

 

@Paul@PFI why does Bill get a credit for the 15% tax paid by the fund? Would you mind explaining?

 

Tax law says he does.

The excess amount has been taxed when it hit the fund. Rate is 15%. So when bill is assessed on the excess amount he is given credit for the 15% already paid (even if the fund used tax credits etc to pay that tax since the member account is charged contributions tax!!) to prevent double taxation. Giving the offset at 15% also means Bill isnt overtaxed on 15% either.

If the taxpayer was Joe he could also seeks a release from the fund to pay the EXTRA tax and excess charge. However the release is limited to a max 85% of the excess amount (since the tax has already been paid from Joe's account.

Excess contributions used to be really heavily penalised. Malcolm Turnbull stood in parliament when Rudd / Swan were putting a modification law change through and asked why it cant be simplified and proposed the present system. It made sense and was less punitive. They tore up the old law, changed the changes and introduced this simpler system which seeks to unwind any benefit rather than punish.

 

Very interesting thanks for that. Is there a scenario that includes impacts of div293 that can be planned for using any of this?

 

No. Excepting not earning income

Div293 is a tax that strips 50% of the tax concessions from higher income earners. And at best is 15% X concessional contributions while still saving the same.

 

This scenario is quite a useful way for people to get large sums of money into super if the situation works. Deliberately exceeding the cap.

I do think you numbers need a re-jig though as per s291.15 in the link you provided, the 15% offset that Bill gets is not refundable.

The other situation where I see this being viable is if the individual has carried froward tax losses, they could, through their employer, related or not, salary sacrifice as much as possible. Whilst the excess amount would get added back to their taxable income, if they have carried forward losses, this impact may be negligible.

Even better if they have met a condition of release and access the funds held in super.

 

The offset isnt refundable but it increases other refunds eg franking credits or can be applied to other tax eg the excess contribution additional income tax. Each has to run their own numbers.

Sal Sac has some limits. Earnings cant be fully exchanged for super in many cases. You could also generate a reportable benefits issue and affect other levies etc (eg HELP debt, Private Health Offset and Medicare Levy Surcharge) . eg if you earn $0 then the super guarantee is $0. Correct.... tax losses may help.

Some Fair Work issues occur. But in its strict sense yes a employer can pay $35K pa. And in this tax year it may not breach caps....The catch up rules would allow Margaret to salary sac $35K if her concessional was just $15K in the 2019 year. The $10K not used in 2019 can allow a increased contribution in 2020 or 2012 maybe.

A past condition of release may not work for present contributions to accumulation. It may be preserved pending a new condition of release if the member is aged under 65. eg They may need to be retired for second time? A TRIS would limit them drawing funds out under the new COR occurs

 

Curious as to why the "guru" states (p133) div 293 tax is not payable on ECC that have been taxed under div292 (or refunded under 292-468)

 

This podcast episode might be of interest Chris:
How excess concessional contributions can work in your favour | Tax Talks

 

You may be confusing two issues here. Div 293 is a extra tax on the amount of concessional contributions when a person has a high income. The $50K concessional cap example would not work in such a case.

The two situations are likely mutually exclusive since anyone paying Div293 tax would pay a high marginal tax rate + ECC penalty charge on any excess above $25K PLUS a further 15% Div 293 and may also trigger a non-concessional cap issue.