Superannuation concessional contribution - cap

Hello

For the 2018 tax year onwards (ie 1 July 2017), the concessional contribution cap will be $25k.

2 questions (assuming the goal is to maximise super contributions):
1) What is the impact of you contribute above $25k? My understanding is that you effectively pay tax on it at your marginal tax rate.
2) With the tax free threshhold at $18k, if I earn $43k (incl super), does this mean I can salary sacrifice the full $43k and go above the concessional contribution cap, and effectively pay no penalty? Although I will be paying 15% tax in super.

Thanks!

 

Your excess concessional contributions will count towards your personal assessable income, and you will have to pay income tax at your marginal income tax rate from your personal savings on those excess concessional contributions, since they are treated as part of your regular income. The ATO will apply a 15% tax offset when processing your tax return, to recognise the 15% contributions tax already deducted from the excess concessional contributions.

You can withdraw up to 85% of your excess concessional contributions. If you leave the excess concessional contributions in your smsf they will count towards your non concessional cap.

 

In its worst case exceeding the concessional cap can also trigger serious unexpected consequences for non-concessional caps and a variety of other issues. There is no hidden benefit of blowing caps.

 

Next year everyone will be able to add $25k per person, so $50k per couple, to your super at a tax rate of only 15%. Might make negative gearing look like a pittance. Lol

At current settings the couple would need to earn over $500k to add that much to super, salary sacrifice aside.

 

Not everyone..Some taxpayers..and some taxpayers pay 30% tax on contributions and that group will expand in size.

Generally said the removal of the 10% test substantially expands the potential group who can choose to reduce tax and maximise super but I suspect it will be the most under-utilised available deduction ever known. Costing the average taxpayer $2,000 - $4000 per year, every year. Salary sacrifice and pensions for those aged 60+ already are under-utilised.....Ask 100 taxpayers and 99% think a car is a great thing to salary sacrifice. Ask them about super and they roll their eyes. And justify it with all sorts of false stories about super, how they dont want or need super etc....And many say they have property etc etc....The true issue is they still arent using tax effective options on top of property. Not considering super is often just paying more tax.

To be practical a good example is comparing a 35 year old who saves just 9.5% employer contributions to one who commences to do 19%.....(ie earns around $130K pa package). $592 v's $863K on retirement.... And an annual tax deduction of $3766 giving a higher refund of $ 1785 (ie cost to contribute after tax benefit is $40 per week)
Source : Smart Money ASIC Calculator

Wait until common deductions get culled in the future and I expect outrage but its trivial to the under-utilisation of super as a practical tax saving wealth accumulation strategy ON TOP of property and and other strategy.

 

Thanks for the responses so far. With the first question it sounds like my understanding is correct, you essentially pay your marginal tax rate if you contribute above the cap.

Still not clear on my second question. If one's aim is to maximise super contributions, can it make sense to deliberately go over if one is a fairly low income earner? Also assuming one does not go near the 3 year non concessional limit.

 

Yep, I'm interested in this too. If you can afford to put your complete salary (after tax) into super, then is there any other penalty other that having to wait to get it out?

Also does the 85% withdrawal rate for excess contributions over the concessional limit apply for regular super accounts eg Hesta?

Could I use it like a savings account but where the earnings stay in and I could redraw my capital (85% of excess contributions) before I'm 60?

thanks for responses

 

I came across this site today when looking at the effects of the new caps ====> Linky

Ignoring using the bring forward of after tax contributions, it would take 64 years of contributing $25000/yr to reach $1.6m in super (not allowing for interest/dividends/growth/tax @15% etc) - so it looks like gearing is going to be a necessary part of an SMSF to get anywhere near the cap. IMHO the new cap goes against the concept of super.

 

I've exceeded the concessional super cap by about 2K this year. What are the consequences likely to be Paul and what if anything can I do about it?

Ross what do you mean with this comment? How can it be withdrawn? Do I need to do something before the EOFY? My super is in an industry fund. Does that make any difference?

 

You will be issued an excess contributions tax assessment personally after lodgement of your return AND when the fund/s report member annual contributions received. You will pay your marginal rate of tax on the excess contribution. You can release funds from super to pay the additional tax.

Super contributions - too much can mean extra tax

 

There are technical reasons why a 100% salary sacrifice should be avoided. In some cases it is not permitted (Fair Work, Award etc) . There needs to be an effective salary sacrifice arrangement or the ATO may consider it a scheme. The arrangement will affect PAYG sumamries too. And could impact borrowing later.

Your specific circumstances need advice.

 

Many havent read The Richest Man in Babylon and got the lesson that it's not only how much you earn (and then spend) it is how much you choose to keep aside that matters. While my husband earns more and puts in some compulsory Super, as I am actively choosing allocations in my super and contribute my little bit, my super has grown 3x faster than his.
I would like to learn more ways to contribute more to Super for the self-employed if anyone has got some.

 

I see allowable super contribution via salary sacrifice as a straight profit of #mariginalrate-15%.

then park as much one can in offset account on ppor, gives you a tax free return of your mortage rate.

 

I see it as higher. I save 24% (39%-15%) on the salary sacrifice bit AND in super its a compulsory savings for later in life. The earnings (My fund paid 19.2% to 12th May 2018 when it merged with SunSuper) occurs on the 85% that is invested after tax. A far higher compound return AND those earnings are then also only subject to 10-15% tax...perhaps less with franking credits.

Always bear in mind that sal-sac affects borrowing capacity.

 

One of the failings of the super system is that only employees have compulsory super. Self employed get a choice...Typically they ignore the issue not just each month, but annually and also year after year. They are always going to...but never real get there. Its a max $25K pa. I always say - Pay yourself first. We now have a nation of tradies and contractors who chose to ignore super who retire with little to show for it in many cases. And they have no life cover or TPD. A few of them are business owners who invest in their business instead. Not many however.

For each self employed person I would see 1 in 20 makes solid and regular contributions to super. The others are going to...after they buy a house, after they pay the rent, aftre th kids have grown. One day they are 55 and have no super..... And 2 out of 20 would have a property or two...And some use the property parlay strategy which meaans they dont actually have a lot of property equity. $2m of property isnt wealth if you owe $1.8m

But then more employees have property. So its a sign that on average they ignore super AND under invest.

A few things are broken with super
1. It should be universal and compulsory for all workers.
2. It should be paid to an agency on the same day as pay. Employer theft should be penalised harsly
3. The wages system should slowly increase the rate based on age. No option.
4. Too many people have their hand in the system..unions, insurers etc

 

Agree with a lot of this, and I hear similar things. There is always something more pressing (mortgage, school fees etc) and retirement always seems a long way off. Then, all of a sudden, it isn't a long way off!

The other issue for self employed clients is that they see the government making changes to superannuation, and that makes them nervous and reluctant to commit funds into a superannuation fund. Of course, the changes make salary earners nervous too, but they don't have a choice.

 

You know since 1990s I have never seen anyone with a managed super account actually lose all their money other than in a SMSF, and thats rare too. Ignoring market defined events of course and those are limited events. I have seen loads of people outside super incur major losses.

But, the ones on aged pensions all wish they had super. I would choose a cruise and overseas travel over the capped $2.50 public transport concession any day.

 

Take advantage of Personal Super Contributions while you can. Contribution reserving this year for both of us to reduce CGT liabilities. Taking advantage of everything we can just incase idiot Bullsh*t Shorten gets in during the next Federal Election.

Same goes for 3 year bring forward of non-concessional contributions. Shorten’s looking to trim that as well. Don’t put off what you can afford now, you may not get the chance later.

 

Im trying to get this. I get the strategy but it doesnt impact taxable income normally. Pls explain

Shortens tax plan for franking is shallow. So is his super

 

Offsetting lumpy capital gains by $50k each rather than $25k in this F/Y. Not expecting as much CGT / income again next F/Y but can bring forward 2020 Personal Contribution of $25K if need be. From what I understand that’s why it’s most often used.

Been used by SMSF administrators for years including mine. As usual very important that the deed allows for it and correct documentation is created. Daniel Butler has often written about it and even @Redwood here at PC. ATO even have a standardised form for it now to avoid hassles / processing issues and objection process as in earlier years:

Request to adjust concessional contributions

And older articles here prior to the above ATO form being introduced:

Using the 'double dip strategy' for June 30 tax planning - SMSFAdviser Magazine

TD 2013/22 & ID 2012/16: ATO confirms that each contribution made to a reserve requires an objection | Leading SMSF Law Firm