From 1 July 2017, there are changes to concessional (pre-tax) contributions. Concessional contributions include salary sacrifice, super guarantee, employer contributions and self-employed tax deductible contributions.
The contribution cap will drop to $25,000 per year (regardless of age) and tax deductions will be allowed for personal contributions to super for all individuals, not just the self-employed.
Contributions to constitutionally protected funds and defined benefit schemes will no longer be exempt from the contribution cap. Further, from 1 July 2018 the carry forward of unused concessional contributions will be allowed for up to five years if your total super balance does not exceed $500,000.
Reduction in concessional contributions cap
From 1 July 2017 the annual concessional contribution cap will reduce to $25,000 for everyone, regardless of age (indexed in line with wages growth). Currently, this cap is $30,000 for those under age 49 at the end of the previous financial year or otherwise $35,000.
Concessional contributions can be made by those individuals under age 75 (individuals age 65 to 74 must meet a work test which requires that over a 30-day period the individual works 40 hours within the year of contribution).
There is no upcoming change to the treatment of excess concessional contributions, which you may choose to withdraw up to 85% of these from super. Excess contributions are included in your assessable income and taxed at your marginal tax rate (regardless of whether they are released from super or not) with an additional interest charge.
Concessional contributions to constitutionally protected& defined benefit funds
Currently concessional contributions to a constitutionally protected super funds, unfunded defined benefit schemes and funded defined benefit schemes that are constitutionally protected funds, do not count towards the concessional cap.
From 1 July 2017 concessional contributions to these funds will count towards the concessional contribution cap.
If the sum of these concessional contributions exceeds your concessional contribution cap, they will be deemed to equal your concessional contribution cap, and so will not cause excess concessional contributions (from these funds only).
Concessional contributions made to other types of super funds could result in you exceeding the concessional contribution cap.
- Example – Concessional contributions to constitutionally protected & defined benefit funds
During the 2017/18 year, Samantha makes concessional contributions of $50,000 to a constitutionally protected fund. She also makes concessional contributions of $20,000 to retail super fund.
The $50,000 of concessional contributions made to the constitutionally protected fund counts towards Samantha’s concessional cap. However, even though they exceed the $25,000 concessional cap, they cannot be considered excess concessional contributions.
However, because her cap is fully utilised, the $20,000 of concessional contributions made to the retail fund are excess concessional contributions.
Deductions for personal contributions to super
From 1 July 2017, anyone who is eligible to make voluntary super contributions will be entitled to claim a tax deduction for these.
Under current rules, the ability to make personal concessional contributions is limited to those who:
- have not ‘done anything’ to be considered an employee as defined by the Super Guarantee Administration Act 1992, or
- satisfy a 10 per cent test which requires that less than 10 per cent of their income is attributable to employment.
The government will abolish the ’10 per cent rule’ from 1 July 2017, which essentially means that you do not need to be a self- employed person – you could be a full-time employee and eligible to claim a tax deduction for your personal super contributions from this date.
The removal of this requirement will allow those under age 75 who make personal contributions (including those age 65 to 74 who meet the work test) to claim an income tax deduction for personal super contributions.
These amounts will count towards the individual’s concessional contributions cap and are subject to 15 per cent contributions tax.
As per current rules, prior to claiming a tax deduction for any super contribution, the fund must be notified before the super contribution is made.
- Example – Deductions for personal contributions to super
Chris is age 31 and decides to start his own online cricket merchandise business. While he gets his business up and running he continues working part-time in an accounting firm where he earns $10,000. In his first year he earns 80,000 from the online business (as a sole trader). Of his $90,000 income he would like to contribute $15,000 to his super fund.
Under current arrangements (prior to 1 July 2017), Chris would not be eligible to claim a tax deduction for any personal contributions. This is because Chris earns more than 10 per cent of his total income from employment sources. While his employer allows him to salary sacrifice into super, he is limited to the $10,000 he earns in salary and wages.
Under the new rules from 1 July 2017, Chris will qualify for a tax deduction for any personal contributions that he makes (up to his concessional cap). Chris makes a $15,000 personal contribution and notifies his super fund that he intends to claim a deduction. He includes the tax deduction as part of his tax return. This will reduce his taxable income from $90,000 to $75,000.
Source: Budget 2016 Superannuation Fact Sheet 07 (Updated 9/11/2016)
Reduction in Division 293 threshold
From 2017/18 the Government will reduce the threshold at which high-income earners pay the additional 15 per cent Division 293 (“Div 293”) super contributions tax from $300,000 to $250,000 on concessional contributions.
Div 293 tax is imposed on concessional contributions that exceed the Div 293 threshold. The reduction in this threshold may mean that previously you weren’t impacted, but from 1 July 2017 if your salary package, including fringe benefits, exceeds $250,000 you will be impacted. Receipts of one off income items such as the sale of an asset that results in a large capital gain, bonus or an employer termination payment are included in your taxable income and so may cause a Div 293 notice.
The Australian Taxation Office may take up to 18 months to issue such notice after making concessional contributions.
- Example – Additional contribution tax on high income earners
In 2017/18, Alex earns $260,000 in income. In the same year he has concessional super contributions of $25,000.
Alex’s fund will pay 15 per cent tax on these contributions. In addition, Alex will pay an additional 15 per cent Div 293 tax on the $25,000 of concessional contributions, resulting in these amounts effectively being taxed at 30 per cent.
Carry forward of unused concessional contributions
Commencing 1 July 2018 catch-up concessional contributions will be allowed for those individuals with super balances below $500,000 as at 30 June in the previous year.
The first year that catch-up contributions can be made is 2019/20. Individuals aged 65 to 74 must meet the work test to access these provisions.
Individuals will be able to access their unused concessional contributions cap on a rolling basis for a period of five years. Amounts that have not been used after five years will expire. This increased flexibility will make it easier for people with varying capacity to save for retirement and benefit from the tax concessions, including those with interrupted work patterns.
The $500,000 total super balance is retested every 30 June of the previous financial year, so if you have accumulated used concessional contributions, but subsequently your total super balance exceeds $500,000, you will not be able to utilise these contributions from previous years.
- Example – Carry forward of unused concessional contributions
On 30 June 2024, Margaret has a total super balance of $440,000. She is therefore able to add any previously unused concessional cap amounts from the previous five financial years to her cap for the 2024/25 financial year.
For the previous five financial years Margaret made total concessional contributions of $18,000 per year. Assuming the general concessional cap is still $25,000, Margaret could therefore make total concessional contributions in that year of $60,000, (5 × $7,000 plus $25,000) without exceeding her concessional cap.