Super contributions – too much can mean extra tax

There are limits on how much you can pay into your super fund each financial year without having to pay extra tax. These limits are called 'contribution caps'.

 How much you can contribute to your super fund and whether your fund is allowed to accept your contribution may also depend on your age and total super balance.

Contribution caps apply to all super funds. If you have more than one super fund, all your contributions are added up and count towards your caps.

 If you exceed these caps, you may need to pay extra tax. You can avoid this by knowing about your own contribution caps.

 

Understanding the types of contributions

There are two types of contributions you (or others) can make into your super fund:

• Concessional – These contributions come from income that has not yet been taxed. They are also called 'before tax' contributions. Once the concessional contributions are in your super fund, they are taxed at a rate of 15%. You may need to pay extra tax if you exceed the concessional contribution cap.
• Non-concessional – These contributions come from income that has already been taxed. They are also called 'after tax' contributions. These contributions are not taxed once received by your super fund. However, you may pay tax on them if you exceed your non-concessional contribution cap.

Concessional contributions and contribution caps

Concessional contributions are contributions that are made into your super fund before tax. They are taxed at a rate of 15% in your super fund.

From 1 July 2021, the concessional contributions cap is $27,500. The increase is a result of indexation in line with average weekly ordinary time earnings (AWOTE).

From 1 July 2017 to 30 June 2021, the concessional contribution cap for each year is $25,000.

Your cap may be higher if you did not use the full amount of your cap in earlier years. This is called the carry-forward of unused concessional contributions.

If you exceed your concessional contribution caps, you will receive a letter (determination) and a notice of assessment in your myGov Inbox.

If you receive a letter you must lodge a tax return for that year.

Division 293: If your combined income and concessional contributions are more than $250,000 you may have to pay extra tax.

If you exceed your concessional contributions cap

If you exceed your concessional contributions cap, it means that:

• the excess concessional contributions amount is included in your assessable income,
• this amount will be taxed at your marginal tax rate.

You may have to pay extra tax.

ATO apply a 15% tax offset to account for the contributions tax already paid by your super fund.

If you exceed your concessional contributions caps, you may elect to withdraw up to 85% of your excess concessional contributions from your super fund to help pay your income tax liability.

When your excess concessional contributions are included in your assessable income it can lead to:

• you entering the pay as you go (PAYG) instalment system;
•  your existing PAYG instalments being affected.

 

If you do not withdraw your excess concessional contributions

From 1 July 2017, if you do not or cannot elect to release your excess concessional contributions, you could be taxed up to 94%. This is because any excess concessional contributions that is not released from the fund count towards your non-concessional contributions cap.

 

Non-concessional contributions and contribution caps

Non-concessional contributions are:

• from your after-tax income;
• not taxed in your super fund.

From 1 July 2021, the non-concessional contributions cap is being increased to $110,000 as a result of indexation in line with average weekly ordinary time earnings (AWOTE). If you contribute more, you may have to pay extra tax.

From 1 July 2017 to 30 June 2021, the non-concessional contributions cap is $100,000.

Your own cap might be different. It can be:

• higher, if you can use the bring-forward arrangements;
• nil, if your total super balance is greater than or equal to the general transfer balance cap ($1.6 million from 2017–21; $1.7 million from 2021–22).

If you take money out of your super and put it back later, it counts as a new non-concessional contribution, unless you have claimed and been allowed this amount as a tax deduction.

If you have more than one fund, the total of all non-concessional contributions made to all your funds during a financial year count towards your non-concessional contributions cap.

You must also lodge a tax return for that year if you exceed your cap.

 

If you exceed your non-concessional contributions cap

For most people the non-concessional contribution cap (limit) is $110,000 per financial year (from 1 July 2021).

To work out if you have exceeded the non-concessional contributions cap, we assess the information reported to us by your super fund and in your return (if you lodged it) and consider your age (date of birth).

You must not apply to your super fund to release an amount relating to exceeding your cap. 

If you exceed your non-concessional contributions cap:

• we will send you a determination which explains your options;
• you must lodge a tax return for that year. If you can't lodge your tax return by the due date, and you do not want us to issue a determination before you lodge, you will need to request a lodgment deferral;
• we will manage the release of money from your super;
• you may need to pay extra tax.

Chang Accounting Advisory Pty Ltd, we are CPA practice and tax agent. If you or your families or friends need our services, please feel free to contact our team for any assistance. 

This article is for informational purposes only and does not form part of our advice. This article is based on Australian Business Registry Services (ABRS) and Australian Securities & Investments Commission (ASIC). Please contact our team if you need any assistance.

Claire Chang, 0497 131 419, claire.chang@changadvisory.com.au, WeChat: clairechang26

Michelle Cui, 0433 539 870, michelle.cui@changadvisory.com.au, WeChat: michellejc