There are two significant benefits to planning contribution strategies early on in the new financial year:

1)      Where possible and appropriate, planning can ensure that contribution caps are fully utilised

2)      Ensuring that contributions are not left to the last minute, or worse still, neglected altogether.

Contribution caps are a ‘use it or lose it’ offering in that if a member fails to take advantage of the full cap in a given year, there is no opportunity to go back and ‘re-draw’ on that lost opportunity. If higher taxes are paid overall as a result of failing to fully utilise the contribution caps, then essentially the member is paying a ‘stupidity tax’ on those lost tax savings and lost fund earnings. Of course, the member needs to be in a financial position where they are able to maximise contributions and would actually benefit from doing so, hence this assessment can only be made on a case by case basis.

When contributions are left to the last minute, the super fund may not actually allocate the contribution to the same period that the contributor intended it to be allocated to. For example, an employer may electronically transfer a withdrawal from the business’ bank account to the super fund on the 28th of June 2014. However, if the money is not actually received into the super fund’s bank account until after the 1st of July, the contribution will count towards the member’s contribution cap in the following 2015 financial year, not the year that it was intended.

When employers make contributions on behalf of employees there is often a mis-match between the period that the super contribution relates to and the period in which the super fund records receipt of the contribution. For example, whilst an employer may record an accumulation of super benefits for an employee for the April – June 2015 Quarter (and claim a corresponding deduction after payment), the actual payment may not be made to the super fund until July 2015 and as such count towards the member’s cap in the 2015 year. If any other contributions are made up to the full cap amount in the 2015 financial year, the cap will be exceeded.

So, what are the contribution cap amounts?

 

Year Concessional Contributions for those younger than 50 Concessional contributions for those aged 50 – 59 Concessional contributions for those aged 60+ Non-concessional Contributions annual cap Non-concessional contribution cap using the bring-forward rule
2013/14 $25,000 $25,000 $35,000 $150,000 $450,000 over three years beginning with the 2013/14FY
2014/15 $30,000 $35,000 $35,000 $180,000 $540,000 over three years beginning with the 2014/14FY

Increase in concessional contribution caps from 1 July 2014

Concessional contributions are essentially contributions that allow the entity or individual making those contributions to claim a tax deduction on the payments. Hence, concessional contributions are often referred to as ‘before tax’ contributions since the 15% tax on those contributions is paid only by the super fund and will form part of the ‘taxable component’ in the fund. Concessional contributions include employer compulsory and additional voluntary superannuation payments as well as personal contributions where certain conditions are met by the individual to claim a tax deduction for that payment.

In the 2013/14 financial year, the $35,000 concessional contribution cap was only available to those who were aged at least 59 on 30 June 2013. However more people will be eligible for the higher $35,000 concessional contribution cap in the 2014/15 financial year as the eligibility criteria has expanded to include those who were at least 49 years of age on 30 June 2014.

Furthermore, the general concessional cap for all other ages has been lifted from $25,000 in the 2013/14 financial year to $30,000 in the 2014/15 financial year.

Increase in non-concessional contribution caps from 1 July 2014

Non-concessional contributions (also known as ‘after-tax contributions’) are essentially contributions where no deduction is being claimed for making those contributions. Generally tax has already been paid on the earning of that money – for example, an individual earns income and pays tax on that income at their marginal tax rates, they then take a portion of savings from that income and contribute it to super without claiming a deduction for doing so. The super fund pays no tax on receipt of non-concessional contributions and these amounts are allocated to the ‘tax-free component’ within the fund.

The annual cap has been lifted from $150,000 in the 2013/14 financial year to $180,000 in the 2014/15 financial year.

The bring-forward rule may be applied where a member wishes to contribute more than one year’s non-concessional cap amount in a particular financial year and has not previously triggered the bring-forward rule to cover that year. This is particularly beneficial for individuals who will receive large one-off lump sums in excess of the annual cap amount that they would like to contribute immediately to super and individuals under 65 who will no longer be eligible for the bring-forward rule after turning 65 (note that a work-test applies for those over 65 just to make a non-concessional contribution without using the bring-forward rule so this increases incentives to use the bring-forward rule before turning 65).

The catch is that in the period from the beginning of year one (the year the bring-forward rule was triggered) to the end of year three, the total con-concessional contribution amount must not exceed three years’ worth of non-concessional caps ($540,000 if triggered in the 2014/15 or later year).  What this essentially means is that non-concessional contributions greater than the annual cap amount can be made earlier in the three year period, however this reduces the amount that can be contributed later in the three year period so that overall, the amount is no greater than if the non-concessional contributions had been made on an annual basis. Note that the trigger begins from the first year that contributions are greater than the annual cap amount and cannot be applied against years before the triggering of the bring-forward rule.

BEWARE – when the bring-forward rule was first triggered will determine the total bring-forward non-concessional amounts that can be made over three years. If the bring-forward rule was triggered in the 2013/14 financial year, then the total non-concessional cap amount over the three years will be $450,000, NOT $540,000 as would be the case if the bring-forward rule was triggered in the 2014/15 financial year.

 

The information in this document is factual information only and is not intended to be financial product advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances.  While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Star Super Services Pty Ltd and Star Super Advice Pty Ltd is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.