From 1 July 2009, it’s important that you review your contribution arrangements. The cap for concessional contributions made into your super in any financial year is $25,000 if you are aged under 50, or $50,000 if you are aged 50 and over. If you exceed the concessional contribution cap, you will be liable for an additional 31.5 per cent tax on top of the existing 15 per cent contributions tax (and the excess amount also counts towards the non-concessional contribution cap).
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The following amounts count towards the concessional contribution cap:
- salary sacrifice (pre-tax) contributions;
- employer contributions made under Superannuation Guarantee (SG) requirements;
- voluntary employer contributions (e.g. bonuses etc); or
- any employer contributions made separately to cover insurance premiums or superannuation fees.
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Below are two case studies that may assist you in reviewing your arrangements.
Case study 1 – accumulation member
Paul, aged 47, earns $75,000 p.a. and expects to receive a bonus of $5,000. His employer makes super contributions at the rate of 10 per cent on both his salary and his bonus and also pays for insurance premiums in his super plan.
Sample calculation of concessional contributions for Paul for the 2009/10 financial year (estimate).
(1) SG contributions
10% x $75,000 = $7,500
(2) Bonus estimate
10% x $5,000 = $500
(3) Insurance premium subsidy
Allow $1,000 (Paul has based this on the amount of premiums shown on his last benefit statement)
Paul’s total concessional contribution estimate is $9,000 ($7,500 + $500 + $1,000). As Paul is allowed a maximum of $25,000, he can salary sacrifice an additional $16,000 into super for the year.
It’s important to monitor your concessional contributions on an ongoing basis as the calculation above has a number of potential variables.
Case study 2 – defined benefit member
Frank, aged 47, earns $75,000 p.a. and expects to receive a bonus of $5,000. His employer makes all contributions in relation to his defined benefit and pays a super contribution at the rate of 10 per cent on any bonus he may receive during the year.
The contributions that Frank’s employer makes to fund his defined benefit will count towards Frank’s concessional contribution cap. The contributions are estimated notionally using a legislated formula (this formula includes an allowance for insurance premiums and super fees paid by the employer).
The formula is: 1.2 x (NER x S x D/365 – M)
Where:
- The factor 1.2 allows for tax and administration expenses;
- NER = a percentage determined by the Plan Actuary (in this example, assume 10 per cent);
- S = salary used for calculating superannuation benefits at the start of the financial year;
- M = member contributions paid over the year which are not assessable income (i.e. post-tax contributions); and
- D = number of days during the financial year the defined benefit accrued.
In this example, the formula results in notional contributions of 12 per cent of super salary for the financial year.
Any other salary sacrifice or voluntary employer contributions e.g. on bonuses etc. also count towards Frank’s contribution cap.
Sample calculation of concessional contributions for Frank for the 2009/10 financial year (estimate).
(1) Defined benefit formula amount
12% x $75,000 = $9,000
(2) Bonus estimate
10% x $5,000 = $500
Frank’s total estimated concessional contribution is $9,500 ($9,000 + $500). As Frank is allowed a maximum of $25,000, he can salary sacrifice an additional $15,500 into super for the year.
It’s important to monitor your concessional contributions on an ongoing basis as the calculation above has a number of potential variables.
What happens if the notional taxed defined benefit contribution exceeds the cap?
If Frank's defined benefit notional contribution has resulted in an amount greater than $25,000, it will be
deemed to be $25,000 due to grandfathering provisions provided in legislation (and given Frank was a
defined benefit member at 12 May 2009). In other words, Frank will not be penalised if the defined
benefit formula amount exceeds his concessional contributions cap.
If you are a defined benefit member, this grandfathering provision will not apply to you if you joined the
Fund after 12 May 2009. It will also cease to apply in certain circumstances including if any of the
following occurs or has occurred since 12 May 2009:
- your NER has increased;
- the Trustee or your employer exercises their discretion to pay a benefit that is greater than the
benefit assumed for the purpose of calculating your NER;
- the method of calculating salary for defined benefit purposes has changed in a way that would
increase your salary (other than to meet superannuation guarantee minimum requirements); or
- the rate of salary for defined benefit purposes has increased by more than 50 per cent in one year
or 75 per cent over three years.
Defined Benefits can be a complex area of superannuation. If you were a defined benefit member as at
12 May 2009 and think that your notional taxed contributions in 2009/2010 might exceed the
concessional contributions cap, you may wish to seek advice from a qualified financial adviser about
whether the '2009 grandfathering provisions' apply to you.
You might also want to seek advice if you were a defined benefit member as at 5 September 2006 and
thought that you were not eligible for the grandfathering arrangements because you had not satisfied
the requirements of the '2006 grandfathering provisions,' to check whether the recent legislative
amendments to those provisions affect your position.
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What can I do to avoid exceeding the concessional contribution cap?
You may need to review your existing salary sacrifice arrangements if you believe you could be
adversely affected by the concessional contribution cap reduction. To make changes, simply speak to
your payroll or HR department.
Consider any other payments or contributions you or your employer make and whether these count
towards the concessional contribution cap. Such payments can include salary sacrificed bonuses.
Remember, concessional contributions include your employer's regular SG contributions and any
administration fees or insurance premiums they pay on your behalf.
If you are a member of The Escalator Program, whereby you lock in automatic increases in voluntary
(before-tax) contributions to your super on an annual basis, you may wish to confirm that your existing
arrangement will not result in you exceeding the concessional contribution cap. Speak to your HR or
payroll department.
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Any questions?
If you have general questions about these changes, or would like more information, please contact a Plum Member Services Consultant on 1300 55 7586 from 8.00am to 6.00pm, any business day, Melbourne time.
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