Superannuation strategies

Are you nearing the super contribution cap?

This could mean extra tax on your super savings.

The 2009 Federal Budget announced significant changes to superannuation. These changes may impact you if concessional contributions are made into your super, particularly if you have a salary sacrifice arrangement in place or are interested in establishing one. Whether you are a defined benefit member or an accumulation member, you may need to review your contributions to all super accounts you hold to monitor your position in relation to the reduced contribution cap. Table: Contribution cap Contribution cap 2008/09 2009/10 (after Budget) Concessional contribution cap Under age 501 Over age 50 (until 30 June 2012)2   $50,000 $100,000   $25,000 $50,000 1 These thresholds are indexed in line with movements in Average Weekly Ordinary Time Earnings (AWOTE) in increments of $5,000 (rounded down). 2 This cap is not indexed.

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).

Below are two case studies that may assist you in reviewing your arrangements.

Case study 1 – accumulation member

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).

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.

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, Australian Eastern Standard Time (AEST).