Superannuation is a key part of retirement planning in Australia, offering tax-effective savings to help individuals build wealth for their later years. However, strict contribution caps exist, and exceeding these limits can have financial consequences. One of the most common issues faced by superannuation contributors is exceeding concessional contribution caps.
What Are Concessional Contributions?
Concessional contributions are pre-tax contributions made to a superannuation fund. They include employer Superannuation Guarantee (SG) contributions, salary sacrifice contributions, and personal deductible contributions claimed as a tax deduction. These contributions are taxed at 15% within the fund, which is generally lower than an individual’s marginal tax rate.
Excess Concessional Contributions: What Happens?
Each financial year, the government sets a cap on concessional contributions. For 2023/24, the cap is $27,500. If an individual exceeds this cap, the excess amount is included in their taxable income and taxed at their marginal rate. The Australian Taxation Office (ATO) will issue a determination outlining the excess amount and associated tax implications.
Managing Excess Contributions
If you exceed the concessional contributions cap, you have two options:
1. Elect to release up to 85% of the excess concessional contributions from your super fund to help cover additional tax liabilities.
2. Leave the excess in your super fund, where it will count towards your non-concessional contribution cap. If this results in exceeding the non-concessional cap, further tax penalties may apply.
How to Avoid Exceeding the Cap
To prevent excess concessional contributions, individuals should:
– Keep track of employer contributions, including SG amounts.
– Review salary sacrifice agreements regularly.
– Consider the timing of personal deductible contributions to avoid unintended breaches of the cap.
Final Thoughts
While superannuation is an excellent vehicle for building retirement wealth, understanding the contribution rules is crucial. Being aware of concessional contribution caps and monitoring contributions can help individuals avoid unnecessary tax liabilities and optimise their retirement savings.