Superannuation is an essential part of the financial planning landscape for Australian professionals. Understanding how superannuation contribution caps work is crucial to maximising your retirement savings while ensuring compliance with tax laws. In this guide, we’ll explore the importance of these caps, how they function, and how you can use them to your advantage.
Why Superannuation Contribution Caps Matter
Superannuation contribution caps are limits set by the government on the amount you can contribute to your super fund each financial year. These caps are pivotal because they help prevent individuals from exploiting superannuation as a means of excessive tax avoidance. By understanding these caps, working professionals can ensure they make the most of their super contributions without incurring additional tax liabilities.
Types of Superannuation Contributions
Before we dive into the specifics of contribution caps, let’s briefly review the types of superannuation contributions:
1. Concessional Contributions
These are contributions made to your super fund before tax. They include employer contributions (such as the compulsory 11.5% Superannuation Guarantee), salary-sacrificed contributions, and any personal contributions for which you claim a tax deduction.
Example: If your employer contributes $10,000 as part of the Superannuation Guarantee and you salary-sacrifice an additional $5,000, your total concessional contributions would be $15,000.
2. Non-Concessional Contributions
These contributions are made after tax and do not attract any tax deductions. They typically include personal contributions from your after-tax income.
Example: If you deposit $10,000 from your savings into your super account, this amount counts as a non-concessional contribution.
Understanding Superannuation Contribution Caps
For the 2023-24 financial year, the contribution caps are as follows:
Concessional Contribution Cap
The concessional contribution cap is currently set at $30,000 per annum. This cap applies to all individuals, regardless of their age. Contributions exceeding this cap are subject to additional tax and may affect your overall tax position.
Practical Tip: Regularly monitor your super fund statements and keep track of your contributions to avoid exceeding the concessional cap. If possible, coordinate with your employer to adjust any salary-sacrificed amounts to stay within limits.
Non-Concessional Contribution Cap
The non-concessional contribution cap is $120,000 per annum. However, if you are under 75, you can bring forward up to three years’ worth of contributions.
Example: If you receive a large bonus or inheritance, you might consider making a larger non-concessional contribution using the bring-forward rule.
Practical Tip: Ensure that your total super balance is below $1.9 million if considering the bring-forward arrangement, as exceeding this threshold makes you ineligible for the benefit.
Catch up Concessional Contributions
Catch-up contributions allow individuals who have not fully used their concessional contribution cap in previous financial years to “catch up” by making extra contributions. This option is available to those with a total superannuation balance under $500,000 as of the previous June 30, and it enables them to carry forward unused portions of their concessional cap for up to five years. Catch-up contributions can be a strategic way to boost super balances and may offer tax benefits, as they are taxed at the concessional rate rather than the higher personal income tax rate.
Practical Tip: If you have a lower-income year or receive a financial windfall, consider making catch-up contributions to maximise your superannuation savings while potentially reducing your taxable income.
Navigating Contribution Strategies
Now that you have a solid understanding of contribution caps, it’s time to strategise how to optimise your super contributions:
Utilise Salary Sacrifice
Salary sacrifice allows you to contribute pre-tax dollars to your super, potentially reducing your taxable income while boosting your retirement savings. Discuss options with your employer to determine the best arrangement for your financial situation.
Claim Tax Deductions
If you’re self-employed or your employer doesn’t offer salary sacrifice, consider claiming a tax deduction for personal contributions. This can effectively convert non-concessional contributions into concessional ones, thus lowering your taxable income.
Monitor and Adjust
Regularly reviewing your contributions ensures you remain within the specified caps. Take advantage of online calculators and tools provided by your super fund to project your contributions and plan accordingly.
What Happens if You Exceed Contribution Caps?
Exceeding contribution caps can impact your tax situation significantly. Excess concessional contributions are taxed at your marginal tax rate, plus an excess concessional contributions charge. They may also count towards your non-concessional cap, potentially leading to further penalties.
For excess non-concessional contributions, you have the option to withdraw the excess amount, along with 85% of the associated earnings, to avoid the excess non-concessional contributions tax. However, the earnings will be included in your assessable income and taxed at your marginal rate.
Practical Tip: If you accidentally exceed your contribution caps, consult a financial adviser or your super fund immediately to explore rectification options.
Understanding and managing superannuation contribution caps is essential for any working professional keen on maximising their retirement savings. By staying informed and proactive, you ensure both compliance with tax laws and optimal growth of your super fund. Explore your contribution strategy, engage with financial advisers when needed, and leverage online resources to keep your superannuation on track.
Ready to make the most of your super? Start by reviewing your current contributions and setting goals for the financial year ahead. Remember, a well-managed super today leads to a more secure and fulfilling retirement tomorrow.
If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.