Thursday, 21 January 2021

Australian Superannuation Caps and Limits

Superannuation provides a tax effective means of saving for your retirement in Australia, but the system is meant to reduce pressure on the Age Pension, so the tax concessions come with caps and limits - super is meant for retirement funding, not for estate planning or general tax minimisation (prior to the introduction of the caps and limits some wealthy individuals had managed to transfer a large amount of wealth into superannuation. For example, in 2019 it was reported that there were around 60 SMSFs with balances over $50 million, and around 750 more SMSFs will balances between $20 million and $50 million. And in 2016 it was reported that nearly 2,000 people had over $10 million in their superannuation accounts).

This was due to previous rules regarding contribution caps not taking into account how much had already been put into superannuation.

Under the current rules such large balances are very unlikely to accrue in future (unless an SMSF makes exceptional investments - for example investing 100% in a start-up company that does really well. But that would probably attract the scrutiny of the regulators regarding whether or not the SMSF trustees had paid appropriate regard to the risks of their asset allocation). The current rules regarding caps and limits are:

* Concessional (paid from before-tax income e.g. SGL and salary sacrifice) contributions are capped at $25,000 pa. These contributions are taxed at 15% for individuals with less than $250,000 pa taxable income, or at 30% for individuals with taxable income above $250,000 pa. You can still make concessional contributions (SGL and salary sacrifice) of up to $25,000 pa when you Total Super Balance exceeds $1.6 million - provided you are under 75 years of age.  Once you are 75 or older, only SGL (mandated employer) contributions can be made.

* Non-concessional (paid from after-tax income) contributions capped at $100,000 pa. These contributions are not taxed further unless they exceed the cap (and under the bring-forward rules up to $300,000 can be contributed over three years for those under 65 years of age) provided the existing super balance (as at last tax return) was under Total Super Balance Cap (currently $1.6 million).

As I will be approaching the Total Super Balance Cap in the next few years, I will have to decide whether I want to make any after tax contributions into my super while I still can.

While in an accumulation account, superannuation is taxed at 15% on income, and 10% on long term capital gains. Due to franking credits the effective tax rate for super assets is actually around 7%.

Once you satisfy conditions (such as preservation age and employment status) to be able to transfer superannuation from 'accumulation phase' into 'retirement  phase' you can shift up to $1.6 million into an allocated pension account (where there will be 0% tax rate applied to earnings and capital gains). Pension payments will be tax free to those aged 60 or more, but those aged between preservation age and 60 would have pension payments taxed at their marginal tax rate - 15%.

There are a whole raft of other caps and limits that apply in specific cases (for example inclusion of LRBA outstanding balances in calculating total super balances for SMSFs, treatments of defined benefit super balances, rules regarding government co-contribution eligibility, spouse contributions etc.), so this is not a comprehensive list of superannuation caps and limits.

Exceeding caps and limits can have significant consequences, such as additional tax liabilities.

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