Getting nearer to your retirement? Or are you worried about the super cap 2023 legislation passed, which will hopefully be implemented in the financial year 2026?
Well, if you can’t make the heads or tails of how superannuation caps limits impact you in 2023 then perhaps you ought to know the ropes of super contribution caps in this blog, we will guide you in detail about the tax implications.
Let’s dive right in…
What is a superannuation cap?
If you are wondering “How much can i put into my super?” The answer to this is as specified by the Superannuation cap, which means the amount you contribute towards your super. This amount is capped by the ATO so that you aren’t paying excess tax towards the super.
What is contribution tax in super?
Contribution tax super is the amount of tax ATO covers from your super contribution. Taxes deducted by ATO are based on the type of contribution i.e. Either pre-tax or after-tax on the amount contributed by the employer or employee.
Now let’s explore more, to understand the types of super contribution caps and the superannuation maximum contribution.
Types of super contribution caps?
The contributions made to the Australian superannuation fund are characterized as concessional super contributions or non-concessional super contributions, also known as voluntary super contributions.
Concessional super contributions
As an employer the superannuation guarantee you pay with other contributions sums up to an amount of $27,500 annual cap, further, these are taxed at 15% as per superannuation contribution limits 2023. Here are those pre-tax concessional super contributions:
- Salary sacrifice payment
- Shortfall amounts in SGC
- Insurance premium and admin fees incurred by the employer
- SG employer payments
Voluntary super contributions
The term non-concessional super contributions or voluntary super contributions refers to the amounts already taxed (after tax) paid by the employee or employer. These contributions are not included in assessable income and so are not allowed for deductions in ITR. If the amount of non-concessional super contributions doesn’t exceed the annual cap of $110,000, it would not be taxed in your super fund. These contributions include:
- Spouse contribution
- Unclaimed personal contribution
- Exceeded amount of lifetime cap limit for CGT (Capital gain tax)
- Unwithdrawn concessional super contributions over the limit
- Premiums and Fund fees
As per the new government reforms, from 1 July 2025, the tax rate will subsequently increase from 15% to 30% on concessional super contributions. Although some people may say that it’s not 30% ( doubling of tax rate) but rather it’s a new 15% tax beyond the limit of $3 million.
How is a client’s superannuation balance calculated under the $3m cap?
The calculations are subjected to the difference between an individual’s total superannuation balance brought forward and carried down the amount, adjusting for the contributions and withdrawals made.
The calculation method is as follows:
Earnings= TSB (Current financial year) – TSB (Previous financial year) + Withdrawals – Net contributions
On amount exceeding the $3m cap:
Proportion of earnings = TSB (Current financial year) -$3 million
TSB (Current financial year)
Tax liability can be calculated as follows:
Tax liability = 15% * Earnings * Proportion of earnings
Let’s consider some examples;
Suppose, Mary is retired and her superannuation fund is $9 million on 30 June 2025. She withdrew $160,000 million and did not contribute to the fund. At the end of year, the balance of her SMSF is $10 million.
Earnings = $10-$9+$160000= $1.16
Proportions of earning (above $3) = ($10 million-$3 million) / $10 million = 70%
Tax liability = 15% * $1.16 * 70% = $121,800
Moreover, if there are carry-forward concessional contributions. Have a total super balance of less than $500,000? Or unused concessional contributions from previous but not before 2018, then you may be able to carry forward concessional contributions to later years to increase your contribution cap.
However, you can only use the unused contributions from the last 5 years only which also includes the year in which you weren’t a member of the super fund.
You can follow the following steps to calculate carry-forward concessional contributions;
In case of excess concessional contribution, it shall be taxed at 15%.
How will these changes affect superannuation structuring for wealthy clients?
The new proposed method of measuring superannuation balance renders great impacts on members previously unrelated to it. For example, a person might be witnessing a total super fund of ($ 800,000) however from the view of newer calculations the value may drop to $500,000 giving way to catch up with more concessional super contributions.
How are unrealized capital gains and pensions treated under the rules?
unrealized capital gains
Balances exceeding $3 million of superannuation fund, the tax on such amount will include unrealized gains. This means that an increase in the value of assets will be subject to the additional 15% tax even before it’s sold.
Since the unrealized gain is also tax-applicable there could be cash flow issues for members, because the tax needs to be funded on assets that haven’t been realized or converted into cash.
As for the pension, the treatment of defined benefit interest is included within this measure and account-based pensions are impacted by this legislation especially if the account balance exceeds $3 million.
Currently, the tax-free retirement phase amount is set at $1.7 million. If you didn’t fully reach the cap in full in prior years then perhaps you may be able to benefit from a proportionate increase in TBC. However, for those starting their first pension phase, the account will have a transfer balance cap of $1.9 million.
How is the tax collected and what are the penalties for late payment?
Instead of levying the additional 15% tax on superannuation funds, it’s levied on individual members on the balance exceeding $3 million.
Critical planning strategies in preparation for the NEW $3m cap
For the increase in your total superannuation fund exceeding $3 million, there’s 15% more tax over a 15% tax already levied over your TBC. Don’t worry as there can be several planning strategies that can be applied for the new $3 million cap. Some are here:
- You need to be calculative of your investment in TBC, if you or your spouse’s superannuation fund is reaching the threshold try to minimize or maximize it by making spouse contributions or involving contributions splitting.
- Another strategy is “Withdrawal”, you can draw such an amount that your superannuation fund doesn’t hit the roof and invest that amount in vehicles outside the superannuation fund.
- Use the option of investing in family trusts or investment bonds which also offers favorable tax treatments.
- For those over 60, ensure that you maximize the tax-free status of your pension account as income and capital gains are tax-free in this phase.
As the new reform is planned to be implemented in FY 2026, there are increasing concerns over the inevitable change in super balances over time and more people will have to face hurdles. But, it’s likely that before the time comes an awareness of avoiding and managing any difficulty caused would allow people to handle it smoothly.
Information and statistics for This Post provided by My Tax Daily.