Well Rod, I attended a lunch recently when the assistant treasurer, David Bradbury was the guest speaker. I asked him about the reduction in contribution limits for tax deductible superannuation contributions. This is referred to as the Concessional Contributions cap. Many of my clients are concerned about it and I asked him to explain why there was a reduction.
The answer is that the government needs to balance their budget. Unfortunately it does mean that the government plan to defer the higher contributions limit for those over age 50. It has been deferred for a couple of years. This sounds odd because the limit has been $50,000 for those over 50 years of age but this was under previous legislation that expired in June 2012. The government were going to permanently set that limit at $50,000 (with some future indexation) and it is this change that is being deferred to help the government balance their budget. So for the next couple of years the limit is dropping to $25,000 which is the level that has applied to those under age 50 and will remain for those under that age.
Saving for your retirement through superannuation is still very tax effective. Unfortunately though, if you exceed the concessional contributions cap you will end up with an extra tax bill which well and truly wipes out the benefit. A concessional contribution is the name for any contribution where someone is receiving a tax deduction for that contribution. These used to be called deductible contributions. These contributions are taxed at 15% as they enter super and it is this rate (15%) which is considered a concession when compared to the higher tax rates that apply for those earning over $37,000. So if you are earning over $37,000, 15% tax is still better than 32.5% or higher.
The $25,000 limit includes any 9% (or other Superannuation Guarantee Contributions that are being made by your employer) as well as your salary sacrifice. So, please check that you are not going to exceed the limit this financial year. If you do, the tax bill can be nasty.
Now, remember that the other limit – non-concessional – being $150,000 per year per individual has not changed and this will still allow you to contribute personally to super. You can in fact “bring forward” the next two years limits when you are under age 65 and contribute $450,000. So, Rod if you win the lottery, or receive an inheritance, a financial planner will be able to show how to get a significant amount of money into super where earnings are only taxed at 15%, most capital gains at 10% and then zero tax after you start a pension with the fund. It would pay to get advice at that stage to make sure you make the most of the potential savings that super can give you. You may even want to consider then self managed super funds.