2016 Concessional contribution cap

For 2016-17 the general concessional contributions cap for an employee is $30,000 and this is indexed against Average Weekly Ordinary Time Earnings (AWOTE) and moves in increments of $5,000.  If the employee is 49 or older on 30 June 2016 his or her concessional contributions cap is $35,000.  This higher cap is not indexed. 

A concessional contribution is an employer contribution, such as a contribution made to meet the superannuation guarantee, a contribution made under an enterprise agreement or an employee’s salary sacrifice contribution, which under the superannuation legislation is regarded as an employer contribution.  It is paid out of pre-tax money.

Employees’ personal contributions which are made post-tax are non-concessional contributions even if they are paid into the fund by the employer as is provided in the standard modern award superannuation clause.  The current non-concessional contributions cap is set at six times the general concessional cap ($180,000 pa) but it is also possible to bring it forward and make a non-concessional contribution equal to three years of the cap.  Thus, in FY2016-17 an individual could make a non-concessional contribution of $540,000 which would also exhaust his or her non-concessional contribution entitlements for the following two years.

2017 Concessional contribution cap

From 1 July 2017 the concessional cap is reduced to $25,000 per annum for all.  As well, “contributions” into defined benefit schemes will now count towards an individual’s concessional cap.  The cap is indexed against AWOTE as before, but will go up in increments of $2,500, rather than, as at present, in increments of $5,000.  The concessional contributions cap will increase more frequently.

Also from 1 July 2017 the non-concessional cap is reduced to four times the general concessional contributions cap (i.e. $100,000).  As well, non-concessional contributions will not be available to individuals except to the extent that the individual’s total superannuation account balance is less than the (newly introduced) Transfer Balance Cap (set at $1.6M in the FY2017-18).  This new rule also impacts the carry forward provisions.

These changes to caps will put pressure on employers because of employee expectations that employers should protect them from unexpected complications, such as exceeding their caps.  However employers are not in possession of relevant information about employees’ overall superannuation balances, other accounts nor any contributions which the employer has not made.  Employers are rarely licensed to give personal financial advice.   Nonetheless, it may be prudent for employers to consider providing information about the changes to employees.

Carry forward of the concessional contributions cap

The new legislation also provides a capacity for low-middle income earners who have not been able to maximise their full concessional contributions cap to catch up, by enabling them to carry forward unused concessional cap.   The “carry forward” capacity is targeted and will not kick in until 1 July 2019.   Employees with less than $500,000 balance in their superannuation accounts at the beginning of the financial year will be able to access concessional cap which has not been used up over the previous five financial years, starting with the FY2018-19.

The maximum contributions base

Employers’ obligation to make contributions of at least 9.5% of ordinary time earnings is also subject to the Maximum Contributions Base (MCB) which is a cap on an employer’s superannuation guarantee liability for any given employee.  In FY2016-17 the MCB is $51,620 per quarter which means an employer is not obliged to contribute more than $4,903.90 ($51,620 x 0.095) per quarter on behalf of any employee. 

As with the concessional contributions cap the MCB is indexed against AWOTE, but it increases annually by the percentage increase in AWOTE each year ending 31 December and rounded to the nearest $10 (rounding up from $5).  Indexation of the MCB is not rounded down.

The combination of the annual indexation increase to the MCB and periodic indexation increases to the concessional contributions cap means that in time the contribution payable on the MCB will exceed the concessional cap.  To avoid employers having to make concessional contributions in excess of an employee’s concessional cap, the concessional cap will also operate as a cap on the contribution required for employees earning in excess of the MCB.  This new rule will become more important when the superannuation guarantee percentage increases.

Many employers do not take advantage of the MCB and make contributions on the whole salary of their higher paid employees.  The higher general concessional contributions cap ($30,000) and special mature age concessional cap ($35,000) meant this was rarely an issue.  However, the new $25,000 cap will trigger renegotiation of existing salary packages and may also encourage employers to include MCB derived limitations in their future contracts

The $4,903.90 maximum required contribution is a cap on the employer’s obligation, not a cap on an employees’ global entitlement.  Employees, including deemed employees, with more than one employer whose composite ordinary time earnings exceed $263,158 ($263,158 x 0.095 = $25,000) will exceed their concessional cap.  An employee cannot waive the employer’s obligation to meet its superannuation guarantee obligations.

Division 293 taxation of contributions

Division 293 of the Income Tax Assessment Act (Cth)1997 provides that the contributions for individuals whose income (including concessional contributions) exceeds $300,000pa were subject to a tax surcharge which the individual could pay or have paid by the fund out of his or her contributions.  Under the superannuation reform package this trigger reduces to $250,000pa for the income year starting on 1 July 2017.  The lower cap will capture many more employees and may prompt some to exit or reduce salary sacrifice arrangements.

Personal contributions

Employers’ obligations to contribute under the superannuation guarantee are confined to eligible employees, which includes contractors engaged wholly or principally for their labour who are deemed employees under the Superannuation Guarantee (Administration) Act (Cth) 1992.  Owner managers of unincorporated enterprises including independent contractors who are not deemed employees under the superannuation legislation do not have concessional contributions made on their behalf. 

Instead, individuals in these circumstances are allowed to claim tax deductions for the contributions they make on their own behalf.  Under current rules a person must earn less than 10% of his or her income, including (reportable employer) superannuation contributions and fringe benefits, from employment to be eligible for the deduction. 

For the income year starting 1 July 2017 the requirement that less than 10% of the person’s income is repealed, and income source will not be a condition for anyone wishing to make deductible personal contributions.  One consequence of this change is that employees wanting to salary sacrifice part of their salary or wages for concessional contributions no longer have to set up an arrangement with their employer to get the benefit of a pre-tax contribution.  They will be able to claim the contribution as a tax deduction; however, the current process for deductible personal contributions remains.  An individual must give notice to the fund receiving the contribution that (s)he intends to seek an income tax deduction.  Personal contributions to certain types of funds and contributions which are not taxed on entry to the fund cannot be deducted.