There are strict limits on the amount people can contribute to their super before-tax and after-tax.
While it may not appear that complex, the truth is, it’s much easier to breach them than many think.
Why? There’s a few reasons.
1. Changes to super limits
There has been significant changes over the past five years to super limits, with caps reducing substantially over this time, says Esther Angrisano, regional manager at St George Financial Planning.
“If clients aren’t aware of the changes, they may be contributing too much without realising it, which can have adverse consequences.”
2. Employer contributions not factored
Tim Howard, a technical advice consultant at BT Financial Group says, when it comes to before-tax limits, a common mistake happens when clients don’t realise the contributions their employer makes are included in the concessional cap.
“People can contribute the full amount themselves without realising their employer’s contribution to their super fund is included in the concessional amount,” he says.
Timing also matters – sometimes people unintentionally make a contribution in the same financial year as their employer has, which can mean they breach the limit.
“Some employers make extra contributions to fund expenses such as insurance premiums, which are also treated as contributions. So it’s quite easy to breach the cap without realising it,” says Mr Howard.
Ms Angrisano explains that if a client’s salary is above a certain amount, for example $265,000 a year, their employer contribution may inadvertently breach the concessional contribution cap, and this is something of which clients and advisers should be aware.
Helping your clients avoid the pitfalls
There are specific things you can do to help your clients make additional contributions to their super, without enduring the penalties.
Ensure they understand the amount they can contribute
The first step to ensure clients are not breaching the caps is to ensure they understand how much they can contribute and when they are making contributions to their super fund.
Employers must pay their employees’ super at the end of each quarter, although they can make more frequent contributions. Salary sacrificed contributions are made as per the agreement with the employer so the timing of these contributions, particularly at year end, may also affect the client’s total contributions made.
“That might be every fortnight or only once a year. With any larger contributions, encourage clients to work with you around contribution planning strategies to maximise their retirement savings and stay within the rules,” Mr Howard says.
Educate them about new rules
When it comes to after-tax contributions, the limit has reduced to $100,000 a year or $300,000 over three years under the bring-forward rules.
Any excess concessional contributions will count towards a client’s non-concessional cap if not appropriately withdrawn. There are also new rules, such as the Total Super Balance. If your balance is above $1.6 million, you won’t be able to make additional after-tax contributions in a particular financial year, which is a new measure from FY18,” Mr Howard says.
Ms Angrisano adds you should also be mindful of client contributions post 65 so they don’t unintentionally breach super fund rules, as this may have tax implications.
Receive the ATO notice before withdrawing
If clients do breach the caps, they will receive an excess contributions notice from the ATO.
“Importantly, clients must not withdraw any excess contributions until they receive this notice. So wait, and then respond to the notice within the prescribed timeframe to ensure they don't incur additional penalties as a result of the excess,” Mr Howard says.
It’s unlikely the fund would allow the client to withdraw the contribution, and if they did they would be unlikely to meet a condition of release, which could result in further penalties.
Manage and review their contributions regularly
Above all, Mr Howard says it’s essential for clients to be aware of their contributions on an ongoing basis and regularly manage and review them, particularly coming towards the end of each financial year or when their income or super rules change.
“Clients need to consider the super limits every year. So encourage them to engage with their super and understand that mostly it's a ‘use it or lose it’ situation. But if clients do reach their caps, remember there's usually another opportunity to look to contribute up to the cap again next year,” he says.
This publication is current as at 11 January 2019, and has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (‘BTFG’), which is part of the Westpac group of companies (Westpac Group). This document has been prepared for the information of financial advisers only and must not be copied, used, reproduced or otherwise distributed or made available to any retail client or third party, or attributed to BTFG or any other company in the Westpac Group.
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