Defined benefit members - how notional taxed contributions count towards your contribution caps Overview

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1 Defined benefit members - how notional taxed contributions count towards your contribution caps Overview There are two kinds of contributions which can be made to your superannuation fund by you (or on your behalf) - concessional contributions and non-concessional contributions. What are concessional contributions? Concessional contributions are contributions that are included in the assessable income of your superannuation fund (RBF) and are subject to contributions tax of 15% and certain other amounts as specified in legislation. Contributions tax is deducted by RBF when the concessional contribution is received. Your concessional contributions include: 1. Superannuation Guarantee contributions; 2. Salary sacrifice contributions; 3. Productivity and award superannuation contributions; 4. Notional Taxed Contributions in respect of any defined benefits; 5. Contributions for which you have claimed a tax deduction 1 ; and 6. The excess untaxed component (if any) of any rollover superannuation 2 benefit received by the fund on your behalf. Notional Taxed Contributions In the case of members of defined benefit schemes (the Contributory Scheme, the State Fire Service Superannuation Scheme, the Tasmanian Ambulance Service Superannuation Scheme and the Parliamentary Retiring Benefits Fund), RBF is required to use a formula to estimate the cost of providing each member s employer financed defined benefit during a financial year. This amount is referred to as Notional Taxed Contributions (NTC). It is important to understand that if you are a member of a defined benefits scheme, your NTC will be counted towards your concessional contributions cap for a financial year. This means that your total concessional contributions for a financial year are equal to: 1. Your NTC 3 ; plus 2. Any salary sacrifice contributions paid to your defined benefit scheme; plus 1 Strict eligibility rules govern the tax deductibility of personal superannuation contributions. In general, only self-employed or substantially self-employed persons are eligible to claim a deduction. Income from employment must be less than 10% of total income (assessable income, plus reportable fringe benefits plus reportable superannuation contributions). RBF recommends members should seek appropriate financial advice. 2 The untaxed plan cap for the 2011/2012 financial year is $1,205, For members of the State Fire Service Superannuation Scheme or the Tasmanian Ambulance Service Superannuation Scheme, salary sacrifice contributions paid to the defined benefit scheme are included in the NTC calculation. Page 1 of 6

2 3. Any employer superannuation contributions your employer pays to an accumulation scheme including: (a) salary sacrifice contributions paid on your behalf to your Investment Account or other superannuation fund; (b) superannuation guarantee contributions paid to your Investment Account or another superannuation fund; (c) employer productivity and industrial award superannuation contributions paid to your Investment Account or another superannuation fund. This includes the productivity contributions paid for members of the State Fire Commission Superannuation Scheme; 4. Any contributions for which you have claimed a tax deduction 4 ; and 5. The excess untaxed component (if any) of any rollover superannuation benefit received by the fund on your behalf. Grandfathering of Notional Taxed Contributions Grandfathering rules limit the amount of NTC for eligible defined benefit scheme members to their concessional contributions cap where their total NTC for the financial year exceed their concessional contributions cap. Defined benefit scheme members are eligible for grandfathering of their NTC if: 1. Their total NTC exceed their concessional cap for the financial year; and 2. In relation to the 2007/2008 and 2008/2009 financial years: (a) the member must have held the defined benefit interest on 5 September 2006; 3. In relation to the 2009/2010 financial year and subsequent financial years: (a) the member must have held the defined benefit interest on 12 May 2009; and certain other conditions (as set out in the legislation) must also be satisfied. In broad terms, these require that the member s rights to accrue defined benefits have not been improved since the applicable date (5 September 2006 or 12 May 2009). It is expected that these conditions would be satisfied for members of the RBF defined benefit schemes. For the 2010/2011 financial year, RBF has automatically reported the grandfathered amount (the appropriate concessional contribution cap) for those defined benefit scheme members whose NTC for the financial year exceeded their concessional contributions cap. Concessional contributions cap 4 Strict eligibility rules govern the tax deductibility of personal superannuation contributions. In general only self-employed or substantially self-employed persons are eligible to claim a deduction. Income from employment must be less than 10% of total income (assessable income, plus reportable fringe benefits plus reportable superannuation contributions). RBF recommends members should seek appropriate financial advice. Page 2 of 6

3 Your concessional contributions cap for a financial year is determined by your age as at 30 June in the financial year which the contributions were paid. Concessional contributions cap 5 Financial year Age less than 50 Age 50 or more /2012, 2010/2011 and 2009/2010 financial years 2008/2009 and 2007/2008 financial years $25,000 $50,000 $50,000 $100,000 If your total concessional contributions in any financial year exceed the applicable cap, you will be liable to pay excess concessional contributions tax equal to 31.5% of the excess concessional contributions (reference footnote 4). In addition, any excess concessional contributions will also be counted towards your non-concessional contributions cap for the financial year. The excess concessional contributions tax is in addition to the 15% contribution tax already deducted from your concessional contributions. This effectively means that the excess concessional contributions are taxed at the highest marginal tax rate of 46.5%. Example 1 Tasmanian Accumulation Scheme member Mary s total concessional contributions for the financial year are $32,000 represented by superannuation guarantee contributions of $9,000 and salary sacrifice contributions of $23,000. Mary who is 48 years of age has a concessional contributions cap of $25,000. Mary therefore has excess concessional contributions of $7,000 ($32,000 - $25,000 and will be liable to pay excess concessional contributions tax of $2,205 ($7,000 x 31.5%) (reference footnote 4). Mary s excess concessional contributions will also be counted towards her non-concessional contributions cap (reference footnote 4). For further explanation, please refer to example 3 below. Example 2 Contributory Scheme member 5 The Commonwealth Government has announced that from 1 July 2011 it will allow members who breach the concessional contributions cap for the first time (i.e. in or a later year) by $10,000 or less to have those contributions refunded. The refunded contributions then will be taxed at the person s marginal tax rate. 6 This is a transitional threshold only and is scheduled to reduce to the limit that currently applies to members who are less than 50. The Commonwealth Government has announced that the transitional limit will be retained for members aged 50 or more whose superannuation benefits are less than $500,000. However, this is not yet law. Page 3 of 6

4 Max joined the Contributory Scheme on 1 July 1992 and is 48 years of age. His NTC for the financial year is $30,000 and his employer contributed salary sacrifice contributions of $10,000 to his Investment Account. As Max was a member of the Contributory Scheme on and before 12 May 2009, his Contributory Scheme NTC are subject to grandfathering and Max s NTC will be limited to $25,000. Max s total concessional contributions for the financial year are $35,000 ($25,000 + $10,000 salary sacrifice contributions). Max will have excess concessional contributions of $10,000 ($35,000 - $25,000) and will be liable to pay excess concessional contributions tax of $3,150 ($10,000 x 31.5%) (reference footnote 4). In addition, the excess concessional contributions will be counted towards Max s non-concessional contributions cap for the financial year (reference footnote 4). What are non-concessional contributions? Non-concessional contributions are contributions that you make to RBF from your after-tax income. Non-concessional contributions are also referred to as personal or after-tax contributions and they include: 1. personal (after-tax) contributions; or 2. spouse contributions. Non-concessional contributions also include: 1. the amount of a payment from an overseas super fund which is not subject to tax in the fund; and 2. excess concessional contributions Non-concessional contributions cap The standard non-concessional contributions cap is $150,000 or six times the current concessional contributions cap of $25,000. If you are aged 65 or more at the start of the income year your nonconcessional contributions cap is fixed at the standard non-concessional contribution cap of $150,000. Contributions in excess of the non-concessional contributions cap will be taxed at the rate of 46.5% If you are less than 65 years of age at the start of the income year, you can bring forward the payment of up to 2 years of non-concessional contributions over three financial years (this is known as the bring-forward rule ). The bringforward rule allows you to contribute non-concessional contributions up to a maximum of three times the non-concessional contributions cap or $450,000 (3 x $150,000). The amount of the bring-forward non-concessional cap is set in the first financial year in which the member s non-concessional contributions exceed the non-concessional contributions cap. If you contribute/pay more than $450,000 of non-concessional contributions over the three financial years, you will be liable to pay excess non-concessional contributions tax at the rate of 46.5% on the amount of the excess nonconcessional contributions. Page 4 of 6

5 Example continuation of example 1 above Using example 1 above, assume Mary receives $200,000 from the sale of investments and decides to contribute the entire amount to her Investment Account on 8 March This non-concessional contribution is greater than the non-concessional contributions cap of $150,000. Mary will automatically trigger the bring-forward rule. Mary s non-concessional contribution cap for the period 1 July 2011 to 30 June 2014 is $450,000 (3 x $150,000). The following table demonstrates how the bring-forward rule works in practice. Financial year st year Usage of non-concessional contributions cap Mary pays a once-off non-concessional contribution of $200,000 on 8 March Mary s excess concessional contributions for the financial year are $7,000. Mary s total non-concessional contributions for the financial year are $207,000 ($200,000 + $7,000). Mary s non-concessional contributions are greater than the nonconcessional contributions cap of $150,000. As Mary is 48 years of age, she will automatically trigger the bring-forward rule. In order to avoid having excess non-concessional contributions, Mary s total non-concessional contributions paid during the period 1 July 2011 and 30 June 2014 cannot exceed $450,000. Mary s unused non-concessional contributions cap is $243,000 ($450,000 - $207,000) as at 30 June Mary s bring-forward non-concessional contributions cap for the financial year is $243,000. Mary contributes non-concessional contributions of $43,000 during the financial year. Mary s unused non-concessional contributions cap as at 30 June 2013 is $200,000 ($243,000 - $43,000) Mary s bring-forward non-concessional contributions cap for the financial year is $200,000. Mary contributes non-concessional contributions of $100,000. Mary will not exceed her non-concessional contributions cap as her unused concessional contributions cap as at 30 June 2014 is $100,000 ($200,000 - $100,000). Mary s total non-concessional contributions over the three financial years are $350,000, well within her bring-forward non-concessional cap of $450,000 for the period For the financial year, the non-concessional cap for the Page 5 of 6

6 Financial year Usage of non-concessional contributions cap financial year applies. Need help? You should contact RBF and discuss your personal situation if you are unsure. You can contact the RBF Enquiry Line on Personal interviews are available in Hobart, Launceston, Burnie and Devonport by appointment only. To arrange an interview, call the RBF Enquiry Line. If you require personal financial advice, a Financial Planner from RBF Financial Planning Pty Ltd can assist you. Disclaimer This article contains general information only. It is not intended to be, and should not be relied upon as legal, financial or other advice. It has been prepared without taking into account your personal objectives, financial situation or needs. You should consider whether this information is appropriate to your circumstances and read any relevant RBF documentation available at before making financial decisions. We recommend that you contact RBF to discuss your personal circumstances. Authorised representatives of RBF Financial Planning Pty Ltd are able to provide advice in relation to how the concessional and nonconcessional contributions caps apply to your personal circumstances. RBF Financial Planning Pty Ltd (ABN , AFS Licence No ) is a wholly owned subsidiary of RBF and operates as a separate legal entity. Every care has been taken in providing accurate and up-to-date information in this article. However, things may have changed since this article was published and some of the information may no longer be correct. If there are mistakes or omissions in the information, we reserve the right to correct those errors or omissions. Page 6 of 6