The superannuation nest egg
High income earners such as doctors and lawyers who have previously maximised tax management strategies by contributing to their superannuation fund have been hit with two key changes in the 2012 Federal Budget.
Previously, the superannuation contributions cap for people aged over 50 was $50,000. This was to encourage workers to top up their superannuation fund balance before retirement. However this cap ended for people over 50 on 30 June 2012, and has been reduced to $25,000 for all workers regardless of age. The good news is that this change to the superannuation cap is only temporary, as from July 2014, workers over 50 with less than $500,000 in super will again be able to contribute up to $50,000 at the concessional tax rate of 15 per cent.
The second key change in superannuation is for people with an income exceeding $300,000. From 1 July 2012, contributions tax has increased from 15 per cent to 30 per cent based on an individual with “income” greater than $300,000. The calculation of “income” is likely to include taxable income, concessional superannuation contributions, adjusted fringe benefits, investment losses, government tax free pension income and certain foreign income. There is however an exception when an individual would not have exceeded the $300,000 if it were not for their concessional contributions. In that situation, the 30 per cent rate of tax is only levied to that component of the concessional contribution, over the $300,000 threshold.
Below is an example of how this adjustment would work for a taxpayer in this position:
If an individual who has an income of $285,000 has made concessional contributions of $25,000 this takes their total income to $310,000 and therefore, the contributions “surcharge” on the $10,000 would be at the rate of 30 per cent.
What does this mean?
Whether you are under or over 50 you need to be mindful of the $25,000 contributions cap. Amounts exceeding the cap not only attract the 15 percent contributions tax, but in addition, a penalty tax of 31.5 percent which combined, ensures you are paying the maximum taxation rate of 46.5 per cent.
While super is an excellent tax effective strategy it is now to a lesser degree for high income earners due to the new contributions tax “surcharge”. For doctors or lawyers earning $300,000 or more, they will pay tax of $7,500 on a concessional contribution payment of $25,000 based on a marginal tax rate of 46.5%.
Many individuals that have been self-employed are often late entrants to this tax effective vehicle. Of course individuals under 65 can increase their superannuation balance by contributing non-concessional (after-tax) super contributions of $150,000 per year, or a total of $450,000 in any three year period from now. As profits in a super fund are taxed at low tax rates, there are financial advantages to hold investments in a superannuation fund provided super contribution limits are adhered to.
If you are unsure of the impact on your superannuation nest egg, please consult us for an in depth discussion on your specific circumstances.