Contribution caps are applied to personal contributions that are made to super. Some limits are associated with contribution caps mean limits on how much money you made to super each year without penalty. It is known as a contribution cap. To get detailed information about this, keep your eye on each and every aspect:
What is Contribution Cap?
The ‘cap’ indicates the highest amount that you contribute to your super each year. If you are paying-off extra or above the cap, you might have to pay extra tax. The cap amount and extra tax that you may depend on whether the contribution is non-concessional or concessional.
When you make an additional contribution to your super fund, then it could increase the amount that you have in retirement. However, make sure to get detailed information about the limits on what you can add.
Types of Contributions
- Before tax (concessional) contribution
- After tax (non-concessional) contribution
Before-tax (Concessional) Contribution
Concessional contributions are contributions that are made into your SMSF that are incorporated in the SMSF’s assessable income. Concessional contribution cap is the limit that is applied to concessional contributions made to your super each year before extra tax encounters.
These concessional contributions are taxed in your self-managed super fund at a concessional rate of 15% that refers to contribution tax. The common types of concessional contributions are employer contributions, like super guarantee and salary sacrifice contributions. Irrespective of age, the concessional contribution is $25,000 for the 2020-2021 year.
The concessional contribution may include:
- Salary sacrifice contribution
- Mandatory contributions are done by your employer – such as the super guarantee
- Amounts assigned from a fund reserve
- Personal contribution from which you claim an income tax deduction
- Insurance premium and administrations fees paid by your employer
- Notional taxed contributions if you are a member or part of specified benefit fund
Before-tax (concessional) contribution cap
You can use your unused cap amounts in the future financial year, if you haven’t used them from July 1, 2018. You can carry the unused cap amount for at least up to five years. If the total amount of cap was less than $500,000 at the end of the previous financial year. If you still don’t use your unused carried cap amount, then after five years, it will be expired.
After-tax (non-concessional) contribution
Basically, the after-tax contribution is opposite to the concessional contribution. In this, your contribution will not be included in the SMSF’s assessable income that is made into your SMSF. The common type is the personal contribution made by the member for which you can’t claim an income tax deduction.
A non-concessional contribution may include:
- Contribution from your personal saving or take-home pay
- Contribution can be done by your partner on your behalf
- Most of the transfers are done from foreign super funds
After-tax (non-concessional) contribution cap
Non-concessional contribution cap is $100,000 for 2020-21. You are not allowed to make any contribution after-tax contributions if the sum of the super balance was more than $1.6 million. In this type of contribution cap, no tax will be charged on the amount within the limit of the cap.
If your age is under 67, then you can make after-tax contributions of up to 3 times the amount cap in a year. If eligible, you can gain access to future caps automatically when your contributions exceed the annual cap in one year. It is also called as ‘bring-forward’ option. The cap amount that you can bring forward and the period of bring-forward will be based on your total super balance.
The contribution and bring-forward are available to the member under 65 are demonstrated below:
|Total Superannuation Balance||Contribution and Bring-Forward Available|
|Less than $1.4 million||Access to $300,000 cap (over three years)|
|Greater than or equal to $1.4 million and less than $1.5 million||Access to $200,000 cap (over two years)|
|Greater than or equal to $1.5 million and less than $1.6 million||Access to $100,000 cap (no bring-forward period, general non-concessional contribution cap applies)|
|Greater than or equal to $1.6 million||Nil|
Fund-Capped Contributions Limit
Your SMSF won’t accept single contributions that go overboard a member’s fund capped contribution limit. Fund-capped contributions limit do not include:
- The personal contribution that your member suggests they are about to claim as an income tax deduction
- Super co-contributions
- The amount that corresponds to a directed termination payment
What If You Go Over the Caps?
You can pay more than the caps, but keep one thing in mind that you have to pay extra tax on the excess amount. If you exceed your concessional contribution cap for a year, you need to pay your marginal tax rate on the extra amount. An additional charge will also apply to excess concessional contributions. If you go over your before-tax contributions, you may need to choose to withdraw up to 85 per cent of your excess before-tax contributions. It will be from your super fund you pay-off excess tax liability.
If you exceed the limit of your non-concessional contribution cap for a year, you can withdraw the extra amount and 85 per cent of earnings on that amount. The earning amount will be incorporated in your income tax assessment and is taxed at your marginal rate. If you don’t want to withdraw excess contribution, then you will pay tax at the top marginal rate.
Summing up Contribution Caps
Now, you have an idea of the contribution cap and what does cap mean. So, be aware while paying an extra amount because there are some factors that you need to consider. The types of contribution caps are mentioned above, and make sure to read them carefully.
If you are still finding problems in tax calculations or related to tax, then you can seek help from a taxation accountant. We at Reliable Melbourne Accountants, provide help in solving tax-related concerns and issues.