Warwick asks: I’ve heard we can make larger super contributions next year. Should I wait until then?

Hi Warwick.

The Government recently introduced legislation into Parliament that could have a positive impact on the caps and the retirement plans of many Australians.

Currently, there is a cap of $25,000 pa on concessional super contributions. These include superannuation guarantee, salary sacrifice and personal deductible contributions, as well as certain other amounts.

If the legislation is passed, the cap will increase to $35,000 pa from:

• 1 July 2013 for people aged 59 and over on 30 June 2013, and
• 1 July 2014 for people aged 49 and over on 30 June of the previous year.

This is great news as it will allow people who are approaching retirement to contribute more to super and benefit from some attractive tax concessions.

Concessional super contributions are made with pre-tax dollars and are generally taxed in the fund at a maximum rate of 15%, not the marginal tax rate you normally pay on your income of up to 46.5%. However, higher income earners may pay 30% tax on their concessional contributions if other legislation is passed.

But I wouldn’t suggest that a higher cap next year would be enough on it’s own to justify putting off contributing more this year.

The cap is an annual limit and if you don’t contribute the full amount each financial year, the remainder cannot be carried forward to the following financial year.

So it really is a case of use it or lose it.

If cashflow allows, you may want to make the most of the $25,000 cap this financial year and the higher cap in future financial years.

But make sure you don’t overdo it this financial year, as contributions exceeding the cap will be taxed at a penalty rate of 31.5%.

That said, from 1 July 2013, it’s proposed that excess contributions can be withdrawn from super and will be taxed at marginal rates plus interest to compensate the tax office for receiving the income tax later than usual.

We suggest you speak to us to find out the best way to make the most of the caps without incurring a tax penalty.