Peter Kelly looks at the considerations advisers need to make for their clients in terms of concessional contributions.
Concessional contributions are contributions made by employers on behalf of their employees, and contributions made by individuals who claim a tax deduction for their personal contributions. Concessional contributions are counted against an individual’s concessional contribution cap.
With effect from 1 July 2017, the annual cap for concessional contributions is to reduce to $25,000 per annum. There will no longer be differentiated caps dependant on age (for example – over or under the age of 49).
The current concept for capping concessional contributions was introduced on 1 July 2007. Table 1 sets out the historic movements of the concessional contributions cap.
When determining the applicable age (for 2013/14 through to 2016/17) it is based on a person’s age on the last day of the previous financial year. For previous years (except for 2012/13 where the cap was not differentiated by age), the determinant was the age on the last day of the financial year in which the contribution was made.
CCs and the SG
Questions often arise regarding an employer’s obligation to make contributions under the superannuation guarantee (SG) system, and the concessional contribution cap.
Typically, a question will be framed along the lines of:
“My client receives a salary of $400,000 per annum. The SG contributions will result in their employer contributing $38,000 (9.5 per cent of $400,000) of concessional contributions. Surely this will result in a breach of the concessional contribution cap. Is there an exemption my client can benefit from?”
The response to this statement is simply:
“No, there is no exemption, and an excess concessional contribution assessment will arise.”
The Superannuation Guarantee (Administration) Act 1992 (SGAA) includes the concept of a “maximum contribution base”.
The maximum contribution base is the maximum salary on which an employer is obliged to make SG contributions. For the 2017/18 financial year, the maximum contribution base is $52,760 per quarter. Put simply, an employer is not required to make SG contributions in respect of that portion of an employee’s salary that exceeds the maximum contribution base in a given quarter.
But having said that, some employers may choose (or be required) to make contributions at a rate higher than the prescribed percentage (9.5 per cent for 2017/18) and/or on a salary that exceeds the maximum contribution base. These obligations may arise from a contractual arrangement an employer enters into with their employee.
If contributions made under such arrangements exceed an employee’s concessional contribution cap, an excess contribution will arise and will be dealt with under the normal processes that apply to excess concessional contributions.
Employees who find themselves in a position that will result in an excess concessional contribution may choose to renegotiate their remuneration arrangements with their employer.
Salary sacrifice arrangements
With the general reduction in the concessional contribution cap from 1 July 2017 – anyone with a salary sacrifice arrangement in place that involves a salary being sacrificed in return for additional employer contributions should review the arrangement at the earliest opportunity.
When determining an appropriate level of contributions to be made under a salary sacrifice arrangement, expected SG contributions (including additional contributions that may be made as a result of receiving an increase in salary and/or bonus payments) should be deducted from the concessional contribution cap of $25,000. The remainder may be applied to employer contributions made under a salary sacrifice arrangement.
When considering entering into an arrangement to sacrifice salary to superannuation, regard should be given to the Australian Taxation Offices (ATO) guidelines covering such arrangements.
The ATO suggests that to be effective, a salary sacrifice arrangement needs to comply with a number of requirements. These include:
The arrangement should be prospective. That is, an agreement to sacrifice salary should be in place before the work is done that gives rise to the sacrificed remuneration;
There should be an agreement between the employee and their employer. While the ATO does not require this agreement to be in writing, it would be good practice and in the interests of all parties for the arrangement to be documented; and
Once salary has been sacrificed, there should be no access to that salary. The salary must be foregone for the duration of the agreement.
From time to time, questions arise around the ability to salary sacrifice accrued leave entitlements, particularly where employment is ceasing. The answer to the question is very much a case of “it depends”.
For example, if an agreement was in place to the effect that, in the event of employment ceasing, any accrued entitlements are to be contributed to superannuation, then arguably those accrued entitlements could be contributed to superannuation under a salary sacrifice arrangement.
However, the agreement must be prospective in nature. That is, it will need to have been put in place before the work that gave rise to the leave entitlements was commenced. This may not be as big an issue for annual leave, which arguably would only require an agreement to be in place at the commencement of an employment year, but would generally prove to be more problematic for accrued long service leave.
Accrued leave entitlements built up over a number of years may present their own unique problems if seeking to sacrifice them to superannuation given the now reduced concessional contribution cap of $25,000.
Superannuation contributions made under a salary sacrifice arrangement are regarded as employer contributions.
As such, entering into a salary sacrifice arrangement may reduce, or even eliminate entirely, the need for an employer to make SG contributions.
Step one: An employee receives a gross salary of $100,000. In addition, their employer contributes $9,500 SG contributions.
Step two: The employee decides to salary sacrifice $10,000 of their salary to super.
Step three: What is the employer’s ongoing SG liability?
a) 9.5 per cent of $100,000
b) 9.5 per cent of $90,000
The correct answer is: option c).
That is, the salary sacrificed contribution of $10,000 can be used by the employer to offset their SG obligations, as it is equal to or, in this example, exceeds the employer’s SG liability.
Fortunately, most employers will continue to make SG contributions, either based on an employee’s total salary (in this example, $100,000), or on the reduced, post-salary sacrificed salary of $90,000.
This example highlights a potential risk for employees wishing to enter into salary sacrifice arrangements and have their employer supplement concessional contributions. The manner in which future SG contributions will be managed by the employer is a critical element to this ongoing conversation.
Personal contributions and tax deductions
To be eligible to claim a tax deduction for personal superannuation contributions, an individual must, for 2016/17 and earlier years, derive less than 10 per cent of their assessable income – plus reportable fringe benefits and total reportable employer superannuation contributions (from activities associated with being an employee). This includes activities that would regard an individual as being an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992.
A person who enters into contracts that is wholly or principally for the labour of that person is regarded as an employee for this purpose.
The application of the 10 per cent test means that most employees, and many contractors, are unable to claim a tax deduction for their personal superannuation contributions.
And from 1 July 2017, the 10 per cent requirement is to be removed.
This means that anyone under the age of 65, and those aged between 65 and 74 who meet the work test, will be able to claim a tax deduction for personal contributions they may make.
The usual requirements around providing an election to claim a tax deduction (290-170 Notice), and the timing of such notices continues to apply.
Contributions that are intended to be claimed as a tax deduction are counted against the individual’s concessional contribution cap.
For those who may be unable to access a salary sacrifice arrangement, and for those who received reduced SG contributions as a result of entering such an arrangement, more flexibility may be found in making non-concessional contributions with the view of claiming a personal tax deduction for those contributions.
This will benefit employees where their employer pays superannuation contributions on the reduced “after sacrifice” salary, or it will offset their SG obligations against their salary sacrificed salary.
Whether non-concessional contributions are made on a regular or an irregular basis will depend on individual circumstances. However, removing contributions from pre-taxed income will require discipline on the part of the employee to continue to make those contributions voluntarily.
Division 293 tax
Currently, Division 293 tax is payable by individuals with an adjusted taxable income of more than $300,000.
Division 293 tax involves the payment of an additional 15 per cent tax on concessional contributions. From 1 July 2017, the income level at which Division 293 tax becomes payable will be reduced from $300,000 to $250,000.
So, what do you need to remember?
A number of changes are being made to concessional contributions from 1 July 2017. The following points highlight considerations that should be made now:
a) If the opportunity to make additional concessional contributions exists, advantage may be taken to contribute to the higher $30,000 and $35,000 concessional contribution caps that apply until 30 June 2017.
b) Care should be exercised to ensure that any concessional contributions intended to be made in the 2016/17 financial year are received by the relevant superannuation fund in sufficient time to ensure they are accounted for in the current financial year. Where contributions are made by direct bank transfer, or contributions are made utilising the services of a clearing house, delays in remitting the contributions to the relevant superannuation fund may arise.
c) From 1 July 2017, any existing salary sacrifice arrangements should be reviewed to ensure that an inadvertent breach of the reduced concessional contribution cap does not arise.
d) Where employees have entered into salary sacrifice arrangements, and for employees who are unable to access such arrangements, making personal deductible contributions could be a consideration.
Peter Kelly is superannuation, SMSF, and retirement planning specialist at Centrepoint Alliance.