Thank you for downloading the Smart Investing podcast from index fund manager Vanguard Investments Australia, on the web at vanguard.com.au

This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is A sharp reminder of excess super contributions

It was first published on Wednesday 6 June 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

Perhaps the sharpest reminder that superannuation fund members can get about the risks of making excess super contributions is to receive an excess benefits tax assessment relating to an earlier financial year.

As this financial year draws towards a close, the tax office is sending out notices of possible excess contributions for 2010-11. In such cases, an assessment for excess contributions tax could well follow – depending upon the circumstances.

Contributions that overshoot the annual concessional super contributions cap are taxed at 31.5 per cent, having already been subject to the standard 15 per cent contributions tax upon entering the super fund. And contributions that overshoot the non-concessional cap are taxed at 31.5 per cent.

See the Excess Contributions Tax Learner Guide, published by the ATO.

Many super fund members trip up by making excess contributions in the last few weeks of a financial year as they attempt to contribute right up to their annual concessional or non-concessional caps.

Ways to try to minimise the risks of making excess contributions include:

1 Understanding the difference between concessional and non-concessional contributions. (Concessional contributions are broadly made up of salary-sacrificed, Superannuation Guarantee and deductible contributions by the self-employed and other eligible members. Non-concessional contributions are personal, non-deductible or after-tax contributions.)

2 Knowing the exact amount of the contribution caps. (For 2011-12, the concessional cap for members over 50 is $50,000 compared to $25,000 for members under 50. From 2012-13, the concessional cap for members over 50 will reduce to $25,000.)

3 Closely monitoring all employer and employee contributions.

Under what is known as the bring-forward rule, members under 65 can average their annual non-concessional contributions cap of $150,000 over three years. This allows a one-off non-concessional contribution of up to $450,000 every three years without being liable for excess contributions tax.

However, as explained in the Excess Contributions Tax Learner Guide, referred to earlier, the beginning of the three-year period under the bring-forward rule is automatically triggered when a non-concessional contribution above $150,000 is made in a single year. This may lead to unexpected excess contributions.

Keep in mind that excess concessional contributions count towards the non-concessional cap and, in some circumstances, trigger the bring-forward rule

Without doubt, members who are saving hard for retirement through super need to be extremely alert to the risks of making excess contributions – particularly at this time of the year.

And that concludes the column

A sharp reminder of excess super contributions

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

To receive the column by email each week go to vanguard.com.au and register with Smart Investing. 

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.