What happens if you put too much money into super?
From July 1, the concessional contributions cap was lifted from $25,000 to $27,500 which is great news for people who want to put more money into superannuation in the upcoming and future financial years.
The increase in the contributions cap has been widely reported in the media and FMD Adviser, Cameron Sicker, covered it in his 2021 Tax Time Financial Planning Tips video back in May. What has been less well publicised is the associated legislation that changes the consequences for those who go over the new contributions cap.
Previously, if you went over the concessional contributions cap, the amount over the cap was added to your personal taxable income and taxed at your marginal tax rate, minus a special tax offset of 15 per cent. To essentially reverse the tax benefit of making additional tax-deductible contributions into super.
The money could also be counted as part of your non-concessional contributions cap (unless it was taken out of super), and you would have to pay an ‘excess contributions charge’ (think of this like interest on the unpaid tax you would have paid at your marginal rate) as a further disincentive to contribute too much money in super on a highly tax-effective basis.
Under the new legislation, the ‘excess contributions charge’ has now been scrapped. So, what does this mean for you? Ultimately, it doesn’t make it any more beneficial to exceed the cap, but it does remove some of the pain if you do so accidentally which is what the change was designed to do.
As some have mentioned, it also means you could delay the tax bill related to an excess contribution for a year or two, though the ATO has swiftly come out and said that this should not be used as a tax avoidance strategy. Therefore, if you do find yourself with excess savings, there are other tax efficient strategies to consider such as spouse contributions or non-concessional contributions in conjunction with the government co-contribution.
Lastly, if you do find yourself with an ‘excess contributions determination’ letter in the mailbox, you should speak with your FMD adviser as there are different estate planning implications with the options you have available.
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977. Rev Invest Pty Ltd is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977.