Reduction of concessional contribution cap from 1 July 2009
The Government will reduce the concessional contributions (CC) cap to $25,000 per annum (indexed), with effect from the 2009-2010 financial year.
The transitional concessional contributions cap (applicable to individuals aged 50 and over for the 2009-2010, 2010-2011 and 2011-2012 financial years) will be reduced to $50,000 per annum. ‘Grandfathering’ arrangements will apply to certain members with defined benefit interests as at 12 May 2009 whose notional taxed contributions would otherwise exceed the reduced cap. Similar arrangements were applied when the concessional contributions cap was first introduced.
The annual cap on non-concessional contributions (NCC) is $150,000 per annum for the 2008-09 financial year and will remain at that level in 2009-10. In the future, thenon-concessional cap will be calculated as six times the level of the (indexed) concessional contributions cap.
The reduction of the concessional contribution cap to $25,000 ($50,000 transitional to 30 June 2012) from 1 July 2009 does not apply until next financial year so clients will not be penalised for contributing within the current concessional contribution ($50,000 or $100,000 transitional) cap this financial year.
Next year’s cap reduction means employed clients will need to review their salary sacrifice arrangements and self-employed clients their personal deductible super contributions and consider contributing more this financial year. In addition, all clients may need to consider drip-feeding contributions over a longer period in order to meet their retirement goals.
The 2009-2010 concessional contributions cap has technically been reduced by more than half if indexation is taken into consideration (the indexed 2009-2010 cap was to have been $55,000).
The non-concessional contributions cap is essentially unaffected, remaining at $150,000, but has been slightly reduced if indexation is taken into account (the indexed 2009-2010 NCC cap was to have been $165,000). The NCC cap will be calculated as six times the CC cap in future years. There has also been no change to the bring-forward rule, which will be capped at $450,000 for 2009-2010.
The transition to retirement (TTR) strategy remains unaffected other than the amount that can be salary sacrificed tax effectively into super. For example a client age 55 on a salary of $150,000 and with a super balance of $800,000 could see the benefits of a TTR plus salary sacrifice strategy reduce by $57,000 over 10 years due to limiting their total concessional contributions so as not to exceed the relevant cap. This example assumes the client draws a pension payment so as to maintain their original net income. Investment returns are assumed at 7% pa after fees but before tax and inflation is assumed to be 3% pa.
Remember that the concessional contribution cap applies to all concessional contributions. For example, a high income-earning employee under age 50, with SG contributions limited by the maximum contribution base ($152,720 pa for 2008-2009), only $11,255 can be tax-effectively salary sacrificed from 1 July 2009.
While super contributions advice must take into account all relevant contribution caps, advisers will now need to be more cautious about the possibility of a client exceeding their concessional contribution cap and incurring excess contributions tax. Approximately 25,000 individuals have been assessed as exceeding contribution caps in 2007-2008 – lower caps will likely mean greater numbers will receive similar assessments in the future.
For this financial year, remember that the transitional concessional cap is available to anyone age 50 or more at any time during the financial year. For example, a client reaching age 50 on 30 June 2009 can make concessional contributions of up to $100,000 during 2008-2009 without incurring excess concessional contributions tax.