News & Commentary

Over the limit 12 Dec 11

Motorists should obviously take considerable care over Christmas not to overshoot the legal limit for drinking and driving.

It will also be worthwhile for super fund members to spare a few minutes over Christmas thinking about the dangers of going over another limit – the annual caps on superannuation contributions.

As Smart Investing regularly reminds investors, the standard annual concessional contributions cap for over-fifties will halve to $25,000 from 2012-13 to match the cap for members under 50. And the Government has proposed retaining the current cap of $50,000 for those over 50 with less than $500,000 super.

The looming change will no doubt encourage many fund members to adopt a double strategy over the next six months, if suitable for their circumstances:

• Ensure they are contributing as much as appropriate between now and the end of 2011-12 – before the prevailing concessional contributions cap is cut.
• Prepare to reduce their contribution levels if necessary from July to ensure compliance with the lower standard cap for this age group.

The exercising of these strategies will require particular vigilance and agility by fund members; it involves taking advantage of the remaining opportunities without being caught out with excess contributions. Again as Smart Investing has often reinforced, excess contributions generally carry a heavy tax burden.

Ross Clare, research director for the Association of Superannuation Funds of Australia (ASFA), points out in the latest edition of the association’s magazine Superfunds that, based on ABS figures, about 320,000 fund members have more than $500,000 in super.

Given the number of fund members – Clare estimates that there are about 14 million people in Australia with super (counting retirees) – this may seem a relatively small number. However, the figures demand a little more examination.

The majority of members with $500,000-plus balances would be over 50. And given their age as well as the imminent halving of their concessional caps, many members in this age group are keen to save as much as possible in super each year. In other words, this is a rather vulnerable group in terms of excess contributions.

The tax commissioner has the discretion in “special circumstances” to disregard an excess contribution or to the amount to another year. But be careful not to place too much reliance on this discretion.

In a recent issue of the Weekly Tax Bulletin, published by Thomson Reuters, technical editor Terry Hayes makes the point that this discretion is “rarely exercised”.

Hayes writes that the commissioner does not regard an unintentional excess contribution or a misunderstanding of the law as special circumstances.

Certainly, the Government has proposed that members who exceed their concessional cap by up to $10,000 from 2011-12 will have a once-only opportunity to request a refund of the excess amount.

However, the proposed get-out-of-jail card (as it has been tagged by some one-time Monopoly players) would only be useful for first offenders. And it would not apply to non-concessional (after-tax or personal) contributions.

And this intended escape for first offenders of course won’t help those who overshoot their concessional cap by a more than $10,000.

Vigilance is the key word.

* Written by Robin Bowerman, Principal, Corporate Affairs & Market Development at Vanguard Investments Australia.
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