The Government has spent considerable time and energy confusing people about super. So it’s understandable that everything relating to super becomes a question. One of the common questions is: can I add money to super, and how much money can I add?
Not surprisingly, this isn’t an easy question to answer. Not everyone can contribute money to super, and no one is free to contribute as much money as they like. There are age limits, caps on the amount you can contribute, and restrictions on the type of contributions you can make.
If you are age 75 and over you cannot contribute money to super. It doesn’t matter if you are still receiving a wage, or income from some source such as royalties or commissions, none of this money can be plonked into a super fund.
If you are under age 75, then the super door is open provided that you jump through a couple of hoops.
For those between age 65 and 74, you must be working part time or full time to contribute money to super. So what constitutes working? Well, it encompasses both employed and self employed work in pretty well any field, doing almost any type of work. Babysitting, gardening and cleaning would fit the bill, provided that you are receiving a return or reward for your effort. The return or reward may be in the form of a salary or wage, business income, a bonus, commission, fees and gratuities. It’s worth noting that volunteer work does not count.
So provided that you have worked at least 40 hours within a 30-day period, then you can make a contribution to super for that financial year. Clearly, any income that you receive must be declared for tax purposes.
Anyone under age 65 can contribute to super without having to prove that they work. So that’s easy.
If you didn’t know already, there are two types of contributions to super – before tax (concessional) and after tax (non concessional).
Non-concessional contributions include personal contributions you make from your after-tax income, such as your PAYG salary. In other words, you withdraw $10,000 from your Bankwest savings account and plonk it into a super fund. This is a non-concessional contribution, unlike concessional contributions which are the super guarantee (the 9 per cent that your employer deposits into super each year on your behalf), any salary sacrificed amounts and any amount that you are allowed as a personal super deduction in your income tax return.
Concessional contributions let you claim a tax deduction for contributions to super. So rather than paying tax on your income at your marginal tax rate, you can instead pay a flat rate of 15 per cent if you shovel the money into a super fund. Now this can be a handy tax saving strategy and many people build up wealth this way. Clearly, this wouldn’t be such a smart move if you pay less than 15 cents in the dollar in tax anyway.
You can’t claim a tax deduction on all types of contributions into super. The contribution must be income – such as employment, business or rental income.
Now, everyone, including those up to age 74, can make both types of contributions to super – both concessional, before tax savings, and unconcessional, which is using after tax savings.
If this is sounding straightforward, then let’s move onto the part that the Government excels at – and that’s confusion. The Government is currently looking to put in some laws to boost the confusion levels. Perfect.
Currently, if you are under age 50 you can contribute at most $25,000 of concessional contributions a year to a super fund and claim a tax deduction. Any amounts over this will be taxed, not at 15 per cent, but at a penalty tax rate. The highest rate on their books. Indeed, something to avoid.
If you are between 50 and 74, then you can contribute as much as $50,000 of concessional contributions until 30 June 2012. Once again, if you are this age and you contribute more than $50,000 in a given financial year you too will be hit by a penalty tax (charged a 46.5%).
But, come 1 July 2012, there are new rules for the over-50s with account balances above $500,000. Although the laws are not in stone just yet, anyone over 50 will be restricted to a concessional contributions cap of $25,000 each financial year. So this is half of the normal cap of $50,000. It is important to be aware of these laws to ensure that you do not overstep your limit and get hit by penalty tax rates.
But remember, we’re talking about concessional contributions here. You can still load up your fund with unconcessional, or after tax, contributions to super. In fact, if you are under age 65 then you can make $150,000 in non-concessional contributions for the 2010/2011 and 2011/2012 financial years. In fact, based on another confusing rule of the Government, if you are under age 65 then once you contribute more than $150,000 in after tax contributions in any given financial year then you automatically trigger the bring-forward rule.
This means that you can make up to $450,000 in non concessional contributions in a single financial year, by say contributing $300,000 in the first year and remaining $150,000 over the following two years.
Now, underline this in red pen, this bring forward rule is only available for those under age 65. If you are over age 65, you are limited to contributing $150,000 in a given financial year (for say the 2010/2011 or the 2011/2012 financial years). Plus, you have to be working either full or part time (as we discussed above).
Super is a minefield. Just remember, before you add funds into your super pot – read up on the current laws, the caps, the age based restrictions and the like, to avoid any nasty tax surprises.
This is for general information purposes only and does not constitute investment advice. Please see a financial adviser before making any investment decisions.