Richard asks:
It seems ridiculous that if you earn a high income and your employer pays compulsory government instructed employee contributions, that this amount itself can be more than the limit of $25,000 per year. You then have to pay maximum tax on the extra. Is there any way round this?
Olivia says:
The superannuation rules have become simpler and more generous in this area over the past year but understanding what they mean for you can still seem confusing.
Here is an explanation of some of the key areas affecting you and what has recently changed.
Super guarantee
Employers must pay the superannuation guarantee for their employees, with a few exceptions. The rate of compulsory superannuation guarantee has risen by one half of a percent to 9.5 per cent from July 1.
Super contribution base
There is a maximum amount of earnings to which superannuation guarantee applies. For the current year, the earnings base is $49,430 per quarter or $197,720 per year.
An employer does not have to provide the minimum support of 9.5 per cent for the part of earnings above this limit.
What this means is that the maximum amount of super that your employer needs to pay, regardless of how large your salary is, will be $18,783 per year (calculated as 9.5 per cent super guarantee on $197,720) which is below the age based superannuation contributions limits.
Changes to super caps from July 1
Keep in mind that these contributions limits have also changed from July 1 and there is no longer a cap of $25,000. The concessional (pre-tax) superannuation contribution caps have increased to $35,000 for those aged 49 and over on 30 June 2014 and for everyone else, the limit is now $30,000 per year.
Remember these generally include employer contributions (including contributions made under a salary sacrifice arrangement) and personal contributions claimed as a tax deduction by a self-employed person.
Excessive contribution tax
The rules around excessive contributions tax have also changed and if your superannuation contributions exceed the limits, the excessive contributions will effectively be treated as income in your personal tax return with a small amount of interest being payable to the Tax Office.
What you can do?
If you are being paid more than the maximum amount that you employer is required to pay, this is an opportunity for you to talk to your employer about your salary package arrangements. In most cases, you can alter the proportion of your wages and super to remain under the contribution caps and take more of your package as a cash salary.
Most employers will have an overall package cost that they have budgeted for your employment and this will include your wage, super and other benefits. This can be rearranged so that you your employer still complies within the rules and you maximise your benefits.
If you are a high income earner, you may want to stay close to the maximum cap to save tax so get some professional financial advice on how to best structure this.
What are the traps?
Before changing your package ask your employer if there are any disadvantages to you doing this. You may have other conditions or benefits in your package such as insurance that may be affected by this change, so ask the questions before making a decision and seek the advice of a professional Financial Planner to ensure you are getting the most out of your salary package.
Why not increase the financial savviness of those around you – pay it forward and pass on these tips to your family, friends and kids.
Olivia Maragna is the co-founder of Aspire Retire Financial Services and is a respected and independent financial expert. Olivia’s advice is general in nature and readers should seek their own professional advice before making any financial decisions.Send your finance questions to Olivia at scoop@brisbanetimes.com.au. You can follow Olivia on Facebook or Twitter at https://twitter.com/oliviamaragna
