Financial planners warn that the regulations surrounding the $1.6 million threshold on the amount of money that can be placed in a superannuation pension are little understood and fear that wealthier savers will break the rules by attempting to top up their super accounts.
Advisers say that while many superannuants understand that they are not allowed to put more than $1.6 million into a tax-free pension, far fewer realise that if they already have that amount of money in super - regardless of whether it is in a pension or a savings account - they are forbidden from making any further after-tax contributions to super.
Confusingly, individuals can continue to make pre-tax, or concessional, contributions even if they have $1.6 million or more in super.
The restrictions to after-tax contributions were introduced as part of a raft of reforms introduced by the Turnbull government in July last year. The measures were mostly designed to reduce the tax benefits of super for high income earners.
"I don't think people understand the significance of the $1.6 million pension cap," said Tony Davison, general manager of boutique advisory firm Henderson Maxwell.
"We are seeing confusion around the $1.6 million threshold," said Nerida Cole, managing director of Dixon Advisory. "The $1.6 million figure applies to the total balance in the case of making non-concessional contributions. It's pretty confusing. There are so many changes. They are quite complex," Ms Cole said.
The Tax Office said it was mostly too early to gauge whether individuals with $1.6 million of super savings had been breaching the rules and making after-tax contributions, because super funds are not required to report such information until October. The ATO also warned that individuals who contributed too much to super may be subject to extra tax.
"From July 1, 2017, individuals who make non-concessional contributions and have a total superannuation balance greater than or equal to the general transfer balance cap of $1.6 million for the 2017–18 financial year at the end of 30 June of the previous financial year, will have excess non-concessional contributions. Individuals always have the right to exceed the non-concessional contribution cap, but must lodge an income tax return for that year, and may be liable to pay extra tax," a Tax Office spokesman said.
The ATO said individuals could choose to take all of the excess contributions out of their super fund, as well as 85 per cent of the associated earnings, and include this in their income tax return. This is the path taken by the vast majority of taxpayers. Alternatively, taxpayers may be required to pay the excess contributions cap tax. Excess contributions are taxed at the highest marginal tax rate, plus the Medicare levy.
Mr Davison said the new year period was an ideal time for savers to check their super balances and the amount of after-tax and before-tax money they have contributed to super since July 1. In addition to the $1.6 million threshold for making non-concessional contributions, the amount of after-tax money that can be contributed has fallen to $100,000 a year from $180,000 a year. This applies to all superannuants.
Furthermore, the amount of pre-tax money that can be injected into super has fallen to $25,000 a year from $30,000, or $35,000 for those who are 50 years of age and above.
Mr Davison recommended savers check that any money they are salary sacrificing into super was on track so they would stay within the new contributions limits for 2017-18.
"Use Christmas and January as a time to check your run rate and make any necessary adjustments to your concessional contributions," Mr Davison said.
