Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 63

Update on super changes, the levy and contribution caps

The two changes to superannuation announced in the Federal Budget, one of which is welcome news, were:

  • the way excess non concessional contributions are dealt with, and
  • the progressive increase of the Superannuation Guarantee will be delayed another year.

A third announcement, the 2% debt levy, is already encouraging the financial planning community to look at ways to avoid it (sigh).

In addition to these Budget changes, the Australian Taxation Office (ATO) recently put the market on notice that it will come down hard on taxpayers using leverage in a superannuation fund to circumvent the contribution limits.

Non-concessional contribution caps

The contributions caps in superannuation limit the amount of tax concessions anyone, no matter how wealthy, can receive from using a low-taxed superannuation fund. One of those limits applies to contributions which, in effect, have not been tax-deductible, and is considered a penalty. It has also been highly problematic for many.

When introduced in 2007, any contributions in excess of the limit were taxed to the member at 46.5%. While that extra tax on excess contributions was said to recapture any tax concessions that had been derived from having the excess in the fund, it was more in the nature of a penalty tax.

Indeed, through one of the other rules relating to this contributions limit, it was not unusual for people to make contributions, say, two years ago and without fully appreciating what they had done earlier, make a contribution now that resulted in an excess non-concessional contribution and a 46.5% tax bill on that excess. It is with some relief, and probably six years too late, that these rules are now changing for the better.

From 1 July 2014 it is proposed that a person who contributes non-concessional contributions in excess of the cap will be required to take it out of the fund. No more 46.5% taxes.

Super Guarantee increase delayed

The increase in the Super Guarantee payment from 9% to 12% will be delayed a year. The super guarantee will not reach 12% now until 2022. However, the increase from the current 9.25% to 9.5% in 2014/2015 will go ahead, and it will remain at this level for four years until the end of the 2017/2018 financial year.

Dealing with the 2% debt levy

I never cease to be amazed by the ingenuity of the financial planning profession (of which I am part, I feel obliged to add). Within a few days of the Government announcing taxpayers over $180,000 pa will be charged an additional 2% income tax as a levy to cover Australia’s debt position, plans surfaced on how to manage around it.

The 2% increase will mean that the highest marginal tax rate for those affected, excluding the Medicare levy, will now be 47%, rather than 45%. However, the FBT rate is staying at 45% until at least the 2014/2015 financial year. The proposed scheme to avoid the levy is to salary sacrifice into taxable fringe benefits, which will be taxed at 45% rather than 47% had it been paid in cash, until 31 March 2015 (the commencement of the new FBT year). 

Leveraging around the contribution limits

There has been one other significant tax issue related to superannuation that does not come out of the budget. The ATO has put the market on notice that it is not happy with people using leverage in a superannuation fund to overcome the contribution limits.

In one extreme example, three wealthy brothers all over age 60 who each set up an SMSF then loaned $10 million to it interest-free. The three SMSFs would then co-invest in a $30 million commercial property.

There is no deeming of the interest free loan as being a contribution so there were no contribution limit problems and as each brother was over age 60, their SMSFs were in pension mode and no tax was being paid on any rent or gain on sale from the commercial property.

The only risk being run was if they died without a Death Benefit Dependent, when tax would be payable on any benefit payment.

In any case, the ATO is now signalling that this kind of structuring is problematic. Briefly, the ATO is suggesting that the rental income and indeed, any gain made by the SMSF on sale, will be taxed to the fund at 46.5%. Some tax professionals are not sure the ATOs technical analysis of these types of transactions is correct. However, they take the view that the more likely result would be the application of the general anti-avoidance rule, which would seem to directly catch this practice.

Importantly, the views expressed by the ATO are a message to the market that it does have serious concerns with using leverage to get around the contribution limits.

This information is general in nature and readers should seek their own professional advice before making any financial decisions.

 

Gordon Mackenzie is a Senior Lecturer in taxation and business law at the Australian School of BusinessUNSW.

 


 

Leave a Comment:

RELATED ARTICLES

Are you paying tax by not starting a super pension?

Meeting the work test for contributions

An SMSF inequity that cries out for attention

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Latest Updates

Shares

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Superannuation

When you can withdraw your super

You can’t freely withdraw your super before 65. You need to meet certain legal conditions tied to your age, whether you’ve retired, or if you're using a transition to retirement option. 

Retirement

A national guide to concession entitlements

Navigating retirement concessions is unnecessarily complex. This outlines a new project to help older Australians find what they’re entitled to - quickly, clearly, and with less stress. 

Property

The psychology of REIT investing

Market shocks and rallies test every investor’s resolve. This explores practical strategies to stay grounded - resisting panic in downturns and FOMO in booms - while focusing on long-term returns. 

Fixed interest

Bonds are copping a bad rap

Bonds have had a tough few years and many investors are turning to other assets to diversify their portfolios. However, bonds can still play a valuable role as a source of income and risk mitigation.

Strategy

Is it time to fire the consultants?

The NSW government is cutting the use of consultants. Universities have also been criticized for relying on consultants as cover for restructuring plans. But are consultants really the problem they're made out to be?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.