Q: Before Budget night, I received advice from my Financial Planner to invest $180,000 into Superannuation this Financial Year and then $540,000 next Financial Year. I haven’t made any contributions yet. Given the Budget announcement of a lifetime limit on Non-concessional Superannuation contributions of $500,000 what should I now do?
A: It is important to recognise that at this stage the changes announce in the Budget are proposals. These proposals will require the passage of legislation before they are implemented. It is impossible to be definitive about the consequences until we receive the fine detail.
Technically you can follow the advice of your Financial Planner. Superannuation funds operate under the current legislation and the prevailing Superannuation fund rules. However if the proposed changes were to be legislated, they would be effective from 3 May (Budget night) and as such, contributions made that would breach the revised caps would need to be dealt with in accordance with the new law.
The current penalty arrangements for exceeding the Non-concessional Cap would apply under the proposed changes. This would mean that contributions received to a fund in excess of the new cap retained within the Superannuation fund would be subject to tax at the top marginal tax rate unless the excess is withdrawn from the fund.
If the funds are withdrawn from the fund, the penalty tax would only be applied to notional earnings on the excess portion whilst it was in the fund. The notional rate of return is currently 9% and is applied for a period of around 18 months and is included in your tax return for the year the contribution is made and taxed at your marginal tax rate.
Note the proposed cap will apply to Non-concessional contributions received after 1 July 2007 and penalties would only apply to contributions received in excess of the cap after Budget night. So if you exceed the $500,000 cap prior to Budget night you wont be penalised but you wont be able to make further Non-concessional contributions.
At this stage we have are unsure how the ATO intend to monitor when Non-concessional contributions have been received to a fund. You may need to check with your Super fund provider to see if they can furnish this data. For Self-Managed Super Funds, this may be problematic as Trustees are only obliged to retain records for 5 years. The ATO have advised they have reliable data back to 1 July 2007, presumably they will be in a position to assist Superannuation Trustees and members to avoid breaching the cap into the future.
If you are confident that the proposed changes will come into law, then it would be prudent to remain below the $500,000 lifetime Cap. However if you felt that the changes may not pass or may be modified in some way, then you could make contributions in accordance with the current legislation. The consequences of exceeding the revised cap are known and that would be the risk that you take.
In the absence of legislation or new rules, your Financial Planner shouldn’t be in a position to advise you on this as it essentially is your call.