Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

Beware your super contribution limit

I RECKON superannuation is a great investment for retirement savings. But with new annual limits imposed on pre-tax super contributions, it's worth taking a look before 30 June to check that you haven't paid too much into super.

In the current 2009/2010 financial year, the annual limit for before-tax, or "concessional", super contributions has been halved. Concessional contributions are capped at $25,000 (down from $50,000 last year) for workers aged below 50, or $50,000 (formerly $100,000) for older workers.

Non-concessional contributions, those paid out of your own pocket, remain capped at $150,000 or $450,000 every three years for people aged under 65.

Exceeding these limits can be an expensive mistake. And while the concessional limits may sound generous, the annual total of $25,000 includes contributions made out of your before-tax income through salary sacrifice as well as your employer's compulsory contributions of 9% of your wage or salary.

If your concessional contributions go over $25,000 in the current financial year, the excess is taxed at 31.5%. That's on top of the normal 15% contributions tax paid by your fund. That could mean paying up to 46.5% on your pre-super contributions.

But it doesn't stop there. Any excess is then counted towards non-concessional contributions, and if you go over this limit, you could face yet another round of tax penalties, this time levied at 46.5% of the excess contributions. So all up, you could face penalty tax of up to 93% just for paying more into your super than you are allowed to.

As far as the tax office is concerned, not realising that the super limits have changed is no defence against penalty charges. And if your salary sacrifice arrangements haven't changed since last financial year, it could be easy to go over the thresholds, especially if your salary has increased.

You could also be at risk if you hold down more than one job, and two employers are contributing to your super.

That makes it worth checking your current year super contributions, including those made by the boss, to confirm just how much has been added to your super fund this financial year. If you're nearing the limit, it could be time to revise any salary sacrifice arrangements.

In case you're wondering, any penalty tax can be paid from the excess super contributions, so you shouldn't have to dip into your fund to pay the charges.

For many workers the prospect of paying too much into their super is pretty remote, and the contribution caps really only apply to high income earners.

This latest move, announced in May 2009, illustrates how the rules of super are constantly changing. But that shouldn't turn you off super. Remember, payouts from your fund are tax free from age 60, and there aren't too many other investments that can make that claim.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Financial Literacy Foundation and chief commentator for Money Magazine.



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