Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)Chapter 3 Reduction in the concessional contributions cap
Outline of chapter
3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax (Transitional Provisions) Act 1997 to reduce the cap on concessional superannuation contributions.
3.2 Schedule 3 also amends the ITAA 1997 to make consequential amendments to the level of the non-concessional contributions cap.
Context of amendments
3.3 Since 1 July 2007, concessional and non-concessional superannuation contributions have been subject to annual limits.
3.4 Concessional contributions are generally those which are included in the assessable income of a superannuation fund and include employer contributions (including superannuation guarantee and salary sacrifice contributions) and tax deductible personal contributions. Non-concessional contributions are generally those for which a deduction is not claimed.
3.5 For contributions made in 2007-08 and 2008-09 financial years, the concessional contributions cap was $50,000. In addition there is currently a transitional cap in place for those aged 50 and over, which allows them to make concessionally taxed contributions of up to $100,000 annually until 30 June 2012.
3.6 The non-concessional contributions cap is currently set at three times the concessional contributions cap.
3.7 In the 2009-10 Budget the Government announced that the concessional contributions cap will be reduced to $25,000 (indexed) for contributions made in 2009-10 and later financial years. The transitional cap (not indexed) will also be reduced to $50,000 for contributions made in the 2009-10, 2010-11 and 2011-12 financial years. These new limits are designed to ensure that superannuation taxation concessions are targeted appropriately.
3.8 The non-concessional contributions cap for the 2009-10 and later financial years will be six times the concessional contributions cap and will therefore be $150,000 in 2009-10. The non-concessional contributions cap was also $150,000 in the 2007-08 and 2008-09 financial years.
Summary of new law
3.9 The ITAA 1997 will be amended to reduce the concessional contributions cap from $50,000 to $25,000 (indexed) for concessional contributions made in the 2009-10 and later financial years.
3.10 This new contributions cap will be indexed annually to average weekly ordinary time earnings (AWOTE), rounded down to the nearest multiple of $5,000.
3.11 The transitional cap will be reduced from $100,000 to $50,000 and no indexation will apply. (The transitional cap is not currently indexed).
3.12 The non-concessional contributions cap will be six times the new concessional contributions cap.
Comparison of key features of new law and current law
| New law | Current law |
| The cap for concessional contributions to superannuation will be $25,000 per annum for the 2009-10 and later financial years, indexed to AWOTE, and rounded down to the nearest multiple of $5,000. | The cap for concessional contributions to superannuation is $50,000 per annum indexed to AWOTE, and rounded down to the nearest multiple of $5,000. |
| The transitional cap that applies to concessional contributions made by individuals aged 50 and over will be $50,000 per annum, for contributions made in the 2009-10, 2010-11 and 2011-12 financial years. | A $100,000 transitional cap applies annually to concessional contributions made by individuals aged 50 and over before 1 July 2012. |
| The annual non-concessional contributions cap will be six times the concessional contributions cap for contributions made in the 2009-10 and future financial years. It will be $150,000 in 2009-10. | The annual non-concessional contributions cap is set as three times the concessional contributions cap. It is $150,000 in 2008-09. |
Detailed explanation of new law
3.13 Since 1 July 2007 superannuation contributions have been subject to annual caps. Contributions in excess of the relevant caps are subject to an additional tax. This tax is imposed on the individual.
Concessional contributions cap
3.14 For the 2007-08 and 2008-09 financial years a cap of $50,000 per person per year continues to apply to concessional contributions made in those years. [ Schedule 3, item 1, paragraphs 292-20(2)(a) and (b) of the ITAA 1997 ]
3.15 For the 2009-10 financial year the cap will be $25,000. [ Schedule 3, item 1, paragraph 292-20(2)(c) of the ITAA 1997 ]
3.16 For the 2010-11 financial year or later financial years the cap will be worked out by annually indexing the 2009-10 financial year cap (that is, $25,000). [ Schedule 3, item 1, paragraph 292-20(2)(d) of the ITAA 1997 ]
3.17 The indexation factor will be the proportional change in AWOTE from the middle month of the December 2008 quarter to the middle month of the December quarter just before the relevant financial year. [ Schedule 3, item 7, subsection 960-285(3A) of the ITAA 1997 ]
3.18 The index number for a quarter will continue to be AWOTE. Thresholds will continue to be rounded down to the nearest multiple of $5,000 to ensure the thresholds remain in round figures.
Transitional arrangements for concessional contributions
3.19 A transitional concessional contributions cap currently applies to contributions made by individuals aged 50 or over any time between the financial years 2007-08 and 2011-12.
3.20 For the 2007-08 and 2008-09 financial years the cap will continue to be $100,000. [ Schedule 3, item 11, paragraphs 292-20(2)(a) and (b) of the Income Tax (Transitional Provisions) Act 1997 ]
3.21 The Income Tax (Transitional Provisions) Act 1997 will be amended so that for the 2009-10, 2010-11 and 2011-2012 financial years the transitional concessional contributions cap will be $50,000 [ Schedule 3, item 11, paragraphs 292-20(2)(c) to (e) of the Income Tax (Transitional Provisions) Act 1997 ]. This amount is not indexed.
Example 3.1
Garry is 55. His ordinary time earnings in the 2007-08 and 2008-09 financial years are $250,000. His employer makes superannuation guarantee contributions of $13,745 in 2008-09. In preparation for retirement Garry has been topping up his employer's compulsory superannuation guarantee contributions with additional salary sacrifice amounts up to the transitional concessional contributions cap which in the 2007-08 and 2008-09 financial years is $100,000.
In 2008-09 Garry's salary sacrifice contributions are $86,255.Example 3.2
Using the information from Example 3.1, in the 2009-10 financial year Garry will be subject to the reduced transitional concessional contributions cap of $50,000. During this year, his employer makes superannuation guarantee contributions. To avoid an excess contributions tax liability, Garry will need to reduce his salary sacrifice contribution by at least $50,000.Example 3.3
In 2009-10 Lola earns $55,000, all of which is ordinary time earnings. Lola is 42. Her employer makes $4,950 of compulsory superannuation contributions to a complying fund.
Lola's concessional contributions cap in 2009-10 is $25,000.
If Lola was to enter into an effective salary sacrifice agreement with her employer, Lola could make additional contributions of $20,050 into her superannuation fund and not breach the concessional contributions cap.
Concessional contributions to a defined benefit interest
3.22 There is a separate arrangement for calculating concessional contributions in relation to defined benefit interests. This is because employer contributions into these interests are not always attributable to individual members.
3.23 The amounts that are counted towards the concessional contributions cap in relation to a defined benefit interest are referred to as notional taxed contributions.
3.24 Special arrangements will apply to certain members with a defined benefit interest on 12 May 2009 where notional taxed contributions for that interest exceed the concessional contributions cap in the 2009-10 or later financial years. In this case, the notional taxed contributions for that interest will be taken to be at the maximum level of the person's cap. [ Schedule 3, item 4, subsection 292-170(8) of the ITAA 1997 ]
3.25 Similar arrangements for defined benefit members applied when the caps were first introduced in 2007.
3.26 This arrangement will be subject to the conditions (if any) set out in the regulations and will only apply to notional taxed contributions reported for the 2009-10 or later financial years. [ Schedule 3, item 4, paragraph 292-170(8)(d) of the ITAA 1997 ]
3.27 The arrangement will continue to apply if the defined benefit interest is transferred to a successor superannuation fund that retains equivalent rights for members. [ Schedule 3, item 4, subsection 292-170(9) of the ITAA 1997 ]
Example 3.4
Donna is 45 and has had an interest in a defined benefit fund since 1 July 2006. In the 2007-08 and 2008-09 financial years Donna had notional taxed contributions of $30,000. The grandfathering provisions in these years did not need to be activated as Donna's notional contributions were below the concessional contributions cap of $50,000.
During these financial years Donna also made salary sacrificed contributions of $20,000 (the difference between the concessional contributions cap and her notional taxed contributions).
In the 2009-10 financial year Donna's notional taxed contributions are $30,000 and therefore in excess of the concessional contributions cap. However, as Donna was a member of the fund on 12 May 2009 the grandfathering provisions will provide that her notional taxed contributions will be taken to be equal to the cap in that year and future financial years provided that the defined benefit interest meets and continues to meet the necessary conditions set out in the regulations. If this is the case, Donna's notional taxed contributions ($30,000 in 2009-10) will be taken to equal $25,000 meaning that Donna will not breach the concessional contributions cap as a result of these contributions.
However, Donna will no longer be able to make salary sacrifice contributions without exceeding the cap.
Non-concessional contributions cap
3.28 For the 2007-08 and 2008-09 financial years the non-concessional contributions cap will continue to be three times the concessional contributions cap for the year. [ Schedule 3, item 2, paragraphs 292-85(2)(a) and (b) of the ITAA 1997 ]
3.29 For the 2009-10 and later financial years the non-concessional contributions cap will be set at six times the new (indexed) concessional contributions cap [ Schedule 3, item 2, paragraph 292-85(2)(b) of the ITAA 1997 ]. This will mean the non-concessional cap for the 2009-10 financial year will be $150,000, the same as the current level for the 2007-08 and 2008-09 financial years.
3.30 The existing provisions which allow an individual to bring forward two years worth of non-concessional contributions will remain unchanged.
3.31 Together with no change to the non-concessional contributions cap for the 2007-08 and 2008-09 financial years, this means that where an individual has triggered the bring-forward provisions in a financial year prior to the 2009-10 financial year, the non-concessional cap as determined in the first year will continue to apply even where the bring-forward period includes the 2009-10 or 2010-11 financial years.
Example 3.5
Rebecca aged 55, makes non-concessional contributions totalling $200,000 in the 2008-09 financial year. Having not already triggered the bring-forward in the previous two years, a bring-forward is triggered.
Rebecca can make additional non-concessional contributions of $250,000 over the following two financial years (2009-10 and 2010-11) without having excess contributions.