Contributions caps and taxation of contributions
There is generally no limit on the amount of contributions which can be made to superannuation. There are, however, limits on the amount of contributions which can be made and still receive concessional tax treatment. These limits are known as contributions caps. The current restrictions to contributing to super were put in place from 1 July 2007. There are two 'contributions caps' which restrict the amount that may be contributed to super by, or on behalf of, an individual within a financial year and once either of those limits is exceeded an individual may incur excessive tax.
Contributions for which a tax deduction is not available are called non-concessional contributions (NCCs).
A non-concessional contribution is generally a super contribution made to a complying super fund which is not included in the super fund's assessable income.
Contributions included in the non-concessional contributions cap
|Personal contributions for which no valid deduction notice is submitted and acknowledged; or where a valid deduction notice is submitted but a tax deduction is unable to be claimed or is denied.|
|Excess concessional contributions1.|
|Spouse contributions (counted toward receiving spouse's cap).|
|Contributions made on behalf of a child under age 18 by anyone other than the child's employer. (counted towards receiving child's cap).|
|100% of transfers of overseas pensions into Australian super funds within six months of Australian residency.|
|A portion of transfers of overseas pensions into Australian super funds after six months of Australian residency. The portion included is: (gross transfer - applicable fund earnings) (see section 10.5).|
|Proceeds from the sale of a small business that are contributed to super if the amount did not qualify for the 15-year or retirement CGT small business exemptions.|
|Contributions that are included in the assessable income of a fund but for which a tax deduction was disallowed by the ATO.|
|Any contributions made after 10 May 2006 to a fund while it was non-complying are counted to the member's non-concessional cap in the year the fund regains its complying status.|
|Non-assessable contributions allocated to a reserve, then allocated to the member's benefits in accordance within the timeframe specified in the SIS Regulations.|
Rodney gives a notice to his fund indicating that he intends to claim his personal contribution of $10,000 as a tax deduction. This claim is later denied by the Tax Office as Rodney did not satisfy the '10% rule'. Rodney has not lodged a notice of variation, so his fund will treat his personal contribution as assessable income which will be taxed at 15%. However, these contributions will be counted towards Rodney's non-concessional contributions cap.
1. However, a client's non-concessional contributions for the financial year are reduced by the grossed up value of excess concessional contributions made from 1 July 2013 that they have elected to release from super.
Non-concessional cap exclusions
The following contributions are specifically excluded from the definition of non-concessional contributions.
Contributions excluded from the non-concessional contributions cap
|Rollovers within the Australian super system.|
|Proceeds from the disposal of assets that qualify for the small business 15-year exemption or the $500,000 retirement exemption that are contributed to super are exempt from the non-concessional cap as long as they are counted towards, and don't exceed, the lifetime CGT cap of $1.355 million for 2014-15 (indexed and rounded down to the nearest $5,000) (see Chapter 8).|
|Contributions arising from structured settlements or orders for personal injuries|
|Contributions to constitutionally protected funds other than contributions included in the contributions segment.|
|An amount that a trustee of a public sector super scheme that came into operation before 5 September 2006, chooses to not be included in its assessable income.|
Contributions from personal injury payments
Payments arising from structured settlements or orders for personal injuries that are contributed to superannuation are excluded from the non-concessional contributions cap. However, for this exclusion to apply, the payment must meet the requirements of section 292-95 of ITAA 1997, as follows:
Type of payment
- The payment is for the settlement of a claim for compensation or damages for, or in respect of, personal injury suffered by the client and the claim is based on the commission of a wrong, or on a right created by statute. The settlement must take the form of a written agreement between the parties to the claim (whether or not the agreement is approved or endorsed by a court), or
- The payment is for the settlement of a claim in relation to a personal injury suffered by the client under a law of the Commonwealth or of a State or Territory relating to workers' compensation, or
- The payment is made following an order of a court for compensation or damages for, or in respect of, personal injury suffered by the client and the claim is based on the commission of a wrong, or on a right created by statute. The order cannot be one approving or endorsing an agreement as set out in point one.
A claim for compensation or damages referred to above has to be made either by the client or their legal personal representative (LPR).
Note that if a claim is both:
••for compensation or damages for personal injury, and
••for some other remedy (eg compensation or damages for loss of, or damage to, property)
only the amount of the payment that relates to compensation or damages for personal injury and identified in a settlement agreement or court order as being solely in payment of that compensation or those damages, can be contributed to super as a personal injury payment.
The above definitions may result in a relatively broad interpretation of which payments are made 'for, or in respect of' personal injury and could include amounts paid for pain and suffering, for loss of future earnings, for future medical expenses, home modifications etc. However, specific legal advice should be sought to ascertain exactly which amounts paid to a particular client are eligible personal injury payments.
The contributions must be made within 90 days of the later of:
- the day the client received the personal injury payment
- the day an agreement for settlement of the personal injury payment was entered into
- the day on which a court order for the personal injury payment was made.
- Two legally qualified medical practitioners have certified that, because of the personal injury, it is unlikely that the client can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training. This effectively means that the client must be totally and permanently disabled to make a personal injury payment to super that is excluded from their non-concessional cap.
- Either before or when the contribution is made, the client or their LPR provides a completed 'contributions for personal injury' form to their super fund.
In addition to gathering details relating to the payment, the 'contributions for personal injury' form requires a declaration by the client or their LPR that the contributions were derived from a personal injury payment received by the client or the LPR and that the contributions meet the requirements of Section 292-95 of ITAA 1997 (and as outlined above).
We would therefore suggest that, in providing advice to a client about the contribution of personal injury payments, financial advisers recommend that the client also seek legal and/or tax advice as to whether they meet the requirements of Section 292-95 of ITAA 1997.
Last modified: Friday, December 12, 2014