- On April 12, 2017
On 1 July 2017, the maximum concessional contribution cap is reducing to $25,000 per annum. Currently employers can make annual deductible contributions of up to $35,000 for employees aged 49 or more on 30 June of the previous financial year and $30,000 for younger employees.
What makes up a concessional contribution?
- Superannuation Guarantee Contribution
- Additional Employer Superannuation Contributions
- Salary Sacrifice Contributions
- Employer-paid insurance premiums
- Employer-paid administration fees
- Personal contributions on which a tax deduction is claimed
This reduction will impact older employees who have the capacity to save more and who wish to salary sacrifice more contributions into superannuation. Salary sacrifice contributions are treated as employer contributions and are taken from an employee’s pre-tax salary. Employees who currently salary sacrifice to the extent that total concessional contributions exceed $25,000 will either need to reduce their superannuation contributions or make after-tax contributions.
In addition, generous contribution levels (above minimum superannuation guarantee requirements) and/or generous employer-funded insurance benefits provided to employees within a superannuation fund from some employers may be causing caps to be breached.
Many employers pay for insurance cover for their employees as an employee benefit. Insurance premiums for cover provided within the superannuation environment are treated as superannuation contributions and therefore do not attract FBT. Insurance benefits are concessionally taxed as superannuation benefits. Some employers choose to provide benefits via a superannuation fund for ease of administration. However, because the premiums are treated as employer superannuation contributions they count towards an employee’s concessional contribution cap of $25,000 per annum. For many employees, insurance premiums will be low and the individual will not be aiming to maximise their concessional contributions. However, for those who are nearing retirement age and aiming to salary sacrifice additional superannuation contributions it can be a very different situation.
For more highly paid employees, the concessional cap can easily come into play. The following example illustrates three possible situations for an employee on an annual salary of $250,000 whose employer pays for insurance cover in the superannuation fund on top of superannuation guarantee contributions (SGC). We have considered the case where the employer pays SGC equal to 9.5% of salary and another where the SG contributions are based on the 2017/18 maximum superannuation contribution base (MSCB) of $52,760 per quarter. In each case the employer is paying for insurance premiums for a moderate level of cover on top of SGC and it is assumed that the employee is aged in their 50’s.
As demonstrated, the concessional cap can be breached even if the employee makes no salary sacrifice contributions to superannuation. The situation can be even worse for the older employees, especially those with IP cover, as insurance premium rates increase significantly above age 50.
For these more highly paid employees, the additional 15% tax on superannuation contributions for those with adjusted taxable incomes (for many people salary plus employer superannuation contribution plus any fringe benefits) over $250,000, must also be taken into account.
What can employers do?
Firstly, it is important to understand what insured benefits are being provided via a superannuation fund, the cost for each employee and the likely impact on their financial positions. Consider whether the benefits continue to be appropriate and if they are best situated within the superannuation environment, weighing up the various advantages and disadvantages which will be different for each employer and each group of its employees. Some of the considerations may involve benchmarking benefits, considering taxation implications, ease of administration and communication. Even if the concessional caps will be breached, the employer can continue to pay for cover, with the excess above the cap being taxed at maximum marginal rates and then treated as non-concessional contributions. Importantly, ensure that benefits and possible implications for employees are being communicated adequately, encouraging employees to consult a financial adviser who can take account of their total financial position and explain it to them.
For highly paid employees, provision of IP cover outside of superannuation would generally be financially attractive for the employees. For death/TPD the financial attractiveness will vary depending on the individual’s circumstances.
Is there a role for superannuation funds?
Ideally superannuation funds and their major employers would liaise and agree on how insured benefits can best be provided for different groups of employees of each employer.
Some individuals, including senior decision makers of fund employers, will be impacted in less than three months so early action is recommended to identify whether this is likely to be an issue for your members so that there is time to consider the alternatives.