Baked in super contributions caps to burn high income earners

Author: Richard Webb, Policy advisor - Financial planning and superannuation, CPA Australia

Unless superannuation contributions caps are updated, high-income earners will be forced to breach the concessional contributions cap from as early as 2024-25, according to CPA Australia modelling.

Various limits and thresholds are baked into the superannuation system to ensure that Australia’s tax-advantaged superannuation environment is not misused. Although similar in effect, they are not identical, reflecting slightly differing policy aims. Some provide blunt limits on contributions, while others are “progressive” in nature and apply only to high income earners. 

The concessional contributions cap, for example, is intended to limit the total amount a taxpayer can contribute to their superannuation on a low-tax basis each year. This cap will increase with indexation to $27,500 annually from July 2021. Anything more is penalised, with tax payable on the excess amount at the taxpayer’s marginal rate.

The concessional contributions cap doesn’t operate in isolation. Additional amounts which weren’t used by the member in the previous five years (but no earlier than 2018-19) can also be contributed, provided the member’s total superannuation balance limit that year is less than $500,000. 

In addition, non-concessional contributions (which include excess concessional contributions) are subject to a limit of $110,000 annually from July 2021. Under the bring forward rule, members may contribute up to three years’ worth of contributions in one hit.

And then there’s the total superannuation balance limit, which increases to $1.7 million in July 2021. This is designed to limit Australians contributing additional amounts into superannuation. As such, it has multiple uses for restricting contributions into superannuation.

In addition to these blunt caps on contributions, there are “progressive” limits on superannuation contributions. 

High income earners are generally restrained from contributing large amounts to superannuation as part of Superannuation Guarantee (SG) requirements. For the 2021-22 financial year, the salary on which contributions must be paid is capped at $58,920 per quarter. This is equivalent to an annual salary of $235,680 as a “maximum earnings base” and capping annual SG contributions at $23,568.  

A higher amount of contributions tax is applicable to concessional contributions for Australians whose total income is greater than $250,000 – the “Division 293” tax. This was originally set well in excess of the maximum earnings base. From this, we can infer it was never intended to apply to Australians earning below that threshold.

What these examples show is that there are multiple superannuation caps doing the essentially the same job, even though they have different policy intentions. Given that some of the limits are indexed differently, it is inevitable that they may conflict with one another. This risk increases with the rise in the SG rate from the 1st of July.

CPA Australia examined what this means for an Australian who is on the maximum earnings base. That is, a person earning a total income of $235,680 (in 2021-22 financial year) from one job. Our modelling is based on historical rises in earnings (Average Weekly Ordinary Time Earnings; AWOTE). 

We found that there is a 15 per cent likelihood that this taxpayer will breach the concessional contributions cap in FY2023-24. For FY2024-25, the likelihood of a breach rises to 85 per cent. From FY2025-26 onwards, there is a 100 per cent likelihood that this taxpayer will breach the contributions cap. 

But that’s not the only way they’ll come a cropper.

An assessment for Division 293 tax would also be 15 per cent likely in FY2023-24. This would climb to 99 per cent in FY2024-25, with 100 per cent likelihood in later tax years. The additional tax bill for such a taxpayer in FY2024-25 is likely to be around $1,200, climbing to $2,200 in FY2025-26.

Forcing members to breach the contributions cap is a consequence of implementing multiple contributions caps. Unintended or otherwise, it’s the situation facing high income earners in the not too distant future unless the government addresses this issue.

The best policy solution would be to legislate that the concessional contributions cap and maximum earnings bases are synchronised. This would have the effect of ensuring that no Australians are forced into breaching the cap.

Additionally, the Division 293 threshold of $250,000 should be moved ahead of the maximum earnings base. Indexation of the threshold may be the ideal way to achieve this.

We need to reconsider the need for multiple similar but not identical caps on superannuation contributions. More broadly, duplication adds unnecessary complexity to Australia’s already complex superannuation system. It’s time that we addressed this as a systemic issue.