About a year after the government made some major changes that lowered the limits on concessional contributions that could be made to superannuation, there was a spate of people, including SMSF trustees, getting caught with excess contributions tax. Depending on if and how they made other contributions to their superannuation people could, in some instances, get whacked with tax rates on those amounts in excess of 90 per cent.
The lowering of the concessional limit from A$50,000, in some instances, to A$25,000 in all instances kicked in pretty quickly for those on higher incomes making large contributions to their self-managed superannuation fund (SMSF). The limit also included the 9 per cent (9.25 per cent from 1 July 2013) superannuation guarantee contributions, which some contributors forgot.
Timing was a huge issue. According to the Australian Taxation Office (ATO): “A contribution counts in the financial year in which your super fund actually receives the money.” But it also points out that an employer, under the superannuation guarantee rules, doesn’t have to make compulsory contributions for the final quarter of the financial year until July 28 (the next financial year).
Fortunately, I’ve never received an excess contributions tax notice for my SMSF, but ever since former Minister for Financial Services Bill Shorten got caught up in the old excess contribution system in 2011, and received a much higher tax bill on his superannuation than he would have liked, the system has been under the spotlight.
About a year ago, the government made some changes that enabled superannuants who had accidentally made an excess contribution to claim a A$10,000 refund for those contributions. Late last financial year the system was freed up even more.
Since 1 July 2013, anyone who gets caught up unintentionally can apply to have 85 per cent of that amount refunded to their superannuation fund, and the tax rate on that amount would be their marginal rate, minus the 15 per cent tax already paid by the superannuation fund. The steps are described below.
1. The super fund deducts 15 per cent contributions tax for concessional contributions (typically personal contributions claimed as a tax deduction and all employer contributions)
2. The super fund sends concessional and non-concessional contribution (NCC) information to the ATO (for an SMSF, through the annual return)
3. The ATO determines if a person has excess concessional contributions (ECC)
4. The ATO adds any excess concessional contributions to a taxpayer’s NCCs
5. If applicable, the ATO sends a determination to the taxpayer about excess concessional contributions (ECCs). The taxpayer has limited scope to appeal against the ATO’s determination
6. A taxpayer with ECCs can request that 85 per cent of these contributions be refunded by the super fund to the taxpayer, and taxed at their marginal rate less a 15 per cent tax offset for the tax paid by the super fund
7. For the ECCs that remain in the super fund, the ATO adds these contributions to a taxpayer’s taxable income and determines how much tax they must pay, plus a general interest charge for the late payment of personal income tax. This interest charge will be calculated from 1 July in the year the contribution is made until just before the tax is due. (In effect, ECCs will be taxed at marginal rates, not the highest marginal rate.)
8. The ATO determines if a person has excess NCCs (after adjusting for any refund of ECCs). The taxpayer has limited scope to appeal against the ATO’s determination
9. Excess NCCs are then taxed at 46.5 per cent and this tax must be paid out of the super system
All up, this is quite a radical change and applies to contributions made after June 2013. The A$10,000 refund system – which the ATO no doubt spent considerable money putting into place – will be gone after just one financial year.
What does it mean for the future?
The increase in the concessional contribution limit from A$25,000 to A$35,000, for those aged between 60 to 69 this financial year, and those aged at least 50 from next financial year, means that you are less likely to be caught up with an accidental excess concessional contribution in the first place.
I have read that some superannuation commentators have suggested that taxing ECCs at a taxpayer’s marginal tax rate is a “game changer” and that investors on moderate incomes, who don’t pay the highest marginal rate, might now be encouraged to make ECCs because they’re now taxed at a lower rate.
Personally, I don’t understand this view. ECCs will form part of your taxable component – potentially taxed if you take a super benefit out before age 60 or death benefits are paid to non-dependants. It is surely better to be paid salary, pay tax at your marginal rate and make non-concessional contributions, because these form part of your tax-free component, which is always tax-free when taken out of your super fund.
Tony Negline has worked in financial services for more than 25 years and has been heavily involved in self-managed super funds since mid-1994. He writes about SMSF matters for a wide range of audiences including accountants, auditors, financial advisers and SMSF trustees.