The treatment of excess superannuation contributions has been a contentious issue for some years, with many people falling victim to the punishing excess contributions tax through inadvertently going over the limits. The reasons this can happen include an employer making contributions that may fall within a different financial year, expense reimbursement or debt forgiveness which is directed to super, or perhaps a pay increase giving rise to more salary sacrificed super than expected.
The situation has not been made easier by successive governments changing the contribution cap limits on a relatively frequent basis, which has made keeping within these limits an, at times, elusive task.
But whatever the reason, breaches of the concessional and non-concessional super contribution caps has been an all too familiar apprehension for many pre-retirees, faced with having to pay an extra tax on the excess.
In 2013-14 the annual concessional contributions cap is set at $25,000. A higher cap of $35,000 applies for those aged 60 and over. These contributions are generally made from before-tax employment income, and are tax deductible to the employer making the contribution. Some scope also exists for concessional contributions to be made by an individual on their own behalf where they are not an employee. The deductibility for these personal superannuation contributions are subject to additional rules (ask this office if you’d like to know more).
Non-concessional contributions are predominantly made up from after tax income, and can include personal contributions that have not been claimed as a deduction, and spouse contributions. Excess concessional contributions are counted towards the non-concessional cap. The non-concessional cap is set at six-times the concessional cap, and is therefore $150,000 (even for the age-based variation mentioned above).
For members aged under 65, the non-concessional cap for the following two years can be brought forward, allowing for a $450,000 cap for the three year period. But there is no member election actually involved — if the non-concessional cap is exceeded (even by one dollar), the “bring forward” applies automatically. The hidden danger is that where a non-concessional contribution is brought forward unexpectedly from a future income year, this may affect any planned use of the full bring forward amount in a future year, potentially resulting in excess contributions.
Excess concessional contribution relief
A recent change has relieved some of the burden of the previous excess concessional contributions regime. From July 1, 2013, excess concessional contributions no longer incur excess contributions tax, but instead will be included in the taxpayer’s assessable income for the corresponding year and taxed at their marginal tax rates. For the 2011-12 and 2012-13 income years, if you are eligible, there is a once-only offer to have the excess concessional contributions refunded to you (up to an annual $10,000 limit) and you pay tax on this at your marginal rate.
With the latest reform however, you will also be liable for an “excess concessional contributions charge”. This is designed to neutralise any benefit that a super fund member may receive from the excess contribution being held in a concessionally taxed environment for the period up to the time the consequent tax return is processed. The rate of the charge is 3% over the monthly average yield of 90-day bank accepted bills.
A super fund member may elect to have excess concessional contributions released from the fund. An amount net of 15% tax is released by the fund to the member. A refundable tax credit equal to the amount withheld by the fund is available to the member for use against their overall tax liability.
As excess concessional contributions are now, in effect, taxed at the marginal tax rate of a member, a breach of the concessional cap is unlikely to be of major concern. However, breaching the non-concessional cap is a different story, and can result in a large excess contributions tax liability for a member.
Non-concessional cap breaches — what can be done
If the non-concessional cap is breached the member is liable for excess contributions tax at the rate of 46.5%, which must be withdrawn from the super fund.
It is possible for excess contributions to be “moved” from one tax year to the next, however the trustee of the superannuation fund must not only retain the contributions in an unallocated reserve until the next income year, but must allocate that money to the member’s fund by July 28.
The Tax Office does have some discretion to disregard or reallocate excess contributions to another year; however there must be special circumstances that it determines will “lead to an outcome that is unjust, unreasonable or otherwise inappropriate”.
To apply to have excess contributions disregarded or reallocated, taxpayers must either complete a form from the Tax Office (ask us for a copy) or at least apply in writing including all of the information that is set out in that form. Ask for our assistance if this is your preferred option. The other thing to keep in mind is that this will mean the cap that applies to a member in the following year will be reduced by this reallocated amount.