Holley Nethercote's David Court outlines the current law regarding the taxation of excess superannuation contributions.
The taxation of excess superannuation contributions has been one of the more contentious areas of superannuation regulation in recent times.
Industry lobbying has been successful in having a number of significant changes made to the operation of the system.
These changes took effect from 1 July, 2013.
The tax treatment of superannuation contributions
Superannuation contributions are divided into two types for tax purposes:
- Concessional – essentially employer and deductible member contributions; and
- Non-concessional – essentially non-deductible member contributions.
Each type of contribution has a dollar cap that applies in each tax year.
The contribution caps
The contribution caps have undergone a number of changes over time and the caps for the 2013-14 tax year are used below.
Concessional contributions
The concessional cap is generally $25,000.
However, members over age 59 at 30 June, 2013 receive a concessional cap of $35,000. From 1 July, 2014 this higher cap will also apply to members over age 49 on the last day of the previous tax year.
Non-concessional contributions
The non-concessional cap is calculated as six times the 'standard' concessional cap and is, therefore, presently $150,000. It should be noted that for those older members with a $35,000 concessional cap, the non-concessional cap is still $150,000.
For members under age 65, the non-concessional caps for the following two years can be brought forward to give a single year $450,000 cap.
Note that no election by the member is actually involved. If the non-concessional cap is exceeded (even by one dollar), the 'bring forward' applies automatically.
It should also be noted that amounts in excess of the concessional contributions cap that have not been released by the superannuation fund count towards the non-concessional cap – leading to the possibility of a 93 per cent tax rate in situations where very large excess contributions are made.
Indexation
The contribution caps are subject to indexation from 1 July, 2014 based on increases in average weekly ordinary time earnings.
However, the indexation does not apply until the increase in the concessional cap will exceed $5,000.
At the same time the concessional cap is indexed, the non-concessional cap will increase by $30,000 so that it remains at six times the concessional cap.
The higher age based concessional cap of $35,000 is not indexed and will eventually (around 2018) merge with the indexed 'standard' concessional cap.
The consequences of exceeding the contribution caps
If these caps are exceeded then the consequences vary depending upon the type of excess contribution.
Concessional contributions
If the concessional cap is breached then the excess concessional contributions are included in the assessable income of the member and, accordingly, taxable to the member at his or her marginal tax rate. A tax offset will apply for the contribution tax paid in the fund.
The member will also be liable to an excess concessional contributions charge to neutralise any benefit that the member might receive from the excess concessional contribution being held in a concessionally taxed environment in the period up to the time that the member pays their own tax.
The rate of the charge is 3 per cent over the monthly average yield of 90-day bank accepted bills.
However, the member can, instead, elect to have the excess concessional contributions released from the superannuation fund. The fund must then refund the excess contribution to the ATO rather than direct to the member. This refunded amount will then constitute a refundable tax credit against the member's overall tax liability.
Non-concessional contributions
If the non-concessional cap is breached then excess contributions tax at the rate of 46.5 per cent is payable by the member. Members must withdraw the excess contributions tax from their superannuation fund.
Note also that a superannuation fund may not accept non-concessional contributions that are, in themselves, in excess of:
- for members under age 65, three times the non-concessional contribution cap; and
- for members between ages 65 and 75, the non-concessional contribution cap.
Therefore, the acceptance of an excessive non-concessional contribution by a fund will raise compliance issues for the fund (in addition to the tax issue for the member).
Dealing with an excessive contributions
In practice, inadvertent breaching of the caps has occurred for reasons such as:
- Contributions for one tax year being received in the following tax year (noting that the 28-day leeway after the end of a tax year that applies to superannuation guarantee contributions does not apply for excess contribution purposes).
- The halving of the caps from their original 2007 levels.
- Confusion as to what amounts constitute a contribution – they can include transactions such as expense reimbursement or debt forgiveness; and
- Co-ordination issues for taxpayers with multiple employers.
As excess concessional contributions are now, in effect, taxed at the marginal tax rate of the member, a breach of the concessional cap is unlikely to be of major concern to a member.
However, breaching of the non-concessional cap can result in a large excess contributions tax liability for a member.
Set out below are some mechanisms which are available to reduce or avoid an excess contributions liability.
Contribution refund
As mentioned above, a superannuation fund may not accept an excessive non-concessional contribution.
The trustee of such a fund must refund the contribution to the person that paid it – following which the fund is then treated as not having contravened the law by accepting the contribution in the first place.
However, this provision is likely to be of limited assistance as it will generally be invoked only if a particular contribution exceeds the $450,000 'bring forward' cap.
Contribution deferral
It may be possible in particular cases to avoid breaching the caps (or reduce the amount of the breach) through having the relevant fund 'move' contributions received in June of one tax year to the next tax year.
This requires the trustee of the fund to retain the contributions in an unallocated reserve until after the end of the tax year.
However, the contribution must then be allocated to the member's account before 28 July. In practice, this strategy would likely only be of use with an SMSF where the trustee/member unexpectedly received a contribution knowing that the member was already close to (or over) their cap.
ATO discretions
The ATO has a statutory discretion to either disregard excess contributions or reallocate them to another tax year.
However, the ATO may exercise such a discretion only if they consider that 'special circumstances' apply. In practice, it has proved difficult for taxpayers to satisfy this requirement.
A number of appeals from ATO decisions have been heard by the AAT, with the unsuccessful taxpayers considerably outnumbering those who were successful.
The ATO also announced in 2012 that it would consider using its administrative discretion to ignore a small breach of the concessional cap that leads to a breach of the non-concessional cap and results in a large tax liability.
The ATO will allow the excess contribution to be refunded to the taxpayer or permit the taxpayer to re-contribute the amount if excess contributions tax has already been paid.
This ATO concession is based on the de minimis principle (that it is a waste of the resources of the legal system to give attention to things that are negligible, trivial or trifling).
However, the ATO has not nominated any dollar amount as being the cut-off point. There are some indications that breaches in the thousands of dollar range may qualify.
David Court is a partner at Holley Nethercote Commercial & Financial Services Lawyers.
Originally published by SMSF Essentials.
