The Government may be talking the talk with respect to simplifying superannuation, but according to Liz Westover its actions on excess concessional contributions suggest it is not walking the walk.
At a time when Australia’s superannuation system requires simplification to assist in restoring the confidence of Australians saving for their retirement, the exposure draft issued by Treasury in December for the refund of excess concessional contributions serves to highlight that the much-needed simplification simply isn’t happening.
In fact, quite the opposite seems to be taking place.
The excess contributions tax (ECT) is an onerous and poorly devised tax that has no equivalent within the tax regime.
No other piece of tax legislation in Australia imposes such a significant, unreasonable penalty for breaches of law, nor denies taxpayers any real opportunity to rectify mistakes.
Under ECT, individuals are severely penalised for putting too much money into their superannuation funds, and its design is such that minor or unintentional breaches can trigger vastly disproportionate penalties.
Under a strict application of the law, an excess concessional contribution of a single cent could trigger a $70,000 tax liability.
The irony is that the reporting mechanisms for superannuation contributions work in such a way that no-one could avoid being detected for excess contributions.
Therefore, people are not going to make excess contributions thinking they will get away with not paying ECT. Where excess contributions are made, it is almost always a result of an inadvertent error.
To impose the existing penalties on individuals who are simply trying to enhance their retirement savings within the rules is both unreasonable and unjust, and certainly not in the public interest.
As part of the 2011-12 Federal Budget, the government announced a one-off opportunity to refund up to $10,000 of excess concessional contributions to provide some relief to those who were exposed to ECT liabilities.
On the face of it, it appeared to be a reasonable first step in the removal of ECT, particularly in light of the government’s budgetary constraints following its commitment to return to surplus by 2012-13.
However, the devil is always in the detail, and with the December release of Treasury’s exposure draft legislation that would give effect to the Government’s budget announcement for the refund, the implications became much clearer.
The legislation offers a one-off opportunity for individuals to be refunded for their first breach of the concessional caps from the 2011 financial year onwards, and is only available where contributions are in excess by less than $10,000.
Excess contributions over $10,000 would mean people lose any opportunity now and in the future for any refund.
If a person does not accept a refund offered to them, they would fail to qualify for future refunds should they be unfortunate enough to breach the cap again.
If someone has commenced an income stream in their superannuation fund, they would not qualify for a refund either.
Furthermore, the Commissioner of Taxation has the power to amend or revoke a determination issued for a refund under a range of circumstances that could apply either before or after a payment of the refund has been made.
Clearly, it is not a straightforward piece of legislation.
Likewise, the process is complex. Upon identification of excess contributions, the Commissioner would issue an offer to the relevant individual to refund the excess amount.
If the offer is accepted, the Commissioner would issue a release authority to the individual’s superannuation fund to enable the fund to release the amount identified in the authority.
As the fund will have already paid 15 per cent tax on the contributions, they would only be required to release 85 per cent of the excess contribution. Refund amounts would be forwarded back to the Commissioner, not directly to the individual.
The Commissioner would then amend the individual’s income tax return for the year in which the contribution was originally made to include the excess contribution as assessable income.
That is, the amount would be assessable to the individual as if it had been received by them as income in the first place.
The individual would receive a tax offset for the 15 per cent tax already paid by the superannuation fund as contributions tax, and the Commissioner would deduct from the refund any balance of tax owing on the amended assessment.
The catch, however, is that under these proposals the Commissioner is also able to deduct from the refund any other amounts owing to the government, albeit subsequent years’ or other tax liabilities to the Australian Taxation Office or other government agencies.
The result would be that the individual may not ever actually receive the refund. A more reasonable outcome would be for the balance of the refund to be given directly to the individual.
Ultimately, the availability of relief under these new provisions is so limited that it does little to truly address the inequities of ECT.
In reality, it further complicates an already complicated piece of tax legislation. The ECT regime needs a serious and significant overhaul.
The government has offered a ‘band-aid’ solution that, due to its complexity and lack of positive impact, is likely to further undermine the confidence Australians have in the superannuation system – and risks further disenfranchising the very people it intends to support.
Liz Westover is head of superannuation at the Institute of Chartered Accountants in Australia .
