Australian Financial Review
5 July 2018
Over the past decade being penalised for exceeding superannuation contribution limits has been a major risk for members of super funds not aware of these important restrictions.
Even though a new set of rules has been introduced with changes to these limits, the July 1 start to the 2018-19 financial year has brought with it a continuing risk of having to pay additional tax.
The key reason, says superannuation legal expert Daniel Butler, of DBA Lawyers, is because super’s contribution rules continue to be far more complex than they need to be, creating ongoing risks for those who are not familiar with them.
The unfortunate circumstances surrounding retiree Colin Ward, featured in The Australian Financial Review last month, are an extreme example of someone caught by making excess contributions, given the $209,250 tax penalty he suffered. This penalty was imposed in 2010-11 for breaching the after-tax (or non-concessional) contribution bring-forward rules.
But Ward was just one of more than 100,000 super taxpayers hit with excess contribution tax that raised more than $550 million in revenue, according to Australian Taxation Office (ATO) statistics quoted in a 2014 review of excess contributions by the Inspector-General of Taxation.
His case continues to be topical because after unsuccessfully exhausting various legal avenues to have the penalty overturned – the most recent to the Administrative Appeals Tribunal arguing that special circumstances should have existed that allowed the tax office to disregard them or allocate them to another year – legal experts came up with a new suggestion: applying to Assistant Finance Minister David Coleman for an “act of grace” government payment as a way of recovering his super.
Opening the floodgates
While this is certainly a course of action he could pursue, says Graeme Colley, an executive manager at self-managed superannuation fund (SMSF) administrator SuperConcepts, it might be difficult. If it’s successful, there is no reason why many others could not make a similar claim.
Although his contributions were made to an SMSF, excess contribution penalties have claimed numerous “victims” in all types of super funds. The contributions have been controversial because sometimes it has only taken a very small amount of excess to lead to a significant tax bill due to the complex calculations that can be involved. There was one case before the changes in mid-2013 where a $10 excess amount gave rise to a tax liability of over $70,000. A taxpayer triggered his bring-forward rule by going over his limit by only $10.
Butler says the main thing highlighted by trying to argue for special circumstances treatment of excess contributions is how strict, inflexible and complex the law that enforces this area not only happens to be, but also continues to be.
While there have been changes under new legislation that came into force last July 1 – such as the reduced entitlements to make both before- and after-tax contributions – the overall complexity of the contribution rules bewilders him. Butler has been working in the superannuation and tax area for more than 30 years and considers most people would not understand the complexity of the rules – even most ATO officers.
The new rules, he says, are still far too complicated for what is needed and should be more reasonable, especially when it comes to entitlements that seek to correct honest mistakes.
How the rules work
So what are the new rules? The just completed 2017-18 financial year and the new 2018-19 financial year will see the concessional contribution limit set at $25,000 while the after-tax or non-concessional limit (also described as the non-concessional cap or NCC) is four times that, or $100,000.
Where the concessional limit exceeds $25,000 – which could be from a variety of sources like an employer (or multiple employers) and salary-sacrifice contributions you may choose to make – such amounts can be paid back to you as taxable income with a 15 per cent tax offset that recognises the tax deducted when the super went into the fund.
One complex aspect of excess contributions , says Butler, is that where you recognise you have made a mistake you can’t just withdraw the money.
If an excess concessional contribution amount is made, the intuitive course of action might be to withdraw this as soon as possible. But doing this could result in you being penalised on the grounds you have withdrawn money from your super when you were not eligible to do so. In order to withdraw money from super, it is stuck there until you have satisfied a “condition of release”.
A condition of release when you exceed a concessional contribution is a release authority from the ATO. Butler describes this authority as a “get out of jail card”.
The release authority is a mechanism that allows you to withdraw money from your super – especially important if you have to pay tax at your marginal tax rate (including the 2 per cent Medicare levy) on the amount of any excess contribution. This can be reduced by a 15 per cent tax offset.
Follow the protocol
If by mistake you have made excess concessional contributions, this is how the system works: you have to wait until the member’s annual tax return and the tax return for the super fund have been prepared and then assessed by the ATO. Where an excess has been picked up, you will then get an excess contributions determination notice and a release authority.
Where you elect to have the excess released, you can have up to 85 per cent of the excess concessional contribution withdrawn but 100 per cent of the excess amount must still be included in your assessable income for the financial year the contribution is made. The election is irrevocable and must comply with certain requirements. If an SMSF is involved, the fund’s trust deed must allow the excess contribution release authority system.
At the same time you are personally entitled to a 15 per cent tax offset on the excess amount.
One point to note about a liability for an excess contribution is that a special excess concessional contribution charge also applies. This interest charge of about 5 per cent begins on the first day of the financial year and ends on the day before tax under the individual’s first notice of assessment for that financial year is due to be paid (or would be paid if there were any to pay).
Failing to make an election to have the excess contribution released and paid back to you will see this amount not only taxed as excess income but measured against your non-concessional contribution (NCC) cap – in essence, the same amount is double counted.
Where your NCC cap happens to be nil because your total superannuation balance on the previous June 30 was above $1.6 million (members with more than $1.6 million cannot make any further NCCs), you face the prospect of paying tax at 45 per cent tax plus the 2 per cent Medicare levy on the excess amount. How excess NCCs will be taxed under the new rules will be the topic of my next column.