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Self Managed Super Fund (SMSF) Article
Avoiding the super sucharge
By Tony Negline.
This article may be out of date.
6th April 2005
Small super fund investors are vulnerable to paying too much super surcharge and there is only one way they can make sure they don’t overpay.
They need to know what data the Australian Taxation Office requires to work out if they have to pay the surcharge and they also need to know how the ATO works out how much surcharge is payable.
If you know what you are doing it is possible to avoid paying the surcharge for some time.
The claim is often made that the surcharge only applies to high income earners. This is not true. As we shall see, it often has to be paid by people who earn moderate incomes.
Moreover this tax has an incredibly complicated collection mechanism and super funds spend a fortune collecting it and this cost is paid by all super fund members including those who may never have pay the surcharge.
You will pay the surcharge if your Adjusted Taxable Income (ATI) for a financial year is greater than a figure called the “lower income amount” which is indexed every 1 July. For the 2005/05 year the lower income amount is $99,710.
For each dollar of ATI you earn above the lower income amount you pay more surcharge. The maximum surcharge rate is 12.5% and this rate cuts in at an ATI of $121,075. This figure is called the “higher income amount”.
What is your ATI? This is not an easy definition to understand even for super experts. For the majority of people it will be their taxable income, any employer super contributions, their personal super contributions claimed as a tax deduction and employer fringe benefits reported on their PAYG Payment Summary (formerly call a Group Certificate).
There are a few items not included in the above definition such as Eligible Termination Payments (ETP) received from super funds and unused long service leave or annual leave entitlements if a person ceased employment due to permanent invalidity, bona fide redundancy or an approved early retirement scheme.
The inclusion of employer fringe benefits in ATI from 1 July 1999 onwards has seen many moderate income earners unfairly caught in the surcharge net. This arises because a person’s employer might give them a relatively small fringe benefit which has to be reported and therefore included in ATI. For example staff above a certain level might be allowed to take a company car home at night and over the weekend. Often these cars are not allowed to be used personally but this ‘benefit’ must be reported.
The surcharge is paid on personal contributions claimed as a tax deduction and on all employer contributions. It also has to be paid on ETPs paid by employers upon termination of employment.
The amount of surcharge payable on contributions is relatively straight-forward for most superannuants. It is simply their surcharge rate multiplied by the dollar value of contributions. For some super funds, typically funded or unfunded defined benefit super schemes, an actuary estimates the amount of employer contributions.
However the rules which govern how the surcharge applies to employer ETPs is so horribly complicated that it is almost impossible to understand.
The administration of the amount of surcharge payable is also extremely difficult to fully comprehend.
Larger super funds send to the ATO information about contributions and other payments received during a quarter for each member. The ATO then takes this data and combines it with the same information provided by other super funds and material contained on a person’s tax return to work out if the surcharge is payable for that taxpayer. Every quarter the ATO tells large super funds how much surcharge has to be paid for each member. Huge complications arise when a person moves from one super fund to another fund before the ATO has worked out if the surcharge is payable. In fact some people move their super often to avoid paying the surcharge for as long as possible! The ATO ultimately catches up with them but at least the taxpayer has had the use of this money themselves.
Small super funds can elect to follow this same collection system however, these funds only have to pass information to the ATO once per year when they submit their regulatory return which is due by the end of March in the following financial year (unless the fund is a new fund).
Small super funds can also assess their surcharge liability however this much be paid by the end of October. In most cases there seems little point in paying the surcharge in advance and given the enormous complexity in working out taxable income levels, the danger of over-estimation is highly possible.
The surcharge tax raises about $1 billion per annum. Why is this tax so complicated? The best answer that the government can give is that superannuation is complicated and to ensure that everyone who has to pay this tax actually pays it, the system has to be just as complicated.
To work out the rate you pay the surcharge you need to calculate the following:
[(Adjusted Taxable Income – Lower income amount) x 12.5%] / (Higher income amount – Lower income amount)
Example: Assume ATI is $110,000 the surcharge rate is:
[($110,000 – $99,710) x 12.5%] / ($121075 – $99,710) = 1,286.25 / 21,365 = 0.06020 or 6.02%
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