HomeFree weekly newsletterFree newsletter archiveContact usLogin
Self Managed Super Fund (SMSF) Article
Super Contributions caught in a tax trap
By Tony Negline.
This article may be out of date.
9th March 2010
By all reports many taxpayers are getting stung because they are unexpectedly breaching some of the three different contribution caps introduced by the Costello Better Super reforms.
These caps seek to discourage excessive contributions into super.
Most reforms often have unintended and unforseen consequences and the contribution caps are no different.
The three contribution caps are:
- Concessional contributions for personal contributions claimed as a deduction and all employer contributions. In the 2009/10 financial year this cap is $25,000 for those aged under 50 at 30 June 2010 and $50,000 for everyone else
- Non-concessional contributions for personal contributions and Excess Concessional Contributions (which are the contributions claimed above their cap). This cap has been $150,000 since it came into existence in July 2007 and will remain at this level for several more years
- Small business contribution caps for the proceeds from selling a small business or certain assets. This cap is $1.1 million in the 2009/10 financial year and, amongst other things, enables eligible small business owners to sell their business and move the proceeds into super without paying Capital Gains Tax. There are two different types of concessions that allow contributions under this rule. One of those rules, often called the Retirement Exemption, is further restricted to $500,000 for each taxpayer
There are also caps for certain types of payments that employers might make when an employee terminates their employment, but we will not look at these here.
The tax laws impose higher taxes when each of these three caps are breached. The impact is to charge 46.5 tax on relevant super contributions.
Unfortunately in many cases these contribution caps might be breached in very innocent circumstances.
For example, suppose Jim is self employed and is aged 58. In July 2009 he contributed up to both his maximum concessional contribution limit of $50,000 and, at the same time, also made a maximum non-concessional contribution of $150,000. In the previous financial year Jim had contributed $180,000 in non-concessional contributions. In order to claim the concessional contributions Jim must exchange written documentation with his super fund.
When Jim's accountant prepares his personal tax return it is established that Jim cannot claim all of the concessional contributions as a tax deduction because he does not have enough income. (Personal contributions claimed as a tax deduction cannot create a tax loss.) Assume he can only claim $30,000 of it.
As he has already contributed the maximum non-concessional contribution allowed, the $20,000 will be deemed to be an excess non-concessional contribution and will be taxed at 46.5%.
Another way these problems can emerge is with employer contributions.
Let's assume that Sally, aged 66, is employed and has a salary package of $150,000. Her private sector employer runs a defined benefit fund.
This means that the employer contributions are determined by an actuary who also works out the employer's concessional contributions using a formula. Sally's employer contributes based on salary package not take home pay.
At the start of the 2009/10 year the actuary estimated that the employer would contribute 15% of everyone's salary package to the employer's super fund.
Gearing up for retirement Sally decides to contribute $150,000 in non-concessional contributions and also asks her employer to salary sacrifice $30,000.
In August 2010 the actuary determines that the notional employer contributions are actually 20% of everyone's salary package.
Sally's concessional contributions are now $60,000.
As she is over 50 she will have excess concessional contributions of $10,000. These are added to her non-concessional contributions which means she now has excess non-concessional contributions of $10,000.
She will pay 46.5% tax on the same contribution twice. That is, $9,300 excess contributions tax on the $10,000 contribution.
What can be done when these caps are breached? There are not many strategies that can be employed. A super law allows funds to return contributions that are exceed limits allowed in the super laws within 30 days of realising that the excess has been breached.
Jim may have been able to use this rule once he had found out he couldn't claim all of his personal super contributions as a tax deduction. This rule is not available to Sally because her employer must follow the actuarial contribution advice.
It's often difficult to undo a contribution which had been made sometime ago. In many cases super fund trust deeds do not allow these contributions to be returned.
The ATO do have the power to deem an excess contribution not to be an excess contribution if they determine that imposing excess contribution tax would be "unjust, unreasonable or otherwise inappropriate".
The ATO have said that financial hardship, ignorance of the law, incorrect professional advice or the impact of retrospective action of laws is unlikely to help a taxpayer avoid these excess super tax traps. As many people are unfortunately finding out, this really means that very few excess contribution cases will be exempted from the penalty tax rates.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.