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Relief for excess super contributions

Key points

  • In scheduled changes, the tax on excess non-concessional contributions will now be the maximum marginal tax rate plus medicare levy and the budget repair levy.
  • You can choose to leave excess non-concessional contributions in your super (if you’re on the highest marginal rate) or remove it.
  • The ATO will send you a notification.

 

Good news if you’ve made excess non-concessional contributions after June 2013!

Late last year the Government introduced legislation into Parliament that will enable you to have those contributions returned to you.

Excess non-concessional contributions can be left in the super system and will be taxed at the highest marginal tax rate plus the Medicare Levy and the Temporary Budget Repair Levy for a few financial years.

If you don’t pay the highest marginal tax rate then, you could take the excess non-concessional contributions out of the system and not face a tax penalty on those contributions.

The new system

Once you have submitted your personal income tax return and your super fund has submitted its contribution data to the Tax Office, the ATO will determine if you have any excess non-concessional contributions (excess NCCs). This year the NCC cap is $180,000. Some super investors can make use of the three bring forward NCC cap of $540,000.

If you have excess NCCs, then the ATO will write to you and give you two options:

  1. You can ask that all of the excess NCCs be paid to you
  2. Decide that the contributions should remain in the super system

The ATO’s notice will detail an amount of earnings that the excess NCCs will be assumed to have earned while in the super system from 1 July in the year the contributions are made until the date when the ATO issues a determination.

Once the ATO has written to you about your excess NCC options, you will have 60 days to make up your mind and tell it what your preference is. Under the draft legislation the ATO can give you more time if there are legitimate reasons as to why you didn’t respond in the required timeframe. For example, you were overseas and not contactable for an extended period.

Note that under this proposed policy, your excess NCCs must be dealt with as a whole amount. This means that all of your excess NCCs will have to remain in or be taken out of the super system.

The options

If you want your money left in your super fund and you’re happy to pay excess NCC tax at the highest marginal tax rate, then you won’t need to do anything. The assumed earnings that the ATO have calculated will be disregarded in these cases.

If you want your excess NCCs to be taken out of the super system to avoid paying the excess NCC penalty tax (if your tax rate is lower than the highest marginal tax rate) then you must tell the Tax Office the names of the super funds that hold your super investments. The Tax Office will then communicate with these super funds, which will have seven days to pay back the maximum possible and to tell you and the ATO how much they’ve paid. They will initially take money from the taxable component. Once that is exhausted, they’ll then take money from your tax-free component.

When you select this option, the assumed earnings that the ATO have determined is included in your personal tax return and taxed at your marginal tax rate, but a 15% tax offset will be available. This assumed earnings will apply even when the value of your investments have gone down because the market value of the contribution’s underlying investments have gone down.

What happens if your super fund can’t pay the amount determined by the ATO? It will notify the ATO, which will then ask you to nominate another super fund. It may be that you’ve taken all your money out of the super system. In these cases excess NCC tax will be waived but you will pay tax at your marginal rate on the assumed earnings amount calculated by the ATO.

As you can see, these rules are quite complicated and I expect it’ll take sometime for their operation to run smoothly.

One final point – these rules are not formally in place. Hopefully the Government will be able to negotiate their passage through the Senate in the near future. Once that happens the ATO will get cracking on finalising their IT systems.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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