Superannuation is a tax effective means of saving for retirement, so attractive that the Government imposes caps on how much you can put into super in any given year to make sure you don’t reduce your taxes too much.
If you break these caps, a nasty tax penalty applies.
How much can you contribute?
Excess contributions are contributions made to your super fund that exceed your concessional or non-concessional contributions cap. The general concessional cap is currently $25,000 and the non-concessional cap is $150,000. You can read more about these different caps on our website.
These amounts are subject to excess contributions tax, with the amount of tax dependent upon which cap has been breached.
Excess concessional contributions are taxed at 31.5% in addition to the 15% already paid by the super fund when the contribution was received. This brings the total tax on the excess to 46.5%.
Excess non-concessional contributions are taxed at 46.5%. If an excess concessional contribution causes the non-concessional cap to be breached as well, the total tax on that amount equates to 93%. It becomes an expensive exercise for those who are not aware of their caps and contributions.
How excess contributions are determined
The Australian Taxation Office (ATO) will assess whether excess contributions tax is payable from information provided to them by the individual’s super fund as well as their tax return. They will then issue an excess contributions tax assessment to the individual in writing. A release authority will then be given stating the date and the amount of tax payable.
The individual may pay the tax liability personally (for excess concessional contributions tax), or have their super fund release the amount of tax (for both excess concessional and non-concessional contributions tax).
From 1 July 2011, eligible individuals who breach the concessional contribution cap by up to $10,000 will have a one-off option to request that these excess contributions be refunded to them rather than attracting the excess tax.
Conditions of this refund require the individual to lodge an income tax return for the relevant year, that it is the first time the individual has had excess concessional contributions from 2011-12 or later years, and only the first eligible breach is refundable. Once an individual has received a notice of offer, whether or not exercised, they are no longer eligible for the refund option in subsequent years, unless the contribution amount is amended and it removes the person from having excess concessional contributions in the financial year. This also applies to individuals who make excess concessional contributions of greater than $10,000.
The refund will become assessable income for the individual at their marginal tax rate.
Note: the following information has not yet been legislated
As indicated in a Superannuation Consultative Committee (SCC) meeting, tax payers will not incur excess contributions tax when an excess non-concessional contribution occurs by inadvertently triggering the ‘bring forward’ rule. This concession will only apply where the contribution in question is of a small value.
Avenues of appeal
Amend the assessment: For incorrectly reported contributions, the super fund will need to provide amended contributions information so the ATO can amend the existing contributions tax assessment.
Object to the assessment: On the belief that the ATO has applied the law incorrectly.
Special circumstances: Applying to have your contributions disregarded or reallocated will be based on unusual, exceptional, abnormal or uncommon circumstances where applying the law would result in an unjust, unfair or otherwise inappropriate outcome. Consideration may be applied where the contributions would be more appropriately allocated to another financial year, whether it was reasonably foreseeable that the individual would have excess contributions when a contribution was made, and any other relevant factors involved.
Generally, the following factors in isolation are not considered special circumstances:
- financial hardship from having to pay excess contributions tax
- unintentionally going over the cap
- misunderstanding the law
- incorrect professional advice
- making a mistake.
It is extremely important that all contributions are tracked and monitored to ensure the caps are not breached. Whilst it may be possible to apply to the ATO for leniency, special circumstances are not granted frequently. Prudent management will be the best way to avoid excess contributions tax.
Important information: 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. Anyone should consider the appropriateness of the information in regards to their circumstances.