Excess superannuation contributions

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Since the commencement of the current superannuation regime in July 2007 the problem of excess superannuation contributions has caused untold misery and agony for both taxpayers and their advisers who have fallen foul of the contribution caps.  After living and experiencing this misery and agony for 7 years, the Government has now, finally, addressed the problem of both excess concessional contributions and excess non-concessional contributions.

The Government has promised (and delivered on that promise to the extent of releasing draft legislation) that the problem of excess non-concessional contributions will be solved commencing from 1 July 2013.

1 July 2007 was the date the superannuation system was flipped from a system where there were no controls on the amount of contributions but controls on the amount of benefits, to one where there are controls on the amount of contributions but no controls on the amount of benefits.  

This flip provided a sweet spot for those taxpayers who could and did make very large contributions before 1 July 2007, and after 1 July 2007, could have their contributions and super earnings returned to them without limits on the amount of benefits and, even tax free, if paid out after age 60.  Unfortunately this sweet spot is now closed.  

From 1 July 2007 there are strict and enforced controls on the amount of contributions which can be made to the super system but no caps on the amount of benefits coming out of the system (if you control the contributions, there is no need for caps on the benefits).

The control applying from 1 July 2007 is a tax on excessive contributions.  The tax was set at such a rate that the benefit of exceeding the concessional contributions cap was reversed (albeit sometime later) by imposing a tax rate of 31.5% on the excess concessional contributions and if the non-concessional contribution cap was exceeded a penalty tax at the rate of 46.5% was imposed on excess non-concessional contributions.

As excess concessional contributions were counted as non-concessional contributions, the effective tax rate on contributions which were treated as exceeding both caps was about 93% - which made it extremely expensive to exceed both limits.

From 1 July 2013 the problem of excess contributions has been solved.  Excess concessional contributions are attributed to the member and taxed in the member’s hands at their marginal tax rate.  The member can, if they wish, have up to 85% of the excess amount released and paid directly to the ATO as part payment of their tax liability.

Under draft legislation which has been recently released for comment, the ATO has set out its method of dealing with excess non-concessional contributions which arise on or after 1 July 2013.  In broad terms, once the ATO determines that a member has excess non-concessional contributions, the ATO will notify the member of the amount of the excess and the ATO will calculate the amount of the associated earnings related to the excess contributions.  The associated earnings are determined by reference to statutory rate (which will be 9.66% for 2013/14) rather than attempting to quantify the actual earnings.  The ATO will also issue the member with a release authority.

The member has a choice of two options:
1.    The “do nothing” option.  In this case the excess non-concessional contributions will be taxed at 46.5% (if they relate to the 2013/14 financial year) and 49% if they relate to the 2014/15 financial year) and the associated earnings will be included in the member’s assessable income and taxed at marginal rates.

2.    The “refund” option.  The member exercises the refund option by forwarding the release authority to their superannuation fund.  The superannuation fund will then implement the release authority and the released amount (ie excess non-concessional contributions plus the associated earnings) will be paid to the member.  The portion of the released amount which relates to the associated earnings will be included in the member’s assessable income and taxed at marginal rates.  The portion of the released amount which relates to excess non-concessional contributions is received by the member tax free.

Some points to note:
Associated Earnings – these have nothing to do with the actual earnings of the fund to which the excess non-concessional contributions have been made.  They will be calculated by the ATO having regard to the average General Interest Charge rates applying to the contribution year.  In determining the associated earnings it will be assumed that the excess contributions were made on 1 July of the contribution year.  The member cannot request that the actual earning rate be used to determine the associated earning rate.

Special Circumstances Requests – the new system does not prevent a member from requesting the ATO to exercise its discretion to disregard or reallocate excess non-concessional contributions.  Presumably the success rate which applied to these requests before 1 July 2013 will continue to apply after 1 July 2013.

The new arrangements apply only from 1 July 2013.  Excess non-concessional contributions which relate to 2012/13 or earlier years are not subject to the new arrangements.

Any Superannuation Fund will do – the member can provide a release authority to any superannuation fund in which the member has a superannuation interest.  There is no requirement that the released amount can only come from the superannuation fund to which the excess non-concessional contributions were paid.  Further, the member is not restricted to only releasing benefits from a single superannuation fund.  However, penalties will apply if too much is released.

Tax treatment of released amounts – it is proposed that the application of the proportioning rule will be modified so that the released amount must first reduce the tax-free component of the member’s superannuation interests and will only reduce the taxable component if the tax-free component has been exhausted.  This modification to the proportioning rule is required otherwise the tax-free percentage of a superannuation interest could be altered by making excess non-concessional contributions.   

Preservation treatment of released amount - by way of contrast there is no alteration to the preservation rules as they apply to the released amount.  As the released amount is not a benefit payment, it will effectively reduce the preserved component of the member’s superannuation interest and not the non-preserved component.

Timing – the member must forward release authority within 60 days (otherwise the release authority becomes state in the absence of the ATO granting an extended period) and the trustee must act upon release authority within 7 days.

Insufficient account balance – the trustee is only required to release amount up to account balance of the member.

ATO notification – trustee must notify the ATO of release payment or underpayment and reason for underpayment.

To the extent the member does not elect to have their excess non-concessional contributions refunded, they will be subject to tax at the rate of 46.5% (if made in respect of the 2013/14 financial year or 49% (if made in respect of the 2014/15 or later financial years).

Once the draft legislation is implemented, the Government will have defused – at least on a prospective basis – the worst aspect of the superannuation regime introduced in 2007.