How does the Solution Work?

Using 2013/14 and Ernestine as illustrative financial year and illustrative taxpayer - the solution can be explained in four steps.

First step: The ATO must determine whether Ernestine has excess non-concessional contributions for 2013/14. Contribution details are reported to the ATO using member contribution statements for large funds and annual returns for SMSFs.  

Assume that Ernestine has $80,000 of excess non-concessional contributions.

Second Step: If the ATO determines that Ernestine has excess non-concessional contributions then the ATO will determine the amount of the excess contributions and will also determine an amount called the "associated earnings" in respect of that excess. Finally, the ATO will determine the "release amount" which is equal to the excess contributions plus 85% of the associated earnings.

The excess is simply the total non-concessional contributions for Ernestine in respect of 2013/14 over her non-concessional contributions cap.

The "associated earnings" is an amount calculated by applying an interest rate to the excess contributions in respect of the period from 1 July 2013 (the start of the financial year in respect of which the excess contributions arose) up to (but not including) the date on which the calculation is made.

The "associated earnings" is intended as a proxy for the actual earnings which could have been derived by the excess contributions in the super fund. As it is too difficult to calculate the actual earnings - a proxy amount is used.

The interest rate is based upon the average of the quarterly General Interest Charge rates applying to 2013/14 which is 9.66%.

The release amount is the sum of the excess contributions and 85% of the "associated earnings". Only 85% of the associated earnings is used to reflect the fact that the notional earnings would have been taxed in the fund at 15%.

Assume the determination is made on 1 November 2014 then the "associated earnings" will be $10,519 (which is $80,000 at 9.66% pa for 489 days compounded daily).

The release amount is $88,941 (being $80,000 plus 85% of $10,519).

Third Step: The ATO notifies Ernestine that she has excess non-concessional contributions for 2013/14, the amount of the "associated earnings" and the amount of the release amount. Also the ATO notifies Ernestine of her options in relation to the excess contributions.

Fourth Step: Ernestine makes her selection from the four options.

Ernestine has four options – she may elect one of the four options below:

• Option 1 - "Special Circumstances Option" Apply to the ATO for the exercise of the discretion to disregard or reallocate some or all of the contributions;
• Option 2 - "Release Option". Elect to have the notified release amount released from her super interests;
• Option 3 - "Nil Super Option" - Advise the ATO that she now has no super interests but still wishes take advantage of the new release system; or
• Option 4 - Decides not to release. Decides not to take advantage of the new release system but has super interests.

Ernestine must make her selection within 60 days of receiving notification from the ATO and must make her selection using the approved form.

What if Ernestine does not make a selection?

If she fails to make a selection within that time, makes an invalid selection or makes a late selection then the new arrangements will not apply and she will be issued a notice of assessment for Excess Contributions Tax at the rate of 46.5%. This will result in a tax assessment of $37,200 (being 46.5% of $80,000).

She will be issued with a release authority which she must pass on to her super fund and the super fund will pay the assessed amount directly to the ATO to satisfy her assessment.

What if Option 1 is selected?

In this case, Ernestine has decided to make an application to the ATO for the exercise of the discretion to disregard or reallocate all or some of the excess non-concessional superannuation contributions.

If the application is successful and contributions are disregarded or reallocated - then the ATO will re-determine whether Ernestine has an excess non-concessional contributions for 2013/14. If there is no excess - the process stops.  If there is still an excess of non-concessional contributions, then the process commences again. However, Ernestine will no longer have access to Option 1.

What if Option 2 is selected?

In this case Ernestine has decided to release the excess contributions. Ernestine completes the approved form (in which she nominates the fund or funds from which the excess contributions and associated earnings will be released and the proportions).

The ATO, upon receiving the completed form, will then issue release authorities directly to the nominated funds.  Each nominated fund must release the amount specified in the release authority and pay the specified amount to Ernestine.

If the fund cannot release the entire specified amount – the fund must release the maximum amount it can.

The trustee of the superannuation fund then notifies the ATO of the actioning of the release authority and the amount released.

The ATO will issue an amended assessment of income tax for Ernestine by including the full amount of the associated earnings and allow a tax rebate of 15% of the associated earnings.

In this case the amended assessment (it is assumed that Ernestine has already lodged her tax return for 2013/14 by 1 November 2014) will increase her taxable income by $10,519 (100% of the associated earnings) and she will be entitled to a tax rebate of $1,578 (the rebate is non-refundable).

As a result of these actions, Ernestine will no longer have any excess non-concessional superannuation contributions in respect of the 2013/14 financial year.

What if Option 3 is selected?

Ernestine can only select this option if she has no superannuation interests (and assuming the ATO is satisfied that she has no such interests). This situation could arise if Ernestine had withdrawn all her superannuation interests before 1 November 2014.

Ernestine must still complete the approved form and return the completed form to the ATO.

In this case the amended assessment (it is assumed that Ernestine has already lodged her tax return for 2013/14 by 1 November 2014) will increase her taxable income by $10,519 (100% of the associated earnings) and she will be entitled to a tax rebate of $1578 (the rebate is non-refundable).

As a result of these actions, Ernestine will no longer have any excess non-concessional superannuation contributions in respect of the 2013/14 financial year.

What if Option 4 is selected?

In this case Ernestine will be issued with a notice of assessment for excess contributions tax for an amount of $37,200 - being 46.5% of $80,000.
She will be issued with a release authority which she must pass on to her super fund and the super fund will pay the assessed amount directly to the ATO to satisfy her assessment.

Further QAs

Does Ernestine have the option to have a partial release?

No, the options are a full release or no release.

What if Ernestine’s super interests are less than the release amount?

Ernestine has $80,000 in excess non-concessional contributions and $10,519 of associated earnings. Her release amount is $88,941 (85% of the associated earnings and the amount of excess contributions).

Ernestine can still elect to have a full release. The process will be the same as in Option 2. However, as the value of Ernestine’s super interest is only $60,000: that is the maximum amount which the fund can release.

In this case the fund will notify the ATO that it has released only $60,000 of the $88,941 release amount. Consequently $28,941 of the excess non-concessional contributions have not been released.

The ATO will notify Ernestine of the partial payment and invite Ernestine to nominate other super interests. As Ernestine has no other super interests no further amount can be released. Consequently, Ernestine must notify the ATO that she now has no superannuation interests.

Assuming the ATO accepts that Ernestine has no other superannuation interests, the ATO will treat Ernestine as having no excess non-concessional superannuation contributions for the 2013/14 financial year and will amend her personal tax return by increasing her assessable income by $10,519 (the full amount of the associated earnings), applying her marginal tax rate to the increased assessable income and allow a tax rebate of $1,577 (being 15% of the associated earnings).

What if Ernestine had two super interests one of which was a non-commutable defined benefit interest?

If Ernestine had a second superannuation interest which was a non-commutable defined benefit interest then a very different result would arise.

The first superannuation interest of $60,000 has been exhausted by the partial payment of the release amount.

The ATO will notify Ernestine that there has been only a partial payment of the full release amount and invite Ernestine to nominate another of her super interests from which the balance of the release amount can be paid.

The only other super interest of Ernestine is the non-commutable defined benefit interest.  Ernestine cannot nominate another super interest as it is a non-commutable defined benefit interest. Consequently, Ernestine cannot select either Option 2 nor Option 3. Option 1 is not applicable. By default Ernestine, can only select Option 4 - either make no selection within the required time or advise the ATO that she cannot select Option 2 and is not eligible to select Option 3.

In this situation the ATO will proportionately reduce the excess non-concessional contributions of Ernestine and issue a notice of excess contributions tax.

First, the ATO will treat Ernestine as having released 75% (ie $60,000 of $80,000) of her excess non-concessional contributions. She will be issued with an amended income tax assessment for 2013/14 increasing her assessable income by $7,889 (being 75% of the associated earnings), she will be taxed at her marginal rate on the included associated earnings and she will be entitled to a tax rebate of $1,183 (being 15% of $7,889).

Second, she will be issued with a notice of excess contributions tax in respect of $9,300 (being 46.5% of the reduced excess non-concessional contributions of $20,000). While the ATO may issue a release authority to the fund, the fund cannot action the release authority as the only interest is a non-commutable defined benefit interest and must accordingly advise the ATO. Consequently Ernestine will be required to pay the excess contributions tax assessment of $9,300 from her own resources.