The problem of Excess Contributions - now finally solved! (1)

It has taken about 7 years but the Government has finally solved the problem of excess superannuation contributions - both concessional and non-concessional.  Well, at least, for excess contributions made on or after 1 July 2013.

The problem of excess contributions arose because taxes at 31.5% and 46.5% respectively were imposed on excess concessional and excess non-concessional superannuation contributions.  Further, excess concessional contributions were treated as non-concessional contributions which, in extreme cases, could have resulted in excess concessional contributions being taxed at an effective rate of 93%.

These taxes were required in order to "enforce" the contributions caps – which is the keystone of the current superannuation system.

However, excess contributions could arise from simple miscalculation of previous contributions, inadvertent triggering of "the bring forward" of 3 years’ worth of non-concessional contributions, over-estimating assessable income and failing one of the many requirements for the small business capital gains concessions.

The Original Solution – Perfect but only in "Special Circumstances"

The original solution to the problem of excess contributions was to confer a discretion on the Commissioner of Taxation which permitted the Commissioner to "disregard or reallocate" all or part of any concessional or non-concessional contribution. Unfortunately, the Commissioner, before the discretion could be exercised, had to find that there were "special circumstances". The requirement for special circumstances proved to be a very high hurdle which most taxpayers failed.

The First Attempt at a solution – “Once Only” Get of Gaol Card

The first attempt (Attempt No 1) at solving the problem of excess contributions was only applied to the excess concessional contributions. For the financial years 2011/12 and 2012/13, a taxpayer who exceeded the concessional contributions cap by $10,000 or less had a once-only opportunity to have the excess contributions refunded.

Eventually the Government conceded that Attempt 1 was ineffective and, like the determined Coyote, went back to the ACME drawing board.

The Second Attempt – Coyote finally gets the Roadrunner

The Government conceded the limitations of the First Attempt and then introduced a new system which applied to excess concessional contributions made on or after 1 July 2013.

Under this system the amount of excess concessional contributions is included in the assessable income of the taxpayer and taxed at their marginal rates (thereby reversing the previous tax deduction for the excess concessional contribution).  A tax offset of 15% is provided to reflect the fact that the excess contributions were subject to 15% in the hands of the superannuation fund. This offset is not refundable.

Additionally, a non-deductible charge is imposed which reduces the effect of any financial advantage which arising from exceeding the concessional contribution cap.

The taxpayer may elect to have 85% of the excess concessional contributions released from their superannuation accounts and paid to the ATO. If the taxpayer does not elect to release amounts from their superannuation account, the taxpayer must pay the assessed tax from their own resources.

Coyote is on a winner - Government applies Second Attempt to Excess Non-Concessional Contributions

Having successfully designed the Second Attempt, the Government announced in the May 2014 Budget that it would apply (in substance) the same solution to the problem of excess non-concessional contributions.

The Government has made good on its Budget promise and introduced the necessary legislation to solve the problem of excess non-concessional contributions: Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014.

The solution only applies to excess non-concessional contributions made on or after 1 July 2013.

For excess non-concessional contributions made in respect of previous financial years - the current system applies: ie check for reporting errors, request the Commissioner to exercise his discretion to disregard/re-allocate, blame someone else (and seek compensation from them) or bear the tax.