Super high tax on super contributions – changes needed
The red mist has descended! Something has to give!
The law is the law – we all know that. The courts and tribunals have to apply the law to the facts as they find them.
That's what happened last week when the Administrative Appeals Tribunal (AAT) found the Tax Commissioner had correctly raised excess superannuation contributions tax assessments at an effective tax rate of 78% on a taxpayer for contributing too much in superannuation – she exceeded the legislated caps on her contributions for the 2009 year. Add the 15% contributions tax paid by her super fund, and the total tax rate rises to an absurd 93%.
While it's not often that a taxpayer has suffered the 93% rate, 78% is bad enough anyway.
The AAT decision has already received plenty of attention, deservedly so. The decision is not the AAT's fault – it merely applied the law to the facts before it.
The rationale for originally introducing the excess contributions tax was to prevent people from placing "excessive" amounts in the concessionally taxed superannuation environment. Fair enough, but so many of the cases that have come before the AAT could hardly be called excessive or an intention to avoid tax.
The vast majority of cases of excess contributions have been the result of genuine mistakes or timing issues. In many cases, like the AAT case in question, the taxpayers always intended to contribute within the caps, but inadvertent mistakes caught them out and the law gave no ground.
The system is not working. On the one hand, the government extols people to put money into super to provide for their retirement (and to lessen the call on government funds via the Age Pension) and then on the other hand, taxes them harshly (thereby reducing their superannuation retirement savings) for inadvertently exceeding the contributions caps.
The taxpayer in the AAT case, a company director, Ms Verschuer, was effectively caught out by a timing issue for her contributions and the draconian penalty laws that are applicable.
On June 27, 2008, the taxpayer's employer paid a "top-up" superannuation contribution to a clearing account operated by a super fund. The clearing account was opened by the fund (Colonial First State) but was in the name of the employer. Under the terms of the arrangement, the employer contribution of $91,142 was not allocated to the taxpayer's account within the superannuation fund until July 23, 2008, some 26 days later, when the employer uploaded a contribution file online. That pushed it into the 2009 financial year.
In May 2009, the taxpayer made a personal contribution of $90,000 to her self-managed super fund (SMSF), for which she claimed a deduction, and she also made non-concessional contributions of $450,000. The concessional limit was $100,000, and the non-concessional limit was $450,000.
The Tax Commissioner determined that the taxpayer had exceeded each of her concessional and non-concessional contributions caps by $89,314 for the 2009 year. This was based on the $91,142 employer contribution to Colonial First State, the $90,000 deductible personal contribution and $8,172 in other employer contributions for the 2009 year. This meant the $100,000 concessional cap was exceeded by $89,314.
But wait, there's worse to come. As the excess concessional contributions are counted as non-concessional contributions, the taxpayer also exceeded her non-concessional contributions limit by $89,314 (as she was already at the $450,000 limit under the super contributions bring-forward rule). A real double-whammy!
The Commissioner assessed the taxpayer to excess concessional contributions tax of $28,134 (ie 31.5% of $89,314) and excess non-concessional contributions tax of $41,531 (i.e. 46.5% of $89,314). This represented an effective tax rate of 78% (i.e. 31.5% and 46.5%). When you add the 15% contributions tax paid by the fund, the total tax rate rises to 93%!
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