ATO warning on exceeding super contributions limits
Making contributions to superannuation is a good thing to do. So far, so good. But under the current superannuation regime, people who contribute more than the limits allowed under the law (known as the annual superannuation concessional contributions cap) will face penalties – in the form of what is known as the all-too-technically-sounding superannuation excess concessional contributions tax. That tax is levied at the rate of 31.5%.
This means that, where super contributions exceed the annual limits, the amount by which they exceed the relevant cap is taxed at an effective tax rate of 46.5%, ie. the excess contributions tax of 31.5% plus the 15% tax that is paid by the super fund itself.
The annual concessional contributions cap is not a cap on tax deductibility of super contributions but, rather, is a limit on the level of super contributions that will only be taxed once at the contributions stage, ie. at 15%.
Although this tax has been around for a little while now, it is still not generally appreciated how it works or why and when it can apply. As assessments imposing the tax are about to be issued by the ATO, it is timely to cover some of the basics so people can be aware of how they can avoid having to pay this tax. After all, the name of the game is to maximise super and not have it eaten away by a tax that can be avoided with proper knowledge and planning.
What are concessional contributions?
“Concessional contributions” is a commonly misunderstood term and it is essential that it is understood. They are essentially super contributions made by or in respect of an individual for a financial year that are included in the assessable income of the complying superannuation fund. The following contributions count towards the concessional contributions cap for a financial year:
• employer contributions for superannuation guarantee purposes, ie. the 9%;
• salary sacrifice contributions made by an employer in respect of an employee from before-tax income;
• personal super contributions made by a self-employed person.
What is the cap?
The concessional contributions cap is $25,000 per annum (indexed) for the 2009-10 financial year and later financial years (it was previously $50,000 pa). The annual cap on concessional contributions applies per annum per person, irrespective of the number of employers contributing on behalf of the person. Thus, for example, even if a person works for three separate employers, the concessional contributions cap for the individual for 2009-10 is $25,000 and not $25,000 per employer.
A transitional concessional contributions cap of $50,000 pa applies for those aged 50 and over for the 2009-10, 2010-11 and 2011-12 financial years (was previously $100,000 pa). This would apply to those who have taken out a transition to retirement pension.
Penalty if cap exceeded
As noted above, a 31.5% penalty applies if the cap is exceeded. And, if the penalty is to be avoided, it is the employee’s responsibility to ensure they do not exceed the cap. At November 2009, the Tax Office said it had identified between 35,000 and 40,000 potential penalty cases for the 2007-08 year but it was not yet clear how many of these would result in an assessment.
Of some 30,000 letters sent to taxpayers who may have exceeded a contributions cap in 2007-08, the Tax Office said around 10% of the individuals in the May 2009 mailout were no longer reported as having excess contributions after their funds corrected their reported contributions data. As the ATO collects this data from funds and employers, it is critical it is right. The Tax Office said any assessments will commence to be issued in February 2010.
In a legal technical sense, excess concessional contributions tax (ECT) tax is a primary tax (and not a penalty). As such, the Tax Office says it has no ability to remit the ECT liability even where the individual has made an "honest mistake" and did not mean to incur the liability to the tax.
However, the Tax Office does have discretion to disregard or reallocate contributions where "special circumstances" exist that make the imposition of the tax unjust, unreasonable or inappropriate: see ATO Practice Statement PS LA 2008/1. Nevertheless, the Tax Office says that financial hardship, ignorance of the law or incorrect professional advice would not generally amount to special circumstances that make the imposition of the tax unreasonable.
According to the Tax Office, many cases involving individuals making excess superannuation contributions arise from errors such as poor arithmetic or a failure to take into account contributions made earlier in the year. Other common errors include:
• not being aware of what contributions cannot be accepted by superannuation funds under the law;
• advisers not asking a taxpayer for information about other contributions they have made or are making which will count towards their concessional or non-concessional contributions when recommending amounts and timings of contributions;
• not determining if the individual's planned income tax deduction for their personal superannuation contributions will be allowable to them because of their age, other assessable income;
• not understanding when contributions must be reported by funds, such as counting a contribution on the date the contribution was remitted rather than received by the fund or counting employer contributions to the period for which they were made rather than the period in which they were made;
• not understanding that all capital gains cannot be excluded under the superannuation CGT cap concession, or that not all amounts eligible for the a CGT small business concessions be excluded; and
• not understanding transitional termination payments and the consequences of the timing of when amounts are taken as cash or directed to super.
Superannuation is too important an issue for people to be caught by excess concessional contributions tax. The penalty is steep. But it is also too easy to misunderstand, or not understand, what counts towards the contributions cap. If in doubt, see your adviser.