New regime for excess super contributions means more complexity from July 1

The excess concessional superannuation contributions tax regime was criticised as being unfair and inefficient.

Many cases were before the courts. The Administrative Appeals Tribunal had found against taxpayers and they were been penalised. Something had to give.

It did, and now legislation has been introduced in federal parliament to establish a new excess concessional contributions tax system from July 1st, 2013.

The government believes the new system will be fairer for individuals who exceed their annual concessional cap. But “fairer” is in the eye of the beholder and those already paying tax at the top marginal tax rate are in for a shock – they will pay more tax under the new regime.

The legislation will repeal the existing excess concessional contributions tax provisions in the tax law. That is, excess concessional contributions tax will no longer apply from July 1st, 2013. Instead, the proposal is that excess concessional contributions will automatically be included in an individual’s assessable income, and subject to an interest charge to account for the deferral of tax. The charge, equal to shortfall interest charge, will be payable on the increase in the individual’s tax liability arising as a result of having excess concessional contributions for the relevant financial year.

The proposed new rules seek to ensure that individuals who make excess concessional contributions are taxed on the contributions at their marginal tax rates, rather than at 46.5% tax for all taxpayers.

Under existing arrangements, concessional contributions that are in excess of the annual cap are effectively taxed at the top marginal tax rate of 46.5%. Concessional contributions in excess of the annual concessional cap are subject to excess contributions tax at the rate of 31.5% (plus the 15% contributions tax paid by the fund) and counted towards the taxpayer’s non-concessional cap. The concessional cap is generally $25,000 (or $35,000 proposed for 2013-14 if aged 59 or over on June 30th, 2013). Note that “concessional contributions” include all employer contributions (such as superannuation guarantee and salary sacrifice contributions) and personal contributions, for which a deduction has been claimed.

The government recognised that the current effective tax rate of 46.5% for excess concessional contributions is a severe penalty for individuals below the top marginal tax rate.

The amendments are designed to ensure that individuals are taxed on excess concessional contributions in the same way as if they had received that money as salary or wages and had chosen to make a non-concessional contribution. The government expects that the reform would reduce the tax liability (by $1,100 on average) for around 40,000 people in 2013-14.

Excess contributions included in assessable income

From the 2013-14 income year, the amendments will mean that an individual’s assessable income will automatically include an amount equal to their excess concessional contributions for the corresponding financial year.

An individual will be entitled to a non-refundable tax offset equal to 15% of their excess concessional contributions (i.e. for the 15% tax already paid by the fund on the contributions).

If a taxpayer has excess concessional contributions from the 2013-14 income year, the tax commissioner will be required to give the taxpayer an “excess concessional contributions determination”. In such a situation, a taxpayer will be entitled to elect to release up to 85% of their excess concessional contributions from their superannuation fund. An amount released as a result of this election will be non-assessable non-exempt income (as the excess contributions will be included in assessable income).

Disappointingly, the commissioner’s existing discretion to disregard or reallocate excess concessional contributions upon the application of an individual will be retained. The “special circumstances” concession (a very narrow legal concept) will remain especially relevant for taxpayers on the top marginal tax rate who will have a slightly higher tax liability under the new regime (due to the additional interest charge).

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