Excess superannuation contributions

An increasing number of superannuation fund members have inadvertently breached the contribution caps imposed by the Simpler Super changes of 2007 and are in danger of receiving heavy penalties as a result.

The caps on contributions are on both concessional and non-concessional contributions as follows:

From 1 July 2012, the cap on concessional contributions is supposed to fall to $25,000 for everyone, except those who over age 50 and have less than $500,000 in super. For this particular group of contributors, the cap is set at $25,000 more than the general contributions cap.

Members caught breaching those caps could be hit with a punitive tax of up to 93%, unless the Tax Commissioner exercises his discretion to allow the contributions to be either counted in a later year or returned to the member.

The conditions under which the Commissioner is able to exercise his discretion are very limited and as a result, many superannuation fund members who have inadvertently breached the caps have been heavily penalised.

It all comes down to which contributions are counted as concessional (i.e. tax-deductible). Here are the most common types:

• Super Guarantee (SG) contributions, currently 9% of your salary, count towards the cap. Employers may have overlooked that there is a maximum SG contribution payable per employee ($15,200). If employers pay SG on the entire salary, employees earning more than $278,000 per year will be in breach of their caps without anything else being counted.
  
  
• Additional voluntary contributions by the employer above the SG will count towards the cap, as do salary sacrifice contributions.
  
  
• Fund administration fees or life insurance premiums paid direct by the employer to the supplier count towards the cap.
  
  
• Transfers from reserves, transfers from foreign funds that are in excess of the member’s vested benefits and some transfers from Superannuation Holding Accounts may be counted.
  
  
• The taxable component in excess of $1 million of an Employer Termination Payment that has been directed to a superannuation fund will count towards the cap.

One of the traps that many have fallen into is not counting the insurance premiums on policies that have been designated as “superannuation”. Whether paid by an employer or by a self-employed person, they are counted as part of the concessional cap.

It is important to have a close look at any benefits that have been rolled over into the fund. The rollover statement provided by the former fund will detail employer contributions that it will report to the Australian Taxation Office (ATO) for the year in which the rollover happens. These should be taken into account when working out what the total concessional contributions are for the year.

If you are a member of a defined benefit fund, the Trustees must work out what your “notional contributions” have been and report them to the ATO. If your notional contributions (which are worked out according to actuarial formulae set out in tax regulations) are greater than your concessional contributions cap, “grandfathering” provisions may protect you from breaching the cap.

What happens if you breach the caps?

For concessional contributions, the penalties take two forms:

1. The member will receive an assessment for tax at 31.5% of the excess. The ATO will issue a release authority, which allows the member to choose whether to apply to the fund to release benefits to pay the tax.
2. The excess concessional contributions are added to your non-concessional contributions to be counted towards those caps.

From 1 July 2011, fund members breaching the caps by less than $10,000 will have the option of receiving a refund of excess contributions, which will be taxed as normal income. This option will only be available in the first year of breach.

For non-concessional contributions:

• Excess concessional contributions (that are not refundable as a result of the Budget changes) are added to non-concessional contributions to determine if the $150,000 cap has been breached. If it has, the three-year cap of $450,000 is triggered. This means that no more than $450,000 can be contributed over the three-year period starting at the beginning of the financial year in which the original contributions are made.
• Contributions in excess of $450,000 over three years are taxed at 46.5% in the hands of the member. This penalty, added to the tax already paid by the member on the pre-tax earnings required to generate this capital, results in an effective tax rate of 93%.
• An excessive contributions assessment is accompanied by a compulsory release authority, which requires the fund to release sufficient money to pay the tax. The regulatory authorities consider that this satisfies a condition of release for preservation purposes.

In response to considerable pressure from accountants, financial planners and the superannuation industry, some relief from these provisions has been announced as part of the Budget handed down on 10 May 2011. This takes the form of allowing small breaches (less than $10,000) to be refunded to the member, which are to be taxed at marginal rates in their hands. But remember, this refund is available for the first year of breach only.

If you are concerned that you may be in breach of the contributions cap, please contact your Bongiorno adviser.