The concessional tax treatment of superannuation is undoubtedly one of the key advantages and incentives to contributing to superannuation. That is why triggering excess contributions tax and quickly eroding the tax advantages is so distressing to many individuals and their employers.
Excess contributions tax results in a higher rate of tax on contributions that exceed the contribution caps in any one year. In this edition we take a look at the contribution caps for this year and how you can plan to avoid excess tax.
Contribution caps – knowing how much you can contribute
There are two main contribution caps. The first is the 'concessional contribution cap', which is a limit on the amount of tax deductible contributions which are concessionally taxed. The second is the 'non-concessional contribution cap', which is a limit on the amount of undeducated contributions which are concessional taxed.
The caps for this financial year, ending 30 June 2013 (regardless of age), are as follows:
|Concessional contributions cap||$25,000|
|Non-concessional contributions cap||$150,000|
For individuals under the age of 65, they may be able to 'bring forward' future contributions by using a 'bring forward mode'. The bring forward mode lifts the non-concessional contribution cap for a year to $450,000 (i.e. 3 x $150,000). Using the bring forward mode means the individual is not permitted to make any further undeducted contributions for the following two financial years.
Contributions that relate to the small business capital gains tax concessions or personal injury payments are excluded from the above caps, however they are subject to their own restrictions.
In addition to being mindful of the contribution caps, it is important to check with your advisor whether you are eligible to make contributions. Not all individuals are eligible to make different types of contributions.
Excess contributions tax
When the above contribution caps are exceeded, 'excess contributions tax' may be triggered. The broad result of excess contributions tax is that a total tax rate of 46.5% applies to the amount of the contribution that exceeds the cap. This total tax rate is considerably higher than the 15% that usually applies to concessional contributions and the zero rate that applies to non-concessional contributions.
Some common examples of exceeding the caps and how to avoid them
|Salary sacrifice agreements||Often employees will wish to maximize their superannuation
contributions by entering a salary sacrifice agreement that takes
their contributions up to the concessional contribution cap.
The annual cap can be easily exceeded when the timing and amount of contributions are not planned.
Employees who are aged 50 or over may have entered an arrangement based on a higher contribution cap from an earlier year. Those arrangements should be reviewed urgently.
|Timing of contributions||Contributions are generally counted towards the contribution
cap in the year in which the contribution is received by the
Contributions can often be made in the wrong year when the contributions are not received by the fund before year end. For example, if a cheque was placed in the mail before 30 June 2012 and received by the fund in July 2012, it will be counted against the cap for the 2013 year.
|Triggering the 'bring forward' mode in the wrong year||The 'bring forward' mode for non-concessional
contributions is triggered whenever the $150,000 cap is exceeded
(even by $1).
Individuals need to carefully monitor any year when the 'bring forward' mode is triggered as they will not be permitted to make further non-concessional contributions in the two following year.
What should you do if you accidently exceed a contribution cap?
Where you discover you have already exceeded a contribution cap, there are some steps that can be considered, including:
- Refund of excess contributions
Individuals who exceed their concessional contribution cap by up to $10,000 may be able to have the excess contributions refunded and taxed at marginal tax rates. Whilst this may be a good solution in some cases, there are various conditions that apply.
- Applying for discretion to disregard or reallocate contributions
The ATO has discretion in special circumstances to disregard or reallocate contributions, thereby reducing the amount of excess contributions subject to tax. This discretion can only apply to genuine inadvertent breaches of the caps.
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