Australia: Latest on excess non-concessional superannuation contributions

Introduction

The latest official word on the status of excess non-concessional contributions was a positive one, but caution is still needed.

The latest official word

The ATO published on Friday 26 September 2014 the official minutes of the most recent Individual Taxpayer Liaison Group Minutes.

In it the ATO stated:

Under the new measure for non-concessional contributions (announced in the May 2014 Budget), individuals will be given the option to withdraw their excess contributions (and associated earnings) and have the earnings taxed in their income tax assessment at their marginal rate. This change recognises that in most cases the breach of the non-concessional contribution cap is not intentional and the previous taxing regime (at top marginal rate) was considered too harsh by the government. The measure is not yet law and the ATO continues to work with Treasury to provide input and advice on the practical application of the proposed changes and transitional arrangements.

Naturally this is positive and the powers that be should recommended for their practical stance and recognition that 'the previous taxing regime [which is still technically the current regime] (at top marginal rate) was considered too harsh'.

However, certain caution is still needed as a certain trap exists. This trap is best illustrated with a case study.

What a client might intend to do ... the trap is set!

Consider Larry. Larry wishes to make the maximum non-concessional contributions allowable.
Larry is under 65. Accordingly he contributed $150,000 in the 2014 financial year and wishes to use the bring forward provisions in the 2015 financial year.

Because the concessional contributions cap increased from $25,000 to $30,000 in the 2015 financial year, the non-concessional contributions cap increased as well (ie, from $150,000 to $180,000). Therefore, under the three year bring forward provisions, in the 2015 financial year he contributes $540,000 (ie, 3 x $180,000).

Accordingly, what he intends to do can be summarised as follows:

What actually occurs ... the trap is sprung!

However, Larry had a very small amount of non-concessional contributions in the 2014 financial year that he forgot about. Such contributions can arise in many ways. For example, perhaps:

• He personally paid an amount in respect of his SMSF and that amount is journalised as a contribution.
• An insurance policy that he's being paying for years and years is actually held via super and each time he paid premiums he's actually making a non-concessional contribution.
• He is a member of a defined benefit fund and his employer is made non-concessional contributions.

Regardless of how, assume that an additional $1,000 non-concessional contributions are also made in the 2014 financial year even though Larry doesn't realise this until after he's contributed the $540,000.

Accordingly, what actually occurs is as follows:

Analysis

There are several important points to note.

First, although the non-concessional contributions cap increased in the 2015 financial year, this won't help Larry. Pursuant to s 292-85(4) of the Income Tax Assessment Act 1997 (Cth), by triggering the bring forward provisions in the 2014 financial year, only a total of $450,000 of non-concessional contributions can be made in the 2014, 2015 and 2016 financial years before excess concerns start.

Secondly, on the face of current legislation, the above gives rise to excess non-concessional contributions tax of $241,000 x 49%, that is, $118,090.

(Note that without much fanfare last year the Superannuation (Excess Non-concessional Contributions Tax) Amendment (DisabilityCare Australia) Act 2013 (Cth) increased the rate of excess non-concessional contributions tax from 46.5% to 47% for the 2015 financial year. Further, the Superannuation (Excess Non-Concessional Contributions Tax) Act 2007 (Cth) has been amended so that the non-concessional contributions tax is increased by 2 percentage points in respect of 'temporary budget repair levy years'. Accordingly, the rate of excess non-concessional contributions tax this financial year is officially 49%.)

Naturally though under the current legislation, based on the ATO's de minimis approach, the Commissioner might ignore the $1,000 and thus no excess non-concessional contributions tax would have to be paid. However, when/if the announced change is legislated, it could well be that the ATO ceases this practice.

Accordingly, based on the Federal Budget announcement it appears that in order to not pay the $118,090 liability, $241,000 must be withdrawn from super.

Why this could spell disaster

On its face, having to withdraw the $241,000 does not seem like such a bad outcome. Certainly, it is better than paying a $118,090 tax liability.

However, consider why Larry might have been wanting to contribute the money to super in the first place.

He might be just about to turn 65 and no longer working. Accordingly, this contribution could have been his 'last great hooray' for superannuation.

Although the simple answer is that he should just wait until the three year period is over (ie, 1 July 2016), by then Larry might have attained 65 and no longer be able to contribute. This would be particularly disastrous if these facts arose as part of a withdrawal and re-contribution strategy.

Alternatively, he might have been contributing the money as part of a limited recourse borrowing arrangement and might have needed the money in his SMSF very shortly to have enough in the SMSF so as to satisfy a bank's loan to value requirements.

Take away point: the price of a properly executed superannuation strategy is eternal vigilance!

Even though the announcement in the Federal Budget and the follow up announcements are great news, advisers can't get complacent. As the above case study illustrates, there are still critical reasons to carefully monitor all contributions.

No refunds on the cards

On a side note, we are sometimes asked if they are any plans to refund past payments of non-concessional contributions tax, especially given the recognition that this was a tax raised under a regime that was 'too harsh'. Unfortunately, no. We are aware of no such plans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.