Draft legislation on excess contributions tax released
The exposure draft legislation covering reform of the superannuation excess non-concessional contributions tax has been released, with important considerations for SMSF practitioners and their trustee clients.
In what The SMSF Academy’s Aaron Dunn is describing as the “final piece to reforms of the excess contribution tax puzzle”, Treasury has released draft legislation on reforming excess non-concessional contributions tax as outlined in the 2014-15 Budget.
The draft legislation introduces measures that will allow an individual the option of withdrawing contributions made in excess of the non-concessional contribution cap made after 1 July 2013, with an associated earnings amount to be taxed to the individual at their marginal tax rate, Mr Dunn explained.
Speaking to SMSF Adviser, AMP SMSF’s head of technical, policy and education services, Peter Burgess, said the “associated earnings” approach outlined in the draft legislation appears to be a sensible solution and will avoid the need for funds to calculate actual earnings on the excess amount which was floated with the Budget papers.
“Given the variety in the way funds derive investment earnings, requiring funds to calculate actual earnings derived on the excess amount would have imposed additional administration complexities and costs and the calculation itself open to possible manipulation,” Mr Burgess said.
“The approach proposed in the draft legislation would see the association earnings amount calculated using an average of the general interest charge rates for the financial year in which the excess was made. This is converted to a daily rate and applied to the excess amount for the period commencing on 1 July of the financial year in which the excess was made and ending on the day the Commissioner makes the determination.
“Obviously this approach means that the longer the excess remains in the fund, the larger the individual’s tax liability as the associated earnings figure is required to be included in the individual’s assessable income.”
Where a member who has met a condition of release has withdrawn their entire balance, no excess contributions tax will apply, Mr Burgess said. However, he noted the associated earnings amount will still need to be included in the member’s assessable income.
The same will not apply where the member’s balance has been converted to an income stream, since an income stream still constitutes an interest in the fund, he said.
Mr Burgess said once a member receives a determination from the Commissioner, they will have 60 days to elect to receive the refund. The refunded amount must come out of the member’s tax-free component first and then their taxable component.
“Interestingly, there does not appear to be a requirement for the refunded amount to come from the fund that received the non-concessional contribution, meaning it may be possible for members with multiple funds to elect to receive their refund from their fund which may only have a taxable component,” he said.
“Once a refund has occurred, the super fund provider, including SMSF trustees, must notify the Commissioner of the amount released within seven days. Administrative penalties apply if this notification does not occur,” he added.
Mr Dunn also stressed the importance of following specific processes to avoid being regarded “unfavourably” in the eyes of the Commissioner.
“It’s not just simply: you breach and you take it. There’s a reporting process that needs to be done, because if you don’t follow that process then you’ll end up in a situation where that money will effectively become… illegal early release and so forth.”
See SMSF Adviser’s daily bulletin tomorrow for an extended analysis of this draft legislation from The SMSF Academy’s Aaron Dunn.