‘Sit tight and wait’: SMSFs impacted by bring-forward rule setback urged not to rush avoiding excess determination
With the non-concessional contribution bring-forward rule set to be debated in the Senate, advisers need to be aware that if proposals don’t fall through, clients may face serious impacts if they rush into withdrawing excess amounts prematurely to avoid an excess determination.
The much-anticipated changes to non-concessional contribution (NCC) bring-forward rules to allow clients under 67 at any time during a financial year to make a NCC of up to $300,000 from 1 July 2020 are scheduled for debate this week and will possibly pass unamended.
However, with some SMSFs possibly having already “jumped the gun”, clients could be affected if the proposals don’t get through or the effective date gets amended to 1 July 2021 and the SMSF exceeds their non-concessional cap, according to Colonial First State head of technical services Craig Day.
“The delay in these proposals becoming law may have led to some clients who were about to turn 67 jumping the gun and making NCCs of up to $300,000 during 2020–21 in the hope the rule changes would subsequently get through as proposed,” Mr Day said.
“However, if the bring-forward changes do not proceed, or the effective date gets changed to 1 July 2021, it will be important for impacted clients to sit tight and wait for the excess NCC process to take its course and not panic and withdraw any potentially excess NCC amounts prematurely.”
Under the NCC cap rules, where a client breaches their NCC cap in a financial year, Mr Day said the ATO will issue an excess NCC determination after the end of the year specifying the amount of their excess NCCs and a deemed earnings amount.
This means the client will then have the option of releasing the combined excess contributions and deemed earnings amount from super, or paying excess NCC tax of 47 per cent on their excess NCCs.
“Where the client elects (on an approved form) to release the combined amount from super, or they make no election, the ATO will issue a release authority for the amount to their fund,” Mr Day explained.
“The fund will then pay that amount to the ATO, which will then deduct any tax payable prior to paying the balance to the client.
“As part of this process, the ATO will also reduce the level of the client’s excess NCCs to nil which means the 47 per cent excess NCC contributions tax will not be payable. However, the deemed earnings will be taxed at the client’s marginal tax rate with a 15 per cent non-refundable tax offset.”
In this case, Mr Day noted it will be very important that impacted clients do not withdraw excess NCC amounts as a lump sum to try and avoid being issued with an excess determination, as the withdrawal will not reduce their excess NCCs and will not fix the problem.
“Instead, they will need to wait for the determination to be issued and then make the election to release,” he warned.
“It’s also important to note that a trustee cannot just simply ‘reverse’ a contribution the client intended to make just because it ends up exceeding their NCC cap.
“In this case, the excess NCC process will still need to be followed.”