SMSFs cautioned on pre-non-concessional contribution consequences on caps
SMSFs have been warned on the need to ensure careful checks on pre-non-concessional checks as it can inadvertently create flow-on effects on the fund’s contribution caps.
In a recent update, SMSF Alliance principal David Busoli said that recently, there had been two instances where a small excess concessional contribution was notified to, and disregarded by, the member because the personal tax liability that arose from leaving the contribution in the fund was minor.
The additional consequence – the counting of the excess against the member’s non-concessional contribution limit – was ignored.
“This caused a premature triggering of the three-year count with significant unintended excess non-concessional contribution consequences in subsequent years,” he warned.
“This is an easy mistake to make, particularly as the contribution may have been made to a second fund (possibly to maintain life insurance cover) and may not appear on the member’s MyGov record until sometime after it was made.
“This represents one of the more significant detrimental consequences of the lack of data fed member information from the ATO – there are several more. Until this serious information deficiency is rectified, it is advisable to manually check the member’s MyGov records before making non-concessional contributions.”
This is also an important consideration, especially when it comes to responding to an excess determination. Mr Busoli noted if the determination of the excess is wrong, take immediate action to correct the ATO’s records.
“There is a 60-day time limit to adhere to, so act quickly. If the determination is correct, but there are special mitigating circumstances, apply to have some/all of the concessional contributions disregarded,” he said.
Special circumstances do not include financial hardship from having to pay extra tax, thinking the assessment or determination is unfair, not meaning to exceed a cap and not knowing about or misunderstanding the law or facts. This also doesn’t apply to those receiving incorrect or incomplete professional advice and making a mistake.
“If the excess determination is correct, the value will be added to the member’s personal assessable income in the year the contribution was made and taxed at the member’s marginal rate less a 15 per cent tax offset. If the contribution was made prior to 1 July 2021, an excess contribution charge will also be included,” Mr Busoli continued.
“The member must decide on whether to withdraw the excess or leave it in the fund.
“The withdrawal option allows the member to release up to 85 per cent of the excess. The fund the member nominates is sent a release authority by the ATO. The fund will then release the amount to the ATO, not the member.
“The ATO will credit it against the member’s tax liability and refund the balance to the member. The contribution will not be counted against the member’s non-concessional cap.”
If no action is taken, Mr Busoli flagged that the same personal tax liability will be assessed, but the excess will now be counted against the member’s non-concessional cap with potential further consequences.
The member may exceed their non-concessional cap if they have a total super balance above the general transfer balance cap and their non-concessional contributions cap is nil and if they have already triggered the bring-forward arrangement for non-concessional contributions and have used up their cap, according to Mr Busoli,
“This also happens if they are not entitled to the bring-forward arrangement and have breached their standard cap, and they have unintentionally triggered the bring-forward arrangement for non-concessional contributions,” he explained.
“It may be a couple of years after the excess concessional contribution is made before the determination is issued. During this period, non-concessional contribution strategies may have been implemented, so it is imperative that the member investigates the matter immediately.
“There have been instances where the member hasn’t bothered as the breach was minor. Unfortunately, the subsequent non-concessional cap breach was not.”
Tony Zhang is a Journalist at SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2020, Tony has covered various publications across the legal, financial and professional services sectors including Lawyers Weekly, Adviser Innovation, ifa and Accountants Daily.