A breakdown of the new contributions rules
Changes to the treatment of excess non-concessional contributions have now been legislated, but what do they mean for SMSF practitioners and their trustee clients?
Essentially these changes bring the treatment of excess non-concessional contributions into line with the treatment of excess concessional contributions. We detail below the workings of the new rules.
Where an individual makes excess non-concessional contributions on or after 1 July 2013, the individual may elect to withdraw from superannuation the amount of the excess together with 85 per cent of an ‘associated earnings amount’.
Where the individual chooses the withdrawal option and withdraws the required amount from superannuation:
- the excess will not be subject to excess non-concessional contributions tax;
- however, 100 per cent of the ‘associated earnings amount’ will be taxed in the individual’s hands at their marginal tax rate (plus Medicare levy), less a 15 per cent non-refundable tax offset.
Where the individual elects to not withdraw or makes no election:
- the excess contributions will remain in the fund;
- the excess contributions will be subject to excess non-concessional contributions tax at the top marginal rate plus Medicare levy (as is the case for contributions made pre-30 June 2013);
- no tax is paid by the individual on any ‘associated earnings amount’.
Associated earnings amount
The ‘associated earnings amount’ is designed to approximate the amount earned on the excess contributions whilst they were in superannuation. An approximation is used to avoid superannuation funds needing to calculate actual earnings.
The ‘associated earnings amount’ is calculated using an average of the general interest charge (GIC) rate for each of the quarters of the financial year in which the excess contributions were made (known as a ‘proxy amount’) and compounds on a daily basis.
The proxy rate for the 2014 financial year is 9.66 per cent and the daily rate for the purpose of calculating the associated earnings amount is 0.02646575 per cent.
The ‘associated earnings amount’ is calculated for the period from 1 July of the financial year in which the excess contributions were made, ending on the day the Australian Taxation Office makes its first determination of excess non-concessional contributions for the relevant year.
For example: Belinda’s non-concessional contributions for the 2014 financial year exceeded her non-concessional contributions cap by $100,000. The ATO issued Belinda with an excess non-concessional determination on 1 November 2014. Belinda is taken to have an associated earnings amount of $13,814 calculated as 0.02646575 per cent x $100,000 for the 489-day period from 1 July 2013 to 1 November 2014.
Individuals can minimise the ‘associated earnings amount’ by lodging their personal income tax return for the year of the excess contributions as soon as possible after the end of the financial year. The superannuation fund/s to which the contributions were made must also lodge its member contribution statement (for SMSFs, part of the Annual Return) as soon as possible after the end of the financial year.
Note, the fund which received the excess contributions will still be subject to tax on its actual earnings in the usual manner, regardless of whether the refund option is chosen or not.
The mechanism by which amounts are withdrawn from superannuation operates as follows:
- the individual first needs to lodge their income tax return for the financial year in question and the superannuation fund/s to which the contributions were made must also lodge its member contribution statement;
- where the ATO determines that the individual has non-concessional contributions, it must issue the individual with an excess non-concessional contributions determination. This determination will specify the amount of the excess, the associated earnings figure and the amount to be released (ie the amount of the excess plus 85 per cent of the associated earnings amount);
- individuals who receive a determination can elect to release the total amount of the determination from superannuation. Such an election is irrevocable and must be made within 60 days of the date of issue of the determination;
- the election must specify one or more superannuation funds from which the amount is to be released. The ATO will then issue the fund/s with a release authority. If an individual has multiple superannuation interests, the individual can choose from which interest the monies are released. This need not be the same fund to which the excess contribution was made;
- a superannuation fund which receives a release authority must pay to the individual the amount stated in the release authority within 21 days of the date of issue of the release authority;
- the payment from superannuation to the individual will be a superannuation lump sum. The amount itself will not have any income tax consequences for the individual as it will be non-assessable non-exempt income. However, the ‘associated earnings amount’ will be included in the individual’s assessable income for the year in which the excess contributions were made. Note also that the proportioning rule will not apply to the withdrawal.
- Excess amounts should not be voluntarily released from superannuation. Individuals must first wait for an excess non-concessional contribution determination to issue, make the necessary election and then await the issue of a release authority to a superannuation fund. Where amounts are withdrawn before the issue of a release authority, the amount withdrawn may be considered an illegal early access benefit payment.
- There is no change to the way in which an individual’s non-concessional contributions or non-concessional contribution cap is worked out. That is, the bring forward rule for individuals under age 65 continues to apply.
- A contribution made by an individual in a single deposit which exceeds the individual’s fund-capped limit ($540,000 for individuals aged 64 or less on 1 July, otherwise $180,000) is still required to be refunded to the individual within 30 days of the trustee becoming aware that the amount should not have been accepted. Such an amount should not be reported in the fund’s accounts or member contribution statement as a contribution and therefore will not trigger an excess contributions determination.
Warning on contribution strategies
When the legislation to give effect to these changes was first drafted by the government, it required the amount withdrawn from superannuation to be deducted from the individual’s tax-free component.
However, due to the complexity this would have caused for members with multiple superannuation interests, this requirement did not make it into the final legislation. This provides individuals with the opportunity to choose from which interest the amount is deducted. For example, where an individual has multiple interests, he/she would be free to choose to release the amount from the interest with the highest taxable component.
New rules for excess non-concessional contributions
Unfortunately, some in the industry have suggested strategies where an individual would purposely make contributions in excess of the non-concessional contribution cap with the aim of turning all or part of the individual’s taxable component into a tax-free component. Advisers contemplating such strategies should exercise extreme care. A failure to abide by the strict timeframes in the legislation could result in contributions being subject to tax at the top marginal rate. Further, the more ‘attention’ these strategies receive, the more likely it is that the commissioner of taxation will seek to take action.
Stuart Forsyth, director, McPherson Super Consulting