Tax on super contributions for higher income earners

SMSF technical expert and columnist for The Australian newspaper
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In last year’s budget, the Government announced that higher income earners, who earn more than $300,000, would pay tax on their super contributions at 30%. This new tax was effective from 1 July 2012!

Everyone else will continue to have their super contributions taxed at 15%.

Finally, the Government has issued some draft rules on how the tax will be applied to higher income earners, and how it will be collected. There’s a number of key elements to this new tax measure you should consider.

How income is worked out

This new measure has a specific definition of how income is worked out. This income test is very similar to the assessment that was used for the old superannuation surcharge put in place by the Coalition in 1996.

For this new measure, you include the following amounts in the income test:

  • Taxable income
  • Reportable fringe benefits
  • Total investment losses.

From these amounts, you deduct the following:

  • Some tax-free distributions from family trusts
  • Some super benefits included in your tax return (if you’re aged at least 55 but under 60) that receive a tax offset so the benefit is concessionally taxed.

Super contributions subject to the 30% tax

As far as super contributions are concerned, the following amounts are added to your income amount worked out above:

  • All employer super contributions
  • Personal super contributions claimed as a tax deduction
  • Allocations from reserves above a reasonable amount.

All other super contributions are excluded from this new tax measure including the following:

  • Excess contributions
  • Most transfers from foreign super funds
  • Rollovers containing an untaxed taxable component (primarily paid from unfunded public sector super funds).

What do you pay the 30% tax on?

You add your super contributions and the income (both worked out above) and you pay 30% tax on the lesser of:

  • The amount above $300,000
  • Super contributions already taxed at 15% in your super fund (in which case the contributions will be taxed at an additional 15% to bring the upfront tax to 30%).

Here’s an example:

You earn a $280,000 salary package. With this, you take $25,000 in super contributions and a $40,000 motor vehicle, which is used solely for private purposes. Your pre-tax take home salary is $215,000. You also own a residential investment property. From this you receive $52,000 a year in rent. You claim $80,000 in costs on this property, which means the property is negatively geared to the tune of $28,000 ($52,000 – $80,000).

Your income for this new tax measure is $283,000. You add your take-home salary (215,000), the car (40,000) and the rental loss ($28,000).

Now you add in your super contribution of $25,000 and we have total income of $308,000.

The amount above $300,000 is $8,000, which is less than your $25,000 employer super contributions.

This means the $8,000 will be taxed at 30%.

Last year, you paid $3,750 tax on your super contributions. This year you’ll pay $4,950 – an increase of 32%.

How is the tax collected?

The collection system is very similar to how excess contributions works.

That is, you super fund sends information about the contributions you have made to the Tax Office. For large funds, this reporting is performed regularly throughout the year. For SMSFs, it’s done once when the fund’s annual return is submitted.

The ATO then combines this information with your income (worked out using the above formula once it has your individual income tax return) and works out how much additional tax, if any, you have to pay.

The ATO then writes to you and says you’ll have to pay some additional tax. At the same time, they give you a “release authority”, which you can give to your super fund so they can forward the additional tax to the ATO on your behalf.

Can you object to the ATO’s assessment?

Yes you can, but only using normal objection processes that apply to most tax laws. In other words, it’s not possible to use the “special circumstances” provisions that apply to excess contributions. For example, contributions are made in this financial year and a taxpayer successfully argues to the ATO that, for excess contributions tax purposes, they should be deemed to be made in a different financial year.

Defined benefit super funds

The calculations used to determine how much tax is paid by defined benefit super funds – especially public sector and government employees – are unbelievably complex. The rules remind me of how the super surcharge was collected for these types of funds. SMSFs can’t be defined benefit super funds anymore, so most of you won’t need to worry about these new rules. Regrettably, some of you won’t be so lucky, as you’ll be a member of these funds.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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