The first Luke knew that he had a tax bill for super was when he received an excess non-concessional contribution assessment from the ATO. ‘How did that happen? But I’ve done everything right’, he thought. Maybe I need to retrace my steps to see where the problem is.
As Luke went through his tax and super information, he saw that for the 2017/18 tax year he had contributed non-concessional contributions of $300,000, which was ‘OK under the rules’, according to him. From what he understood, it was possible to access the three years bring forward rule that applied because he was under 65 at the beginning of the year. Then he went to the 2016/17 tax year and saw he had contributed $180,000, which was the standard non-concessional contribution cap for that year and did not trigger the bring forward rule.
All this just didn’t make sense, until he looked at the ATO’s assessment, which showed an excess of $104,000. Then he remembered every year $2,000 was automatically deducted from his bank account to pay the premium for a superannuation insurance policy. The effect of paying the premium was to trigger the bring forward rule one year earlier in the 2016/17 tax year, rather than in the 2017/18 financial year as he had planned. Thus the excess.
It is possible in some situations that excess non-concessional contributions can be allocated to another tax year. However, for Luke that would be unlikely, unless he was able to show that there was a ‘perfect storm’, which lead him down the wrong path resulting in the excess. In this situation, he should have been aware of all the amounts that were being paid to superannuation, even the premium for his superannuation insurance policy.
Luke has two possible options available to him for the excess non-concessional contribution and has 60 days to decide which option he will take. The first is to withdraw the excess non-concessional contributions from the fund, as well as 85% of the penalty earnings, which were included in the ATO assessment. The refund of the contributions will be tax free, but any penalty earnings will be included in Luke’s taxable income and he will end up paying tax of 15% on it. The ATO automatically amends Luke’s tax return and makes the adjustment to include the penalty earnings.
Luke’s second option is to not withdraw any excess non-concessional contribution from the fund and pay tax equal to 47% of the excess. This is a high penalty considering non-concessional contributions are already after-tax amounts made to the super fund. The ATO will automatically amend Luke’s tax return and make the adjustment to include the excess, which will be taxed.
Making non-concessional contributions to superannuation has become a much more precise science since the 1 July 2017 changes, which have reduced the amount you can make to super, based on your age and the balance you have in super, as at the end of the previous financial year. Next time Luke makes a non-concessional contribution to super, he will need to look again to make sure he doesn’t go over his cap.
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 regard to your circumstances.