Key points
- The ATO will notify you of excess concessional contributions and depending on what you decide to do with them, will then send you notification of excess non-concessional contributions.
- You have 60 days to then tell the ATO what you want to do with those NCC but you are now able to have the money refunded to you.
- These new rules can potentially help superannuants enlarge their tax-free components in super.
In some great news, any excess non-concessional super contributions that you make after June 2013 can now be taken out of the super fund and will not face tax penalties.
This is a welcome new law, however there is an interesting twist, which potentially adds a bigger benefit, which I’ll explain in a case study below.
The new process
Firstly I’ll show you the overall process that is used to determine how your excess concessional and non-concessional contributions are treated:
- Super funds deduct 15% contributions tax for all concessional contributions each year in the normal way.
- Super funds send contribution information via a member contribution statement (APRA regulated funds) or annual returns (SMSFs only).
- The Tax Office determines if a person has excess concessional contributions (ECC).
- If applicable the ATO sends documentation about ECCs to a taxpayer and notifies them of their options:
a. Apply for “special circumstances” – that is, apply to disregard or reallocate the contributions (in reality this option has had limited success)
b. Release up to 85% of the contributions – these contributions plus a late interest penalty will be taxed at marginal rates, less a 15% tax offset for any tax already paid
c. Do nothing – excess contributions will be taxed at your marginal rates less the 15% tax offset for contributions already taxed - You must decide what to do within 21 days of receiving the Tax Office’s notice (or longer if the Tax Office allows). You must nominate the super funds that are to have contributions released.
- Excess concessional contributions that remain in a super fund are counted towards your non-concessional contribution (NCC) cap. Any ECCs that are refunded to you under this rule will cause a reduction in the ECCs counted towards your NCC cap.
- Next the Tax Office determines if you have any amount above the NCC cap, that is you have excess non-concessional contributions (ENCCs) and if applicable it determines:
a. Associated earnings – deemed earnings from the start of the financial year in which a contribution is made until the date of calculation by the ATO; these earnings are determined using the General Interest Charge rate which is currently 9.36% per annum (further details of this rate can be found at this link [1]).
b. “Release amount” – ENCC plus 85% of associated earnings - ATO notifies the taxpayer of their options:
a. Special circumstances – apply to disregard or reallocate contributions.
b. Release – have all excess amounts plus associated earnings released from nominated super fund.
c. No money left in the super system – advise and prove that you have no money left in the superannuation system.
d. Do nothing – decide to have ENCCs taxed at penalty tax rates. - You have 60 days to decide which option you wish to select (or longer if the Tax Office allows)
Case Study
Mary is aged 58 and has $500,000 in super of which $150,000 is in her tax-free component.
On 1 December 2014 she made a $700,000 non-concessional contribution. This means she now has $1.2 million in super of which $850,000 is in her tax-free component.
On 20 June 2016, the Tax Office determines that Mary is eligible for the three-year bring forward NCC cap of $540,000. Therefore she has ECNCCs of $160,000.
The associated earnings on this amount are $31,844 (I have made a very rough estimate of what this amount might be).
The Tax Office gives Mary the four options mentioned above including that she can withdraw $187,067 from super (that is, $160,000 plus $27,067 which is 85% of the $31,844 in associated earnings). The $27,067 is taxed at her marginal rates.
She decides to withdraw the $187,067 and nominates her super fund, which holds these contributions.
When this amount is withdrawn it is taken from her taxable component. Only once the taxable component is exhausted will money be taken from her tax-free component.
Ignoring earnings and changes in capital values to Mary’s super investments during the intervening period, after the withdrawal she will have $1.02 million in super. The tax-free component remains at $850,000 and the taxable component has been reduced to $162,933.
In effect, we potentially have another means of enlarging the tax-free component (the traditional way is to take money out of super and re-contribute it as a NCC).
Some downsides with this strategy:
- The associated earnings are taxed at marginal rates – this tax must be considered when determining which strategy is best.
- When money is taken out of super, it must first be removed from the unrestricted component. If Mary has any unrestricted money, then the withdrawal of excess contributions might limit her ability to take money out of super prior to officially retiring. If access to this money is important, then this will be a factor that has to be considered.
- Some have argued that this “strategy” might be “tax avoidance”. If you have any concerns about that then you might like to get some good advice or even apply for a Binding Income Tax Ruling from the ATO.
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.