Understanding the new system for excess superannuation contributions

SMSF technical expert and columnist for The Australian newspaper
Print This Post A A A

From 1 July 2013, the excess contribution system will change quite radically. To understand how the new system will work, it is worth understanding how the old system worked.

The old system

Here’s a brief summary of how the system worked until 30 June 2013:

  1. Super fund deducts 15% contributions tax for concessional contributions (typically personal contributions claimed as a tax deduction and all employer contributions);
  2. Super fund sends concessional and Non-Concessional Contribution (NCC) information to the ATO (for an SMSF, through the annual return);
  3. The ATO determines if a person has excess concessional contributions (ECC);
  4. The ATO adds any excess concessional contributions to a taxpayer’s NCCs;
  5. If applicable, the ATO sends a determination to the taxpayer about excess concessional contributions (ECCs);
  6. The taxpayer has limited scope to appeal against the ATO’s determination;
  7. In limited circumstances, a taxpayer with up to $10,000 of ECCs can request that 85% of these contributions be refunded to the taxpayer and taxed at their marginal rate, less a 15% tax offset for the tax paid by the super fund;
  8. In all other cases, the taxpayer can pay this penalty tax (31.5%) themselves or can send a release authority to their relevant super fund, who then pays 31.5% tax to the ATO;
  9. The ATO determines if a person has excess NCCs (after adjusting for any ECC refund);
  10. Again, the taxpayer has limited scope to appeal against the ATO’s determination;
  11. Excess NCCs are then taxed at 46.5% and this tax must be paid out of your super fund.

New system

In summary, the 2013/14 system will work in the following way:

  1. Super fund deducts 15% contributions tax for concessional contributions in normal way;
  2. Super funds sends concessional and NCC information to ATO (for an SMSF, through the annual return);
  3. The ATO determines if a person has ECCs;
  4. The ATO adds any ECCs to a taxpayer’s NCCs;
  5. If applicable, the ATO sends a determination to the taxpayer about excess contributions;
  6. The taxpayer has limited scope to appeal against the ATO’s determination;
  7. A taxpayer with ECCs can request that 85% of these contributions be refunded by the super fund to the taxpayer, and taxed at their marginal rate less a 15% tax offset for the tax paid by the super fund;
  8. For the ECCs that remain in the super fund, the ATO adds theses contributions to a taxpayer’s taxable income and determines how much tax they must pay, plus general interest charge for the late payment of personal income tax. This interest charge will be calculated from 1 July in the year the contribution is made until just before the tax is due.  (In effect, ECCs will be taxed at marginal rates, not the highest marginal rate);
  9. The ATO determines if a person has excess NCCs (after adjusting for any refund of ECCs);
  10. The taxpayer has limited scope to appeal against the ATO’s determination;
  11. Excess NCCs are then taxed at 46.5% and this tax must be paid out of the super system

All up, this is quite a radical change and applies to contributions made after June 2013.  The $10,000 refund system – which the ATO no doubt spent considerable money putting into place – will be gone after only one financial year.

I have read that some superannuation commentators have suggested that taxing ECCs at a taxpayer’s marginal tax rate is a “game changer” and that investors on moderate incomes, who don’t pay the highest marginal rate, might now be encouraged to make ECCs because they’re now taxed at a lower rate.

Personally I don’t understand this view.  ECCs will form part of your taxable component – potentially taxed if you take a super benefit out before age 60 or death benefits are paid to non-dependants.  It is surely better to be paid salary, pay tax at your marginal rate and make NCCs, because these form part of your tax-free component, which is always tax-free when taken out of your super fund.

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.

Also in the Switzer Super Report:

Also from this edition

View More Articles