By Colin Lewis, Head of Technical Services, Fitzpatricks Private Wealth
What happens if you exceed the contributions limits?
Richard – in his fifties – wished to maximise his retirement savings. Knowing there are limits on how much can be put into superannuation, Richard was diligent with the amounts he contributed.
Richard salary sacrificed part of his pre-tax income into super, aware his employer had to make compulsory Superannuation Guarantee (SG) contributions for him.
In the 2017-18 financial year, Richard made a non-concessional contribution (NCC) of $100,000 – he had not previously made an after-tax contribution.
With superannuation savings of $800,000 at 30 June 2018 – well within the $1.6 million total superannuation balance (TSB) test prohibiting further after-tax contributions and below $1.4 million for the three-year bring-forward rule – Richard decided to ramp it up in 2018-19 by triggering the bring-forward rule and contributing $300,000.
Subsequently, Richard was advised by the Australian Taxation Office (ATO) that he’d exceeded his NCCs cap by $100,009.86.
Surely this couldn’t be right – Richard had watched his p’s and q’s when contributing, or so he thought. What could possibly have gone wrong?
Unfortunately for Richard the ATO was right.
In 2017-18, Richard’s total pre-tax concessional contributions (CCs) were $25,009.86. He had inadvertently exceeded the CCs cap of $25,000 by $9.86.
Calculating the amount of voluntary CCs to make can be tricky as there are a number of other amounts that all count towards the CCs cap and must be taken into account. Amongst these are the employer SG contributions, notional taxed contributions for a defined benefit fund, and a super fund’s administration expenses and/or insurance premiums paid by an employer.
Richard had not been quite on the mark in calculating his voluntary CCs and had gone over by a mere $9.86. After being notified by the ATO, he paid the relevant tax and additional charge but did not withdraw 85 percent of the excess from super. Why bother with such a small amount? Well, it mattered!
Because he hadn’t withdrawn $8.38 (85% x $9.86) from his super fund, the $9.86 excess counted towards his NCCs cap.
In 2017-18, Richard’s after-tax contribution was $100,000, but the total amount counted towards his NCCs cap was $100,009.86 and the bring-forward rule was triggered as it exceeded
$100,000. This meant he could make NCCs in 2018-19 of only $199,990.14 ($300,000-$100,009.86). Instead Richard made a $300,000 contribution thinking he was triggering the bring-forward rule in that year. Consequently, he exceeded his NCCs cap by $100,009.86 ($300,000-$199,990.14).
What are the caps?
The concessional contributions cap is currently $25,000 and you can carry forward any unused cap amount on a rolling five-year basis but can only use it if your TSB is less than $500,000 at the previous June 30.
If you split your CCs with your spouse, these contributions still count towards your cap.
The non-concessional contributions cap is $100,000, but you can only make an NCC if your TSB is less than $1.6 million at the previous June 30. Your NCCs cap is nil if your TSB is $1.6 million or more.
Currently, if you’re under age 65 anytime in the financial year, it’s possible to trigger the bring-forward rule determined by your TSB. If it’s less than $1.4 million at the previous June 30, then the NCCs cap is $300,000 and the bring-forward period is three years. If your TSB is between $1.4 million and $1.5 million, its $200,000 and 2 years, otherwise the NCCs cap is $100,000.
Certain after-tax contributions – a downsizer contribution after selling a home and CGT cap contribution from selling a business or other active business asset – can be made regardless of your TSB.
Importantly, contributions are counted when received by your super fund and it’s up to you – not your super fund or the ATO – to keep track of them.
What happens if I exceed my concessional contributions cap?
The ATO will issue you with an excess concessional contributions (ECC) determination. In addition, you receive an income tax assessment because the excess amount is automatically included in your assessable income and taxed at your marginal rate less a 15% tax offset for the contributions tax already paid by your fund. An ECC charge is also payable to take account of the deferred tax payment.
Within 60 days of the determination, you can make an irrevocable election to withdraw up to 85 percent of your ECCs to help pay the tax, otherwise you’ll need to fund it yourself. If you leave the ECCs in super, they will count towards your NCCs cap – as in Richard’s case.
If you make the election, the ATO will issue a release authority directly to your nominated fund. The fund then pays the release amount to the ATO and you receive a credit for the amount released which is used by the ATO to first pay any tax or government debts before refunding any balance to you.
What happens if I exceed my non-concessional contributions cap?
The ATO will issue an excess non-concessional contributions determination explaining your options. You have 60 days make a choice – which cannot be changed.
The first option allows you to withdraw the excess contributions and 85% of the notional earnings on these contributions. The earnings are then taxed at your marginal rate plus Medicare levy, less a 15% tax offset for tax already paid by your fund on the earnings.
The second option is to leave the contributions and earnings in super, but the excess amount will be taxed at 47 percent (including Medicare levy), regardless of your marginal tax rate. As NCCs are from after-tax money, it means you’re paying double tax. This option must be selected if your only super is in a defined benefit super fund.
Do nothing and the ATO automatically defaults you into the first option and releases your excess contributions from super.
The released amount is a non-assessable non-exempt benefit payment.
The proportioning rule applying to superannuation withdrawals does not apply to released amounts, so if paid from an accumulation account, it reduces the taxable component. Accordingly, if you have multiple super accounts, you should request the release come from the account with the largest taxable component. This may help to reduce tax on any benefits paid in the future.
Where the released amount is paid from a pension account, there is no adjustment to the tax-free and taxable percentages which are calculated on commencement of your pension.
Also, the released amount is taken first from unrestricted non-preserved benefits, then restricted non-preserved benefits and finally from preserved benefits.
So, instead of having excess contributions taxed at 47 percent, you can elect for a refund and only pay tax on the earnings.
You can guess which option Richard chose.
Always check a determination is correct. The ATO makes its assessment using information from your super fund(s) – and tax return – and your fund may have incorrectly reported contributions. If there’s been a mistake, your fund can re-report to the ATO.