By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
Aftermath of tax time
As the 31 October due date for lodging personal income tax returns has passed, the Australian Taxation Office (ATO) will start issuing certain superannuation tax assessments and determinations to affected taxpayers as it uses information from these returns and information reported by super funds.
Division 293 tax assessments
Division 293 tax applies to people who had income and pre-tax concessional contributions (CCs) greater than $250,000 for 2022-23 and affected taxpayers will pay an extra 15 per cent tax on the amount of CCs (within CCs cap) that exceed the $250,000 threshold.
If you receive a Division 293 tax assessment, you are personally liable for payment of the tax, and it must generally be paid within 21 days of the assessment being issued, to avoid penalties.
To pay it, you may elect to release an amount from super within 60 days of the issue date.
Where you make this election, the ATO will issue a release authority to your nominated fund(s), and they pay the requested amount directly to the ATO within 10 business days.
Importantly, while you have 60 days to elect for an amount to be released from your super fund(s), your tax bill remains due within 21 days of the assessment.
So, you should personally pay your tax bill by the due date to avoid penalties even if you intend to elect to have monies released from super.
If your tax liability is extinguished before your fund releases monies to the ATO, the ATO will refund released amounts to you – unless you have other tax or government debts owing.
Making this election is a way of getting money out of super where you’re concerned about the proposed new tax on earnings on superannuation balances greater than $3 million and want to reduce your balance but haven’t met a condition of release, like retirement.
Unanticipated excess non-concessional contribution (NCC) determinations
Making a personal deductible contribution shouldn’t be hard, but many people are discovering this is not necessarily the case.
Take Ray who made a personal deductible contribution in June 2023 to reduce his tax bill.
Ray did things right. He lodged a notice of intent (NOI) to claim a tax deduction and received an acknowledgement from his fund – 15 per cent tax was deducted from his contribution.
He did not touch the contribution – rolling it over to another fund, withdrawing it, or starting an income stream before lodging an NOI mucks up a tax deduction.
Ray lodged his tax return on time.
Ray’s total superannuation balance (TSB) was $2 million on 30 June 2022, so he was ineligible to make an NCC because his TSB was greater than $1.9 million and his NCCs cap is nil.
Then there is Joan who made a $27,500 personal deductible contribution in June 2023. She couldn’t make an NCC having made one of $300,000 in 2020-21 and is in the bring-forward period.
And there’s Bob who in 2022-23 made a $20,000 personal deductible contribution and $110,000 NCC – his TSB was $800,000 on 30 June 2022 – but hasn’t lodged his tax return.
Ray, Joan and Bob received excess NCC – that’s right, non-concessional contribution – determinations from the ATO – not uncommon.
How could this happen when they all made concessional contributions?
Important to understand the process
Personal contributions are NCCs subject to the NCCs cap unless claimed as a tax deduction – lodge an NOI, have it acknowledged and claim it on a tax return.
The ATO makes its assessment using information from tax returns and super funds and can be quick in issuing excess contribution determinations.
Where tax returns are lodged but not processed (Ray and Joan’s case), or not lodged at all (Bob’s case), contributions remain NCCs.
With Ray and Joan being ineligible to make NCCs, and Bob’s total contributions exceeding the NCCs cap, they all end up with an excess.
What happens if I exceed the NCCs cap?
The ATO issues an excess NCC determination explaining your options and you have 60 days to decide.
Option one allows you to withdraw the excess contributions and 85 per cent of ‘associated earnings’ – these earnings are then taxed at your marginal rate plus Medicare levy less a 15 per cent tax offset for tax already paid.
‘Associated earnings’ are earnings deemed to have accrued on the excess while in super calculated at a set notional rate – not what your fund actually earned.
Option two is to leave the contributions and earnings in super and have the excess taxed at 47 per cent. This option must be selected if your only super is in a defined benefit fund.
Do nothing and the ATO automatically defaults to option one.
So, you can have excess NCCs refunded and pay tax only on earnings or have the excess taxed at 47 per cent – a no brainer.
Back to Ray, Joan and Bob
If the ATO doesn’t process their tax returns before their determinations are actioned, then the problem is threefold.
First, money comes out of super that needn’t have come out.
Second, they pay tax on something – associated earnings – they wouldn’t normally have paid tax on.
Third, in Ray’s case, he cannot get the money back into super if his TSB was $1.9M or more on 30 June 2023.
Can I avoid this happening?
Self-employed and retirees under 67 have no choice but make personal deductible contributions, whereas employees can make salary sacrifice contributions under an arrangement with their employer (entered into before income is earned).
Given salary sacrifice contributions are employer contributions, they are concessional contributions from the outset, so you cannot end up with an excess NCC determination from them.
Salary sacrifice contributions are automatically made on a regular basis.
Regular deposits into an investment at regular intervals – dollar cost averaging – is a powerful way to invest – builds exposure to growth assets in a disciplined way, reduces the risk of investing in volatile markets and avoids the pitfalls of timing entry into markets.
But you don’t know when your employer will put the money into your fund, making it difficult to target the CCs cap.
Making personal deductible contributions provides greater control and flexibility over the amount and timing of contributions and dealing with the CCs cap at year end.
There’s peace of mind knowing your fund gets your money. Many employers leave it for months between deducting money from wages and contributing – for some, it never gets there!
It avoids a nightmare should your employer go into administration/receivership, as money deducted from salary but not contributed may take years to recover.
But it may mean ending up with an excess NCC determination.