19 October 2021
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
Have you received an excess superannuation contribution determination from the Australian Taxation Office (ATO) and wondered why – when you thought you’d contributed the right amount?
Apart from the obvious of just putting too much into super, you can easily trip up the contribution caps if you do not know how they work.
Take these two cases.
Case study 1 – Ron
Ron, aged 61, wished to maximise his retirement savings. Knowing there are limits on how much can be put into superannuation, Ron was diligent with the amounts he contributed.
Ron sacrificed part of his salary into super, aware his employer made compulsory Superannuation Guarantee (SG) contributions for him.
In the 2018-19 financial year, Ron made – for the first time – a non-concessional contribution (NCC) of $100,000 – the cap applying at that time.
With superannuation savings of $900,000 at 30 June 2019 – well within the $1.6 million total superannuation balance (TSB) test prohibiting after-tax contributions and below $1.4 million for the three-year bring-forward rule – Ron decided to ramp it up in 2019-20 and contributed $300,000 by triggering the bring-forward rule.
Subsequently, Ron was advised by the ATO that he’d exceeded his NCCs cap by $100,040. What could possibly have gone wrong?
Unfortunately for Ron the ATO was right.
In 2018-19, Ron’s total pre-tax concessional contributions (CCs) were $25,040. He had inadvertently exceeded the CCs cap of $25,000 by $40.
Calculating the amount of voluntary CCs to make is tricky as – amongst other amounts – employer SG contributions, notional taxed contributions for a defined benefit fund, and a fund’s administration expenses and insurance premiums paid by an employer must be taken into account as all count towards the CCs cap.
Ron had miscalculated his voluntary CCs – going over by a mere $40. After being notified by the ATO, he paid the relevant tax and additional charge (applying at the time) but did not withdraw 85 per cent of the excess from super. Why bother with such a small amount? Well, it mattered!
Because Ron hadn’t withdrawn $34 (85% x $40) from his super fund, the $40 excess counted towards his NCCs cap.
In 2018-19, Ron’s after-tax contribution was $100,000, but the amount counted towards his NCCs cap was $100,040 and the bring-forward rule was triggered as it exceeded $100,000. This meant he could make NCCs in 2019-20 of only $199,960 ($300,000 – $100,040). Instead, Ron made a $300,000 contribution. Consequently, he exceeded his NCCs cap by $100,040 ($300,000 – $199,960).
Case study 2 – Paula
Then there was Paula, aged 66, who made a personal deductible contribution of $25,000 in 2019-20 before commencing an account-based pension. Having a TSB at 30 June 2019 of $1.8 million, she was ineligible to make an after-tax NCC.
Paula did the right thing and lodged a notice of intent to claim a tax deduction for her contribution, received an acknowledgement from the trustee of her fund and 15 per cent tax was deducted from the contribution. Paula made sure she did this before commencing the pension as she knew that if it was done after, the deduction would be denied and the contribution would be treated as an NCC.
Subsequently, Paula received an excess contributions determination from the ATO advising she’d exceeded her NCCs cap by $25,000.
Again, what could have gone wrong?
It transpired that Paula had not lodged her 2020 tax return.
After a financial year ends, the ATO assesses contribution information reported by a fund and any deduction for personal contributions information on a taxpayer’s tax return to work out whether they have exceeded their CCs or NCCs cap. Without the tax return, a contribution remains an NCC subject to the NCCs cap.
Whist the vast majority lodge their tax return on time, Paula hadn’t.
The lesson here is to lodge your tax return by the due date.
What happens if I exceed my CCs cap?
You will receive an excess concessional contributions (ECC) determination from the ATO and an income tax assessment because the excess amount is automatically included in your assessable income and taxed at your marginal rate less a 15 per cent tax offset for contributions tax already paid by your fund.
From 1 July this year, a ECC charge is no longer payable.
Within 60 days of the determination, you can elect to withdraw up to 85 per cent of your ECCs to pay the tax, otherwise you’ll need to fund it yourself. If you are a member of a defined benefit fund, the trustee may be unable to release this amount, unless there is an accumulation account in the fund. If the ECCs are left in super, they will count towards your NCCs cap – as in Ron’s case.
If you make the election, the ATO will issue a release authority directly to your nominated fund. The fund then pays the 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 NCCs cap?
The ATO will issue an excess NCCs determination explaining your options. You have 60 days to make a choice – which cannot be changed.
The first option allows you to withdraw the excess contributions and 85 per cent of the notional earnings on these contributions. The earnings are then taxed at your marginal rate plus Medicare levy less a 15 per cent 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 per cent (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 fund.
Do nothing and the ATO automatically defaults you to 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, you can elect to have excess NCCs refunded and only pay tax on the earnings instead of having the excess contributions taxed at 47 per cent. You can guess which option Ron chose.
Always check a determination is correct. The ATO makes its assessment using information from your super fund(s) and tax return. If your fund has reported contributions perchance incorrectly, it can re-report to the ATO.
What are the caps?
The CCs cap is now $27,500 a year. You can carry forward any unused cap amount on a rolling 5-year basis but this can only be used if your TSB was less than $500,000 at the previous 30 June.
If you split your CCs with your spouse, these contributions still count towards your cap.
The NCCs cap is $110,000, but you can only make an NCC if your TSB was less than $1.7 million at the previous 30 June – your NCCs cap is nil if your TSB was $1.7 million or more.
If you were under age 67 on 1 July this year, it may be possible to trigger the bring-forward rule – determined by your TSB. If it was less than $1.48 million at 30 June 2021 then the NCCs cap is $330,000 and the bring-forward period is 3 years. If your TSB is between $1.48 million and $1.59 million, its $220,000 and 2 years.
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 to keep track of them.
*This information is prepared by Fitzpatricks Private Wealth Pty Ltd (Fitzpatricks) ABN 33 093 667 595 AFSL No. 247 429 and, where relevant, its related bodies corporate. The information in this publication is of a general nature only. All information has been prepared without taking into account your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate for you.