TAX ALERT: Refund Of Excess Non-Concessional Contributions
On 19 March 2015, the Tax and Superannuation Laws Amendment (2014 Measures No. 7) Act 2015 received Royal Assent.
The legislation now provides an option to avoid the severe penalties (of potentially a 93% tax) for contributions made to superannuation in excess of the non-concessional contributions cap.
The Act provides individuals with an option to be taxed on the earnings associated with their excess superannuation non-concessional contribution at their marginal tax rate …".
It also provides the opportunity to withdraw excess non-concessional contributions, avoiding penalty tax on those contributions.
These new provisions will apply to excess non-concessional contributions made from 1 July 2013.
The legislation changes impact both:
1. The Individual
If the non-concessional contributions made by an individual in the 2013/14 or later years exceed the relevant cap, the individual will be given the opportunity (in the form of a release authority issued by the ATO) to withdraw the excess amount from their superannuation fund.
Along with the excess contributions, the election by the individual will include 85% of any income earned by the excess amount.
Alternatively, the member may elect not to use the withdrawal option, in which case the excess contributions will be taxed in the fund under the previous regime, where they are taxed at the top marginal rate, not at the taxpayers actual marginal rate.
2. The Fund
If the member elects to withdraw the excess non-concessional contributions and any excess earnings amount, no tax on the excess will be levied in the fund on that money.
It would be prudent to review the trust deed of your Self Managed Superannuation Fund (SMSF) to ensure it permits the payment of both the excess contributions and any excess earnings amount.
Excess Earnings Amount
While the news so far is positive, it is important to consider the calculation of any excess earnings amount, as it may prove to be costly.
Calculation of the excess earnings amount is based on a nominal interest rate to reflect the earnings received on those excess funds during the period they are held by the Super Fund.
The interest rate applicable is the lower of a rate specified by the Minister (if any) and the average ATO General Interest Charge (GIC), which is based on the average of 90 day bank bills plus 7% (ie. in the vicinity of 9% to 10%).
The formula for calculating the excess earnings amount applies the GIC rate at the first day of the year in which the excess non-concessional contributions were made, and applies interest on the contributed amount for the whole year, regardless of when the excess non-concessional contribution occurred.
Clearly this could give rise to a higher notional excess earnings amount than the actual income earned by the excess amount, especially if the excess contribution happens in June of the tax year.
Payment from Super Fund
If the member elects to have the excess non-concessional contributions, and any excess earnings amount released, the amount to be paid to the ATO will comprise:
· the amount of excess non-concessional contributions as determined by the ATO; and
· 85% of the excess earnings amount.
It is important to note that only 85% is paid, as it is assumed that tax of 15% has been paid on the earnings by the Super Fund.
Taxation of Member
The ATO will adjust the member's income tax return for the relevant year to include the total of the excess earnings amount (ie. the grossed up amount) in the assessable income of the member.
That grossed up amount will be taxed at the member's actual marginal rate and, because of the assumption tax of 15% has been applied at the Super Fund level, an offset of 15% will be applied to the assessed amount.
Although this new legislation provides some significant relief from excess non-concessional contributions tax, it still remains critical to monitor the level of contributions made each year.
Whilst the opportunity of a refund is available, the payment of the excess earnings amount from superannuation and the adjustment to the individual's income tax return could still prove to be costly and an unnecessary waste of retirement funds.
Should you have any questions in relation to these matters, please do not hesitate to contact your Lowe Lippmann advisor.