The Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014, which received royal assent on 19 March, provides long-awaited relief and clarity to the previous punitive and potential double taxation treatment of excess non-concessional contributions.
These amendments, applying from the 2014 financial year onwards, allow an individual to choose whether or not to release an amount equal to the excess non-concessional contribution plus 85 per cent of an associated earnings amount from their superannuation. This earnings amount is then assessed by being included in the individual’s assessable income, taxed at the individual’s marginal tax rate (plus Medicare levy), with an entitlement to a non-refundable 15 per cent tax offset. If this choice is taken, excess non-concessional contributions tax will not be imposed. It sounds simple enough and is also in line with the existing treatment of excess concessional contributions. However, with any new changes to legislation, there are finer points to the changes that you need to be aware of for your clients.
They are as follows:
Determination: Individuals cannot release money from superannuation until the commissioner of taxation has made a written determination and the appropriate election and release authorities have been made. The determination will state the amount of the excess contributions, the amount of the associated earnings and the total release amount. An individual can then elect to either release the total release amount, not to release any amount from superannuation because the value of all their superannuation interests is nil or not to release at all. An individual cannot elect to make a partial release; the release election must be made on the approved form within 60 days from the date of issue of the determination and is irrevocable. Amounts will be released directly to the individual and not via the commissioner.
Superannuation interests are nil: Excess concessional contributions tax will not be imposed where the individual’s remaining superannuation interests are nil. However, the individual will still be assessed at a personal level on the full amount of the associated earnings with a non-refundable 15 per cent tax credit.
No election made: If no election is made, the individual cannot release any amount from superannuation. The commissioner will issue an assessment to the individual for the amount of excess non-concessional contributions tax payable. It is also important to note there are no changes to the rules in relation to commissioner discretion. The commissioner still has the discretion to either disregard non-concessional contributions or reallocate them to another financial year.
Associated earnings: The time frame used by the commissioner to calculate associated earnings is from the start of the financial year in which the excess contribution was made through to the date of the written determination made by the commissioner. An average of the general interest charge (GIC) for each of the quarters of the relevant financial year is used to calculate the associated earnings amount. This amount compounds on a daily basis. Section 8AAD of the Tax Administration Act 1953 determines how the GIC is calculated. In effect it is the 90-day bank bill rate plus a 7 per cent uplift factor. For 2013/14, the average GIC was 9.66 per cent. Therefore it may be advisable to lodge the affected individual’s personal tax return and associated SMSF annual return as soon as possible after the end of the relevant financial year so as to reduce the impact of this earnings amount.
It is also important to note the proportioning rule does not apply to any of the release amounts. This means the release amount does not have to be paid out based on the underlying components of the original composition of the superannuation interest(s). The amount paid out based on the release authority is a superannuation lump sum. The excess non-concessional component is non-assessable, non-exempt income, while the associated earnings amount is assessed at the individual’s level.
These changes have brought clarity and consistency, however, care is still required in making sure strict adherence to the legislation and the finer points are met at all times.
