The proposed introduction of a lifetime cap for non-concessional superannuation contributions has given renewed relevance to the rules governing excess contributions refunds. Julie Steed revisits the processes involved in releasing these amounts.
The announcement in the 2016 federal budget regarding a proposed life-time non-concessional contributions cap has sparked significant interest. In this article we will review the current workings of excess non-concessional contributions.
History
Excess non-concessional contributions were introduced from 1 July 2007 whereby 100 per cent of excess non-concessional contributions were taxed at the top marginal rate. No excess non-concessional contributions were able to be released from super funds.
From 1 July 2013, fairer treatment of excess non-concessional contributions was introduced. Excess non-concessional contributions can be released following receipt of an ATO release authority.
Associated earnings
Where excess non-concessional contributions exist, members are liable for an associated earnings penalty. The associated earnings amount is a substitute for fund earnings on excess non-concessional contributions and is imposed to recognise investment returns have been generated in a concessionally taxed environment.
The associated earnings amount applies from the start of the financial year in which the contributions were made up to the day the ATO issues the excess non-concessional contributions determination.
The interest rate used to calculate the associated earnings amount varies each quarter and is equal to the 90-day bank bill plus 7 percentage points and is currently 9.28 per cent. Fortunately, the ATO calculates the associated earnings amount, however, there is no ability for the tax commissioner to waive the application of associated earnings.
Members may minimise the amount of associated earnings payable by lodging their tax return and SMSF annual return as early as possible. If an SMSF lodges its annual return on 1 May, the associated earnings calculation applies for at least 670 days. If the member and the SMSF lodge returns by 30 September, the number of days reduces by about 200 days.
The associated earnings amount is included in the assessable income of an individual and taxed at their marginal tax rate. Eighty-five per cent of the associated earnings can be released to pay the additional tax.
Associated earnings case study – Peter
Peter had excess non-concessional contributions for the 2016 financial year of $540,000. The ATO issues an excess non-concessional contributions determination on 1 November 2016. The associated earnings were calculated over the 489 days from 1 July 2015 to 1 November 2016 as follows:
0.02512978% x ($540,000 + sum of earlier daily amounts) for 489 days = $70,751
If Peter’s SMSF did not lodge its annual return until 1 May 2017, this would be the earliest possible day the ATO could issue an excess non-concessional contributions determination. The associated earnings would then be calculated over at least 670 days from 1 July 2015 to 1 May 2017 as follows:
0.02512978% x ($540,000 + sum of earlier daily amounts) for 670 days = $99,169
Administration of excess non-concessional contributions
The ATO determines that excess non-concessional contributions exist based on the information contained in the member’s personal tax return and information provided by super funds in the annual member contribution statements.
Where an excess exists, the ATO issues a determination notice to the member. The determination notice includes:
- the excess non-concessional contributions,
- the associated earnings amount,
- the total release amount,
- excess non-concessional contributions + 85 per cent of associated earnings, and
- an election form.
Election form
When an SMSF member receives a release authority they can generally elect:
- to release the total release amount per the ATO determination,
- not to release the total release amount because the value of all their superannuation is nil, or
- not to release the total release amount for some other reason.
The election form must be returned to the ATO within 60 days of being issued and must identify the super fund an amount is to be released from. Members may elect to have amounts released from multiple funds, however, the combined maximum for all funds must still equal the total release amount. Members cannot elect to have only part of the release amount released.
Once an election is made it is irrevocable.
Election to pay the release amount
Where the member makes an election to pay the total release amount, the ATO:
- adds the associated earnings amount to the member’s taxable income,
- calculates the adjusted tax amount,
- includes a tax offset of 15 per cent of the associated earnings amount,
- issues an amended tax assessment to the member, who then pays the additional tax liability, and
- issues a release authority to the fund (or funds).
The super fund then has 21 days from the date the release authority is issued to pay the release amount to the member.
Election not to pay the release amount due to a nil super balance
Where the member makes an election not to release any amount because their superannuation balance is nil, the ATO:
- adds the associated earnings amount to the member’s taxable income,
- calculates the adjusted tax amount,
- includes a tax offset of 15 per cent of the associated earnings amount, and
- issues an amended tax assessment to the member, who then pays the additional tax liability.
The ATO then issues a direction to the member confirming they have no excess non-concessional contributions, even though no excess contributions have been released.
Election not to pay the release amount for some other reason
A member may elect not to pay the release amount for some other reason. Where this occurs, the election is irrevocable and the member has excess non-concessional contributions. The ATO will issue an excess non-concessional contributions tax assessment.
If no election is made, then no amount can be released from super. This has the same effect as making an election not to release and will result in an excess non-concessional contributions tax assessment.
Excess non-concessional contributions tax assessment
Liability for excess non-concessional contributions tax arises:
- where a member has excess non-concessional contributions before 1 July 2013, or
- where a member has excess non-concessional contributions since 1 July 2013 and they do not elect to have the total release amount released from super.
The ATO issues an assessment, which includes the amount of excess non-concessional contributions and the amount of excess non-concessional contributions tax (the excess non-concessional contributions amount taxed at the top marginal tax rate).
Payment of the excess non-concessional contributions tax is due in 21 days.
The ATO also issues a compulsory release authority, which the member must provide to the super fund within 21 days.
The tax office will issue a release authority directly to a super fund that holds an interest for the member if:
- the member does not provide the release authority to the super fund within 90 days, or
- the member does provide the release authority to the super fund(s) within 90 days, but the total amount paid by the super fund(s) is less than the release amount.
This may occur, for example, when a member has two super funds and a release authority is issued to only one fund that the member expects to hold the full release amount. However, negative returns may have reduced the balance in the time between the member making the election and the release authority being actioned.
Payment type
The released amount is a special type of benefit payment, which is treated as a non-assessable non-exempt benefit payment to the member. The proportioning rule does not apply to released amounts. Where the released amount is paid from an accumulation account, the release reduces the taxable component only. 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.
The ordinary cashing order applies whereby a released amount will be taken in order from:
- unrestricted non-preserved benefits,
- restricted non-preserved benefits, and
- preserved benefits.
If the released amount is paid from an account-based pension, it will count towards the minimum annual pension. If it is made from a transition-to-retirement pension, it will also count towards the maximum annual pension.
Case study – Pam
Pam commenced a pension in the 2013 financial year with a 10 per cent tax-free component. Pam made a non-concessional contribution of $450,000 during the 2014 financial year and immediately commenced a 100 per cent tax-free pension.
Pam made a non-concessional contributions of $90,000 on 30 April 2015 on the mistaken belief that she qualified for the indexed three-year bring forward. She immediately combined the amount with her 100 per cent tax-free pension.
In 2016, the ATO issued Pam with an excess non-concessional contributions determination notice. The determination included:
- the excess non-concessional contributions of $90,000,
- the associated earnings amount of $15,294,
- the total release amount of $103,000
- excess non-concessional contributions + 85 per cent of associated earnings, and
- an election form.
Pam had $200,000 in one pension account, which has a 10 per cent tax-free component, and $540,000 in her second pension account, which was 100 per cent tax-free. As Pam had no accumulation accounts, the law allows her to elect to release the release amount from an ‘interest’. She makes a valid election to release the total release amount of $103,000 from her $200,000 pension account, which has a 10 per cent tax-free component, and returns the election form to the ATO within 60 days. The ATO issued a release authority to the SMSF requiring the SMSF to pay $103,000 to Pam, which it promptly does.
The full amount of the associated earnings of $15,294 is included in Pam’s assessable income for the 2015 financial year and she is entitled to a tax offset of $2,294 ($15,294 x 15%).
As the total release amount been released, Pam no longer has excess non-concessional contributions.
Pam’s pension paid $103,000, which is about 50 per cent of the account balance as at 1 July 2016. As the highest minimum annual pension amount is 14 per cent of the account balance, no further pension payments are required.
Transition-to-retirement pension
If the pension was a transition-to-retirement pension, the maximum of 10 per cent tax-free component would have been breached and the exempt current pension income concession would be lost. In this scenario, Pam could consider rolling the pension back to accumulation phase prior to the release payment being made.
Pam has a $200,000 pension account balance with a 10 per cent tax-free percentage. If she rolls back to accumulation phase, the tax-free component of the accumulation account is $20,000 and the taxable component is $180,000.
The ATO issues a release authority to the SMSF requiring the SMSF to pay $103,000, which it promptly does.
After the payment, the tax-free component of the accumulation account remains at $20,000 and the taxable component has reduced to $77,000. Pam can then commence a pension with the remaining $97,000, which would then have a tax-free percentage of 20.62 per cent and a taxable percentage of 79.38 per cent.
One pension
As with the transition-to-retirement example, if Pam had only one pension, she may still be able to maximise the tax-free component by rolling the pension back to accumulation phase before the release payment was made.
Summary
In the event members have excess non-concessional contributions, they must ensure they pay attention to the determination issued by the ATO. Members must make an election to have the total release amount released within the required time frames. The amount of associated earnings can be minimised by lodging the individual’s tax return and SMSF annual return as early as possible.
