The new legislation introduced by the federal government last week dealing with excess concessional contributions tax (ECT) should encourage SMSF trustees to revise their strategies, according to an SMSF expert.
The new rules dictate any excess concessional contributions will now be taxed at the individual’s marginal tax rate rather than the top marginal tax rate as had previously been the case.
Considering SMSF trustees would now be provided with an excess contributions assessment with tax levied at the individual’s marginal rate, there would be a distinct advantage for taxpayers not in the top marginal tax bracket to breach the cap and boost their retirement savings, SMSF Strategies principal Grant Abbott told selfmanagedsuper.
“The sweet spot will be for those SMSF trustees who are earning between $80,000 and $180,000 whose marginal tax rate is 37 per cent,” Abbott said.
“Any contributions above the cap will be working for you straightaway at the discounted tax level, so you can allocate it to shares with imputation credits or another asset class knowing you probably won’t have to pay the additional tax on it until three or four months after year end.
“In the lead up to 1 July 2013, SMSF trustees should also consider the use of a contributions reserve as it will enable them to allocate additional contributions to the following financial year.”
He said an added bonus was that the preservation rules did not apply to the excess contribution amount.
However, he noted there was a downside to the rules.
Although the excess contributions are now taxed at the individual’s marginal tax rate, the Australian Taxation Office (ATO) will be raising a shortfall interest penalty of around 5 per cent for the time value of money.
This penalty will only be levied on the tax charged, but will be calculated from 1 July and not from the date the contributions that caused the cap breach were made.
“It’s not a bad system, but perhaps what they should have done is charged the 5 per cent from 1 January rather than 1 July. People don’t make contributions generally until the end of the year, so you’re actually paying this interest charge on contributions where you didn’t get a full year’s benefit from,” Abbott said.
Under the legislation, the ECT can be paid by the individual or released from the fund to the ATO.
Concessional contributions cap breaches can also be withdrawn from the fund, however, these amounts will need be passed on to the ATO and claimed back from the regulator.
“It’s a brilliant result I think at the end of the day and it’s a real game changer,” Abbott said.
