SMSF members considering deliberately breaching the excess concessional contributions cap under the new rules as a tax deferral strategy need to be mindful of a few factors, including the ability to cover the excess contributions charge, according to a specialist SMSF lawyer.
The reason SMSF members may be contemplating strategically breaching the excess contributions cap is because the breaches are now charged at their individual marginal tax rate as opposed to the previous penalty rate levied at the top marginal tax rate, potentially creating the opportunity to defer tax liabilities.
“The purpose of the ECC (excess concessional contributions) charge is to detract from those benefits that might exist from tax deferral,” Townsends Business and Corporate Lawyers superannuation solicitor Caroline Harley said.
“I suppose if you were considering that option, it is very important to keep in mind the returns on the excess contributions would need to exceed the financial penalty.
“That’s obviously subject to market fluctuation risks. Remember the charge is roughly 6 per cent and is compounding daily.”
In addition, Harley highlighted the fact SMSF members looking to use this strategy would need to ensure they had the financial capability to meet the penalties outside of the fund.
“There is also always the risk of pushing over and breaching the non-concessional contributions cap that could see the member getting to the point where they may have to pay 93 per cent tax and that would probably not be a good strategy from any stretch of the imagination,” she said.
“Those are just some of the risks to be aware of if this strategy was being considered by an adviser or their client.”