While the rules surrounding excess contributions have remained relatively stable for some time now, recent changes to non-concessional contribution limits for those with large superannuation balances have muddied the waters regarding the total superannuation balance (TSB).
In particular, what happens when excess concessional contributions are made for someone whose TSB is above the critical $1.6 million threshold?
Firstly, it is worth noting concessional contributions can still be made for someone in this position. This includes both employer contributions and personal contributions for which the individual claims a tax deduction.
If those contributions exceed the $25,000 concessional contributions cap, they are initially dealt with just like any other excess concessional contribution:
- the total contribution amount will be reported to the ATO as part of the fund’s annual return (let’s say the contributions occurred in 2017/18 and are included in the 2017/18 annual return),
- the ATO will determine there is an excess (let’s say this amount is $5000),
- the ATO will add the $5000 to the individual’s 2017/18 assessable income and recalculate their income tax for that year. Their new tax position will be calculated including this $5000 and allowing for a 15 per cent tax offset (to reflect the tax already paid by the superannuation fund), and
- in addition, interest will be applied to this extra tax bill from 1 July in the year in which the contribution was received, in this case 1 July 2017 (this interest component is known as the excess concessional contributions charge). If the extra tax bill is $1000, interest will be applied to the $1000, not the full $5000 excess.
The ATO will also advise the individual they can elect to release up to 85 per cent of the excess contributions (85% x $5000 = $4250) from their superannuation fund. If this election is made, the ATO will send a release authority to the member’s nominated superannuation fund.
If they choose not to release the excess, the full amount of $5000 will count towards the individual’s non-concessional contributions cap (for 2017/18 in this example).
This is where things potentially get tricky. If the individual’s TSB was $1.6 million or more at the previous 30 June, in this case 30 June 2017, their non-concessional contributions cap is $0. Does that mean it is illegal to create an excess in this way? Are individuals in this position forced to refund their excess concessional contributions?
In fact, no. Providing they meet the usual superannuation rules, for example, they are under 65 or between 65 and 75 but have met a work test, any individual in this position can still make non-concessional contributions. They can also have one created via an excess concessional contribution that is not refunded.
But any non-concessional contributions will be in excess of their $0 limit.
In this example, the $5000 excess will be treated just like any other excess non-concessional contribution. It will trigger a determination from the ATO that sets out the excess $5000 plus an amount of associated earnings, effectively the interest on the excess. Again, the interest applies from the beginning of the financial year in which the contribution was received, 1 July 2017 in this case. The individual then has two choices:
- Take the relevant amount out of superannuation (the excess of $5000 plus 85 per cent of the associated earnings). In this case, the individual will just pay extra income tax on 100 per cent of the associated earnings and will receive a 15 per cent tax offset in 2017/18.
- Pay excess non-concessional contributions tax. In this case, just the excess amount of $5000 is taxed at 47 per cent.
Since 1 July 2018, in the absence of the member telling the ATO they don’t want money released from superannuation, the ATO’s default will be to issue a release authority so the relevant amount can be paid out of super.
The new $1.6 million limit on non-concessional contributions has not really changed anything here. It simply means anyone in this position should definitely refund their excess concessional contributions. Importantly:
- no refunding of excess contribution amounts should happen until the determination and release authority is received from the ATO. If any amounts are refunded earlier, they are effectively benefit payments. If the member is not yet eligible to withdraw amounts from superannuation, it will be an illegal early release of superannuation money, and
- even though the member’s TSB in this example was over $1.6 million, the excess concessional contribution, which in turn created an excess non-concessional contribution, was not illegal; it simply had tax consequences.
Meg Heffron is managing director of Heffron SMSF Solutions.