Trustees receiving excess non-concessional contribution (ENCC) determinations need to be alerted to the options they have to address the excess to prevent paying too much to the ATO, according to an SMSF technical specialist.
Addressing attendees at the recent Institute of Public Accountants National Congress in Adelaide, SuperConcepts SMSF technical services executive manager Mark Ellem said ENCCs were being assessed by trustees on the basis of what they believed was the lowest figure they had to pay to the ATO.
“The issue relates to how the notice is worded and how human nature will focus on numbers and to always go for the lower number, not realising the consequence of that choice,” Ellem said.
He highlighted the two options presented by the ATO to superannuation fund members where they have an ENCC, where the first option allows for the excess contribution to be released back to the member and marginal tax charged only on the associated earnings or for the excess to remain in the fund and be assessed for ENCC tax.
The second option is an older rule where the excess is taxed at 49 per cent, but can appear to be a lesser amount in terms of what will be retained by the ATO, he said.
“We had a client issued with an ENCC notice of $125,000, which was the excess and notional earnings, and they looked at the notice and the two options and chose the second option because it stated they would only have to send $50,000 to the ATO, while option one stated $125,000 would have to be removed from their fund,” he said.
“They went with that option without realising that in the first option the excess and notional earnings would go to the ATO who would deduct tax on the earnings and send back the rest of the money, which in this case was over $100,000.”
He highlighted these notices were usually sent directly to fund members and not the adviser of an SMSF, and in the case cited it only became an issue when it was mentioned to SuperConcepts.
“When we asked why they decided to choose option two, they said they would not be paying $125,000 as in option one, but did not realise they would receive back around $100,000 and under option two they would receive nothing.”