Advisers must make their SMSF clients aware of the serious nature of non-concessional contributions cap breaches with regard to the significant financial consequences associated with them, a specialist practitioner has said.
“The penalty for non-concessional contributions cap breaches is a lot higher than an excess concessional cap contribution,” Cooper Partners director Jemma Sanderson said.
The reason for these higher penalties is the way by which these penalties are applied, she added.
“[With a] non-concessional [cap breach] the penalty is [levied] on the contribution itself, the excess, and is this associated earnings amount, or this deemed earnings amount, on that excess and that is at the GIC (general interest charge) rate which is about 7.1 per cent at the moment,” she explained.
“[In addition] because of the way the mechanism works [the calculation of those] associated earnings starts from 1 July of the year of the contribution and not the date of the contribution.”
To illustrate the potential magnitude of these penalties Sanderson examined a hypothetical situation of a non-concessional cap breach in the 2018/19 financial year.
“So, you do your 30 June 2019 financials for the super fund, and let’s say those were lodged by May 2020. Then it’s now [in November] you might be getting that excess notice and that’s quite generous. It’s probably going to be received in a few months’ time,” she said.
“In this situation, the associated earnings will have been accruing since 1 July 2018. So you’re looking at a long period of time, perhaps two years, that those associated earnings have been accruing.
“Now if your excess isn’t enormous then it might not be an enormous amount that accrues, but if your excess ends up being substantial, then the last thing you want is this associated earnings ticking over for 12, 18 or 24 months which is then added to the individual’s assessable income to be taxed at their marginal tax rate.”
Sanderson pointed out penalties levied on concessional contributions cap breaches are significantly less severe because they are calculated using a different methodology.
She noted these penalties are charged on the difference between the individual’s marginal tax rate and the 15 per cent rate applicable to superannuation and are calculated using the shortfall interest charge currently around 5 and 6 per cent.
Previously Sanderson had warned about the effect of data matching lags on excess contribution notices.