SMSF trustees who have made an excess concessional contribution should take swift action to withdraw it from the fund as retaining it may have significant taxation consequences, according to a technical expert.
BT Financial Group advice strategy and technical specialist Tim Howard noted this situation arises from the treatment the ATO applies to concessional contributions when they have breached the respective cap limit.
“An important distinction worth mentioning from a tax component point of view is that while your excess concessional contribution will no longer count towards your concessional contributions cap, if it isn’t released, it’s going to count towards the non-concessional cap at the ATO’s end,” Howard told attendees of a BT Financial Group technical webinar held today.
“Often advisers or clients will think: ‘I don’t really mind if it counts towards my non-concessional cap, we’re not making large non-concessional contributions [and] we’re not going to inadvertently breach our non-concessional cap as a result of bring forwards in addition to that excess.’
“[But] from a member benefit point of view, that excess contribution was assessed on the way in, forms part of the taxable component on the way in, and even though the ATO now considers it non-concessional at their end, there is no mechanism or ability if you look at the legislation for that component to be reclassified as a tax-free component.
“So that excess will always be taxable even though it is now counting towards the non-concessional cap.
“My view would be it’s always going to be better to withdraw that excess rather than leave it in there to count towards the non-concessional cap. Just withdraw it and make a non-concessional contribution if the client wants to make one.”
In the case a trustee wilfully neglects to take action on managing excess contributions, he warned the tax implications for a fund could be severe.
“There are situations where you still can end up in a position where your excess concessional contribution can be taxed at up to 94 per cent,” he said.
“To find yourself in that position, you have to make a conscious effort to firstly leave that excess in super, have it count towards your non-concessional caps base, have it go into an excess non-concessional [environment] and then again nominate to leave it in there at that point as well.”