A senior superannuation executive has alerted practitioners to a component of the retirement savings rules providing trustees with a slight benefit if they breach their non-concessional contribution cap and subsequently decide to release the excess amount.
Institute of Financial Professionals Australia (IFPA) head of superannuation and financial services Natasha Panagis confirmed the advantage arises from the variation an excess non-concessional contribution makes to a superannuant’s taxable and tax-free components.
“While amounts paid out of super must usually be [made] in proportion to the tax-free and taxable amounts of the interest, this doesn’t apply to [an excess contribution] release under the rules,” Panagis confirmed during an IFPA webinar today.
“So the proportioning rule does not apply to any withdrawals made from super or pensions so any withdrawals [of this nature] that are made are effectively drawn from the taxable component.”
She illustrated the point using an example where an individual made a non-concessional contribution of $120,000 in error when their total super balance was $1.9 million and where their benefits prior to the contribution, $950,000, were 50 per cent tax-free.
The contribution then increases the tax-free component to $1.07 million and the person’s total super balance to $2.02 million, resulting in the fund having 47 per cent of its benefits being taxable and 53 per cent being tax-free.
However, when the excess contribution of $120,000 is released, the non-taxable component of the fund remains unadjusted, that is, it stays at $1.07 million.
Conversely, the release of the $120,000 excess contribution will reduce the member’s total super balance, in this case, dropping it back down to $1.9 million.
As a result of the contribution error and subsequent release of the excess amount, the individual ends up with $1.9 million of superannuation benefits made up of a 56 per cent ($1.07 million divided by $1.9 million) tax-free component and a 44 per cent taxable component.
“I suppose you can consider [that] as the silver lining in this situation,” Panagis said.
