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Dealing with excess before-tax super contributions

Making extra before-tax contributions into super (called concessional contributions) can help boost a person’s retirement savings. But fund members need to be aware of the  implications for when they exceed the concessional contributions cap.

Since 2013-14, when the excess concessional contributions refunding scheme came into effect, individuals exceeding their concessional contribution cap will accrue a tax liability.

The excess concessional contribution (CC) amount will be added to the individual’s assessable income for the relevant year and taxed at their marginal tax rates plus an excess CCs charge (as explained below). The individual will, however, be entitled to a 15% nonrefundable tax offset to compensate for the tax already paid by their fund(s) on the same excess amount.

The ATO will determine whether there are any excess CCs once the individual’s fund has finalised its reporting requirements and the individual has lodged their personal tax return for the relevant income year.

Upon exceeding their CCs cap, the individual will receive an excess CC determination from the ATO advising them that their excess CCs amount has been included as  assessable income in their tax return. Together with the determination, the ATO will issue the individual with an income tax return notice of assessment or notice of an amended assessment.

Case study

  • Greg is 54 years old and subject to a marginal tax rate of 34.5% (including the Medicare levy).
  • Greg’s only superannuation interest is in his selfmanaged superannuation fund (SMSF). His total superannuation balance (TSB) on 30 June 2019 was $1.8 million.
  • Greg had super guarantee (SG) and personal deductible contributions totalling $30,000 in CCs made into his SMSF during 2019-20.
  • Greg’s CCs cap for 2019-20 was $25,000, giving him an excess CCs of $5,000.
  • The total CCs amount of $30,000 is reported to the ATO as part of the super fund’s 2019-20 annual return.
  • Greg lodges his personal income tax return for 2019-20 on 31 August 2020 and receives a notice of assessment with payment due 21 September 2020.
  • However, the ATO determines that Greg has exceeded his CCs cap for 2019-20 by $5,000. On 1 November 2020, it issues Greg with an excess CCs determination and amended notice of assessment with payment due on 21 December 2020.

First, the CCs (totalling $30,000) would be included in the SMSF’s assessable income for 2019-20 and taxed at 15% (that is $4,500).

Secondly, the ATO would add the excess CCs of $5,000 to Greg’s assessable income for 2019-20 and recalculate his income tax for that year allowing for a 15% tax offset to reflect the tax already paid by the SMSF. This gives Greg the following tax liability: $5,000 taxed at a marginal tax rate of 34.5% ($5,000 x 34.5% = $1,725). Less 15% tax offset ($5,000 x 15% = $750). Total $975.

EXCESS CONCESSIONAL CONTRIBUTION CHARGE

When an individual has their tax payable increased due to having their excess CCs included in their assessable income, they will also have to pay an excess CC charge (essentially an interest charge) that applies to the extra tax liability. The excess CC charge:

  • applies from 1 July in the year in which the excess contribution was made until the day before the individual is due to pay their income tax liability under their first assessment notice for that income year
  • is calculated by the ATO and compounded daily at a rate equal to the 90-day bank accepted bill (as published by the Reserve Bank of Australia) plus a 3% uplift factor.
  • is contained (along with the period and rate of the excess CCs charge) in the excess CC determination received by the individual from the ATO, and
  • is not a deductible expense and the ATO cannot exercise its discretion to remit it.

Following on from Greg’s scenario earlier, the excess CC charge will apply to his extra tax liability amount of $975 (not the full $5,000 excess CCs) from 1 July 2019 to 20 September 2020 (being the day before tax is due to be paid under his first notice of assessment).

SHORTFALL INTEREST CHARGE

An individual’s tax liability may also increase by the shortfall interest charge (SIC) that applies to the shortfall between the amount of tax the individual paid originally, and the amount of extra tax identified in their amended tax return (which includes the excess CCs and applicable 15% tax offset).

The SIC rates are the same as the excess CC charge, and is applied to the shortfall amount from the time the original tax liability was payable until the day before the extra tax liability related to the amended assessment for the excess CCs is due. The SIC is charged on the total of the extra tax payable due to excess CCs, plus the amount of the excess CC charge.

In Greg’s case, Greg may need to pay the SIC on the extra income tax liability of $975 plus the excess CC charge amount. Many taxpayers seem to be unaware of the SIC until they receive an amended assessment from the ATO.

An exception will arise if you expect to earn more next financial year. In that case it may be to your advantage to delay any tax-deductible payments until next financial year, when the financial benefit of deductions could be greater. Tax planning is the key, as your personal circumstances will dictate whether these measures are appropriate.

It’s probably leaving it a bit late to adopt this strategy now, but you could consider a tactic that can take advantage of this sort of timing and place money into a term deposit that matures after 30 June 2022. Then interest will form part of your taxable income in the following tax year.

Again, this type of strategy may be invaluable if you are anticipating less or more income next year as a result of some of the more longer-term effects of COVID-19 on
the economy.

Final reminders

You can claim up to $300 of work-related expenses without receipts, provided the claims are reasonable for outgoings related to earning assessable income. If the total amount you are claiming is $300 or less, you need to be able to show how you worked out your claims, but you do not need written evidence.

No-one knows your affairs better than yourself, so you will recognise if any of the above tax tips applies to your circumstances. But no-one is better informed as to what is appropriate, or indeed allowable, than your tax agent (and don’t forget, any fee is an allowable deduction in the year it is paid).

Every individual taxpayer is required to lodge their return before October 31, but tax professionals are generally given more time to lodge, which can be a handy extension to a payment deadline if any arises.

Of course, if you’re sure you are going to get a refund there is no use delaying, so in these cases it is worth getting all of your information in and your return lodged as soon as you can after July 1 – especially if the value of a refund is important for your circumstances.

Please contact the TNR team if you have any queries relating to dealing with excess before-tax super contributions.

Important: The information contained in this post / article is not advice. Readers should not act solely on the basis of material contained in this post. Items herein are general comments only and do not constitute or convey advice per se. We recommend that our formal advice be sought before acting on anything contained in this post.