In the last budget the Government announced the end of Excess Contributions Tax.
The announcement was that, just like was already the case for excess concessional contributions, from 1 July 2013 if a taxpayer makes excess non concessional contributions, rather than assessing them with Excess Contributions Tax, the super fund could refund the excess amount.
Sounds simple? Not quite…
In a recent exposure draft, titled “Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014: Excess non-concessional contributions”, the Government attempts to implement this change.
The draft Bill provides that an individual who has made non-concessional contributions in excess of their cap in the 2013-14 year or in later years can elect to release that amount plus an “associated earnings amount”. The associated earnings amount will be included in the individual’s assessable income.
Excess non-concessional contributions tax will not be imposed on excess contributions to the extent that an amount of those contributions is released from superannuation, or where the value of an individual’s remaining superannuation interests is nil.
But remember, if you don’t elect to have the amount refunded there will be Excess Contributions Tax… It can still apply if you forget to respond to the Commissioner’s assessment (or if you have a defined benefit fund… see below).
Some of this is very hard to implement in law. Especially, what are the “associated earnings”, when will there be “nil” superannuation interests and how do defined benefit funds handle all this… And this is where a simple idea gets messy…
Where the amount of the excess contributions are refunded or the Commissioner determines that the value of the individual’s superannuation interests is nil the associated earnings amount is included in the individual’s assessable income. This removes a taxation benefit of having the earnings taxed in the fund and not in the hands of the individual.
But how does a fund work out what the associated earnings on the excess contributions were?
The draft Bill states that the associated earnings amount is calculated using an average of the General Interest Charge rate for each of the quarters of the financial year in which the excess contributions were made and compounds on a daily basis. In addition the period that this rate applies is deemed to commences on 1 July of the financial year that the excess contributions were made and ends on the day that the Commissioner makes the first determination of excess non concessional contributions.
Using the 2014 year as a guide, this means it is assumed the fund earned 9.66%. Also it assumes that the excess contributions were made on 1 July 2013, even if all the contributions were made on 30 June 2014. This can lead to some unfortunate outcomes…
Belinda makes a $550,000 non-concessional contributions on 30 June 2014 and therefore exceeds her non-concessional contributions cap by $100,000. She lodges all her returns promptly in July and August 2014 and the Commissioner issues Belinda an excess non-concessional contributions determination on 1 November 2014.
Even though the $100,000 excess contributions have only been in her super fund for 4 months she is taken to have associated earnings calculated as follows:
0.02646575% (9.66%/365) x ($100,000 plus the sum of the earlier daily proxy amounts) for the 489 day period from 1 July 2013 until 1 November 2014 (not a 120 day period from 30 June 2014 to 1 November 2014).
The result of this formula is that the associated earnings equal $13,814.
Because the fact that the excess contribution was made on 30 June 2014 is ignored and rather it is assumed that the excess contributions were made on 1 July 2013, the earning are substantially higher. And remember these earnings are refunded from the super fund and taxed in the hands of the individual.
Using the example above, to get earnings of $13,814 on $100,000 over the period of 30 June 2014 to 1 November 2014 would require an annualised return rate on 39.7%.
In effect there is a penalty in making excess non concessional contributions as it is likely that more than the actual earnings on those contributions will be required to be withdrawn from the fund and taxed at marginal rates.
Commissioner’s direction if value of superannuation interest is nil
Individuals who make non-concessional contributions in excess of their cap might have been paid some or all their superannuation benefits by the time they receive a determination from the Commissioner.
So how does the fund refund amounts it does not have any more?
If this occurs the Commissioner can make a direction if he is satisfied that the value of all the individuals remaining superannuation interests is nil following the release of any amount stated in an excess non-concessional contributions determination. Alternatively, the individual can elect not to release any amount from superannuation because the value of their superannuation interests is nil.
Where this occurs an individual will not have excess non-concessional contributions that will be subject to excess non-concessional contributions tax for the financial year to which the determination relates.
As always, the final problem is defined benefit funds. But this is not much of a problem as if the defined benefit fund or the individual do not or cannot elect to refund the amounts… Excess Contributions Tax will apply as it always has
So in summary… In most situations there will be no Excess Contributions Tax as, from 1 July 2013, any excess concessional or non concessional contributions will be refunded to the taxpayer if the taxpayer elects to have it refunded. If the taxpayer does not elect, or the fund legally cannot release the amount Excess Contributions Tax will apply.
And for all those people planning to park income in super funds through excess non concessional contributions to delay tax payments… there is a penalty as the earning calculation is almost always going to be higher than the actual earnings. This effectively means some of the non concessional contributions within the cap will be refunded to the taxpayer and taxed at marginal rates.