Print Friendly, PDF & Email

Abolition of Excess Contributions Tax

Superannuation contribution caps were first introduced in 2007/2008 along with harsh tax penalties up to the maximum rate of personal income tax for exceeding those caps.

Concessional contributions

The "excess contributions tax" (ECT) on concessional (tax deductible) superannuation contributions was effectively repealed from 1 July 2013.  Now any excess concessional contributions are automatically included in your personal income tax return for the year in which the excess occurred, and are taxed at your marginal rate of personal income tax.

Non-concessional contributions

Similar changes to remove excess contributions tax on non-concessional (undeducted) contributions were announced in the Federal Budget in May 2014. To date, only an exposure draft of the proposed legislation has been released for public comment.

Individuals are to be given the option to withdraw their excess contributions and the associated earnings thereon.  Only the earnings made during the time that the excess part of the non-concessional contributions were inside a superannuation fund will be taxed, again in your personal income tax assessment at your marginal rate of personal income tax.

The earnings to be taxed will be a notional amount calculated using an average of the General Interest Charge (GIC) rate used by the ATO.

This is a much fairer proposal than taxing the full amount of any excess non-concessional contributions, which effectively taxed private savings on which you had already paid income tax.

However, the draft legislation sets some tough time limits e.g. only 7 days to pay excess contributions and earnings out of your SMSF once the ATO authorises the release. Failure to act on removing excess non-concessional contributions may see the full amount of the excess contributions themselves taxed at 49% under the old ECT rules, which can still apply.

Tips & Traps

We have heard of some "not-so-clever" strategies around that deliberately encourage taxpayers to exceed their contribution caps, to take advantage of the deferral of personal investment income, dividend imputation and to exploit other timing differences.

We caution clients from using such aggressive tax strategies with deliberate excess contributions already being targeted by the ATO.

Also, consider that where you deliberately exceed you concessional (deductible) contribution cap, penalty interest is calculated back to 1 July of the financial year in which the contribution occurred. The ATO then automatically amend your personal tax return for that financial year and charge the General Interest Charge (GIC) from 1 July of that previous financial year, up to the date of assessment of your personal income tax return.

For many taxpayers that may result in say 18 months or more of the ATO's compounding GIC interest penalty, on top of the additional personal tax payable.

Family super fund trustees fined $50,000 over loans

A recent Federal Court decision highlights the importance of ensuring your self managed superannuation fund (SMSF) follows the rules.

The trustees of a family superannuation fund have been fined $50,000 for using their SMSF to provide loans to themselves as members, as well as permitting rent free accommodation to their son.

The Federal Court heard that over a 4 year period, the superannuation fund in question made unauthorised loans totalling $134,418 in order to purchase items including a caravan, stud cattle and motor vehicles.

In addition, the SMSF had purchased a residential property and leased it to the member's son, including $48,500 of furniture purchased by the fund. However the rent required under the lease was never paid by the son.

The Court ordered the husband trustee to pay a penalty of $30,000 (and the wife $10,000), together with $5,000 each for the Commissioner's costs, totalling $50,000. In addition the trustees have also been disqualified from acting as SMSF trustees in the future, forcing them to sell all investments in their SMSF, roll-over the proceeds to a large superannuation fund, and wind up their SMSF.

Beware of intermingling your personal affairs with your SMSF investments, whether unintentionally or deliberately, as this case seemed to be.

Ref: DCT (Superannuation) v Graham Family Superannuation Pty Limited [2014] FCA 1101, Federal Court, Buchanan J, 15 October 2014.