Changes to how excess concessional superannuation contributions are taxed

Excess Concessional Superannuation Contributions

From 1 July 2013 excess concessional superannuation contributions will be included in an individual’s assessable income and will be taxed at their marginal rate.

Concessional superannuation contributions include employer contributions, salary sacrifice contributions and deductible personal contributions. Excess concessional contributions are those contributions made into a superannuation fund in excess of an individual’s general concessional contribution cap.

The excess concessional superannuation contribution amount will not affect the non-concessional superannuation (non-deductible superannuation contributions) cap of $150,000.

The concessional contribution caps for the relevant years are as follows:

If your concessional superannuation contributions exceed the cap you are taxed on the excess amount. You will be entitled to a 15% non-refundable offset which is equivalent to the tax paid by the superannuation fund on the excess contributions.

In addition to the above, an Excess Contribution Charge (ECC) will also be payable by the individual. The ECC is applied to concessional superannuation contributions in excess of the cap, “to recognise that tax is collected later than normal income tax”. The ECC is payable on the increase in tax liability in the year a person makes excess superannuation contributions.

The ECC is calculated from the start of the income year in which the excess concessional superannuation contributions were made and ends just before the tax is due to be paid under your first income tax assessment for the year that includes the excess concessional contributions. The ECC will be calculated by the ATO using a base daily interest rate plus an uplift factor of 3%.

The tax on the excess concessional superannuation contributions together with the ECC will be calculated by the ATO. The ATO will base its calculation on your original tax return and the information they receive from your superannuation fund(s). The ATO will then issue an amended income tax assessment which may be at a later time than when you lodge your tax return and receive your original assessment.

To help pay the tax and ECC on excess superannuation contributions, individuals can request up to 85% of their excess contribution be released from their superannuation fund. This can be accomplished by completing the excess concessional contribution election form that the Australian Taxation Office (ATO) will forward to an individual in these circumstances.

The form should then be returned to the ATO will then forward it the superannuation fund allowing them to release up to 85% of the excess superannuation contribution. The funds will be released to the ATO to be first offset against any outstanding debt and then the balance will be refunded to the individual.

An example of how the new rules operate is a follows:

John is 35 years old and is employed as an engineer. For the year ended 30 June 2014, John received $150,000 salary, his employer made compulsory superannuation contributions of $13,875. John also salary sacrificed $20,000 in to his superannuation fund during the year ended 30 June 2014.

The relevant concessional contribution cap for John for the year is $25,000. Total concessional contributions made by or on behalf of John are $33,875,which exceed the cap by $8,875.

The excess amount will be included in John’s assessable income by the ATO.

The tax on the excess contribution is calculated at John’s marginal tax rate of 38.5% less 15% offset.

Tax        ($8,875 x 38.5%)       $3,416.88

Rebate ($8,875 x 15%)          ($1,331.25)

Total                                           $2,085.63

The ECC will also apply on the above amount from 01/07/2013 to the day before the liability is due to be paid.

John can request, by completing the excess concessional contribution election form and providing it to the ATO, that 85% of the excess contribution be released from the fund. The ATO will then inform John’s superannuation fund and they will release the excess contribution to the ATO. They will first offset the amount against any outstanding debt and refund John the balance.

If you believe your concessional superannuation contributions are nearing your cap, please contact you superannuation or tax advisor to obtain specific advice in regards to how these changes may affect you.

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Source: Written by Roger Potter, Director of Wybenga & Partners Pty Limited, Chartered Accountants, Sydney