Beware of the super contributions tax

Last time we talked about the caps that apply to superannuation contributions. This week we’ll have a look at the implications if the caps are exceeded.

The ATO will impose a penalty known as excess contributions tax if you exceed either the concessional or non-concessional caps in a given financial year.

For concessional contributions, every dollar that exceeds the cap will be taxed at 31.5%. This tax is in addition to the 15% contributions tax deducted by your super fund upon receipt of the contribution, thus the total tax will be 46.5 cents in every dollar you contribute that exceeds the cap.

Similarly, non-concessional contributions attract an excess tax of 46.5% where the cap is exceeded in a given financial year. However, as non-concessional contributions are made from after-tax income, your super fund will not deduct an additional contributions tax of 15%.

But this is not the whole story.

Consider a scenario where you have contributed the maximum amounts under both caps (a common scenario for those nearing retirement). Under the current rules, if you exceed your concessional cap, the excess amount is then added to your non-concessional cap. But as you have already taken full advantage of your non-concessional cap as well, this amount also becomes an excess contribution under your non-concessional cap. In simple terms, this means the excess amount will be subject to excess contributions tax under both caps which amounts to 93%!

Considering the ATO collected in excess of $130m in excess contributions tax in 2010, and that in most cases those that did exceed their caps did so inadvertently and by an amount of under $10,000, it is no surprise the Government has come under pressure to review the existing rules.

The Government have responded, albeit in a very minor way, and have introduced the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Bill 2012 to Federal Parliament for consideration.

The Bill focuses on relief for excess concessional contributions as this is where most breaches occur, and will provide an option for some individuals to have excess concessional contributions refunded to them. However, once refunded, the excess amount will be assessed at the individuals’ marginal tax rate. In effect, this option will mean a reduced penalty only for those with marginal tax rates less than 31.5% (i.e. individuals earning $37,000 or less per year).

In our view, the Bill does not do enough to address the significant issue of excess contributions tax. The application is extremely narrow and whilst excess contributions tax would be reduced if the Bill is made law in its current form, individuals would be penalised by having to pay additional income tax instead.

The Bill has not yet received royal ascent, it’s still being considered by Federal Parliament. We’ll keep you posted.


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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