This updated article is a must-read if you make contributions to a super fund, in addition to your employer’s compulsory Superannuation Guarantee contributions. If you have a salary sacrifice arrangement in place then you will need to check how much, and when, these additional concessional contributions are paid into your super account, and whether such an arrangement means that you may exceed your concessional contributions cap.
For more than 3 years, SuperGuide has been highlighting the tax problems associated with the halving of the concessional contributions cap (taking effect from July 2009), in particular, we have continuously publicised the issues associated with this ridiculous, daft, and heinous excess contributions tax regime.
The unfair application of a flawed penalty regime for excess contributions (introduced 2 years before the concessional caps were halved) has meant innocent, law-abiding Australians trying to plan for their retirement are being hit with massive tax bills, often in the tens of thousands of dollars.
Later in the article, we suggest some strategies to minimise the chances of you being hit with this shocking penalty tax.
More than 100,000 Australians, and counting…
Even though the excess contributions tax (ECT) regime has been in place for nearly 6 years (when tax-free super for over-60s was first introduced), due to the constant tinkering of the contributions caps, tens of thousands of law-abiding Australians who are making a serious effort to save for retirement continue to receive excess contributions tax assessments, and many thousands more are expected to receive a financial shock after the financial year ends in June 2013.
For the first 4 financial years (2007/2008, 2008/2009, 2009/2010 and 2010/2011) since the ECT regime was introduced, the Australian Tax Office has already sent out tens of thousands of excess concessional contributions assessments to individuals. For the 2009/2010 year, the 50,000 or so assessments mainly affect those who failed to adjust salary sacrifice arrangements in response to the halving of the concessional contributions caps.
The table below lists the number of taxpayers who have been hit with an ECT (that is, excess contributions tax) assessment, and the majority of ECT assessments have been for breaches of the concessional contributions cap. The number of ECT assessments applicable for the 2010/2011 year, are 31,000 (as at July 2012) but the number is expected to jump.
Note: The accidental breaches of the contributions caps are expected to continue for those who receive assessments representing the 2011/2012 financial year, and the 2012/2013 year.
|Excess contributions tax assessments for first 4 years|
|Type of assessment||2007/2008 year||2008/2009 year||2009/2010 year||2010/2011* year|
|Excess concessional contributions only||18,258||15,832||49,786||31,217|
|Excess non-concessional contributions only||1,690||1,610||1,212||630|
|Both excess concessional and non-concessional contributions||427||413||378||117|
*More pre-assessment letters and assessments are to be issued for 2010/2011 year.
Source: Excess contributions tax statistical report October 2012, ATO (www.ato.gov.au), number of assessments issued at 4 July 2012.
Exceeding your contributions cap can be costly
The assessments issued to members of Australian super funds state that the affected fund members are subject to an extra 31.5% on contributions exceeding the concessional contributions cap, taking the total tax take on the excess contributions to 46.5%. From the 2012/2013 year, the concessional cap is $25,000 for all ages. Before the 2012/2013 year there were two aged-based concessional contributions caps: $25,000 for under-50s, and $50,000 for over-50s.
Note: At the risk of repeating the previous paragraph’s message, the concessional cap for over-50s has halved again to $25,000, effective from the 2012/2013 year (1 July 2012 to 30 June 2013).
Example: For example, Beth is aged 47 and earns $90,000 a year plus super. In June 2009 she negotiated that if she enters a salary sacrifice arrangement to boost her super savings, her employer will still pay the 9% Superannuation Guarantee on the $90,000. From July 2009 (the start of the 2009/2010 financial year), Beth diverted $40,000 of her salary to her super account, in addition to her employer’s SG contribution of $8,100 making a total of $48,100 in concessional contributions.
Beth believed that she was within her concessional contributions cap of $50,000 – the cap in place for under-50s as at June 2009. From July 2009, the concessional contributions cap for under-50s halved to $25,000. Beth failed to adjust her salary sacrifice arrangement and received an excess contributions tax assessment of $7,276 on $23,100 of excess contributions. By the time she received the excess tax notice for 2009/2010 year, Beth had unknowingly already breached her concessional cap for the following year (2010/2011 year), and for the 2011/2012 year. She has now ceased her salary sacrifice arrangement for the current year but will still receive an excess tax notice for the 2011/2012 year.
Even worse, her employer SG contributions still have to be made (a legal requirement) which means she will be liable for even more excess contributions tax. Even when Beth takes positive action, she can’t stop the excess contributions tax monster.
Confusion reigns: what contributions count towards the concessional cap?
What many Australians don’t realise is that an employer’s compulsory Superannuation Guarantee (SG) contributions are counted towards an individual’s concessional contributions cap. Concessional contributions include your employer’s SG contributions, any additional super employer super contributions, and any salary sacrificed contributions that you arrange for your employer to deduct from your before-tax salary.
Example: Here’s an example: in June 2009, Ivan was earning $120,000 plus SG a year and wanted to make substantial contributions to his super fund. As he was over the age of 50 he knew he could make up to $100,000 in concessional contributions each year (the previous cap before the laws halved the contribution limit in July 2009). He couldn’t afford to use the entire cap because he had living expenses so decided to salary sacrifice $50,000 of his $120,000 salary.
When the new rules halved the concessional cap for over-50s to $50,000 from July 2009, he thought he was bang-on the limit, and didn’t have to adjust his strategy. He didn’t realise that his employer’s SG contributions of $10,800 also count towards his concessional cap. He received an excess concessional contributions tax assessment of $3,402 on $10,800 of excess contributions. He also received an excess contributions assessment for the 2010/2011 year, and expects to receive one for the 2011/2012 year because he ceased the salary sacrifice arrangement after he had already breached the cap for the year.
Ignorance is no excuse
Note that the ATO has publicly stated that ignorance of the law is not compelling enough to show discretion. Quoting directly from the ATO website:
The object of ECT [Excess contributions tax] legislation is to ensure the amount of concessionally taxed super you will receive is the result of contributions made to super gradually over time. The object is achieved by imposing a tax on your excess contributions. The law includes a number of other features to achieve this object and help ensure the tax imposed isn’t unreasonable, including:
- in certain circumstances allowing you to make contributions which exceed the annual non-concessional contributions cap by bringing forward the caps that apply in the following two years
- treating contributions for which the contributor receives an income tax deduction (‘pre-tax’ contributions) differently from those for which the contributor doesn’t (‘after-tax’ contributions)
- allowing you to exclude amounts that would otherwise count towards your non-concessional contributions – for example, amounts paid to super as a result of certain capital gains tax exemptions and amounts payable for certain personal injuries
- allowing you to pay the ECT from your super fund.
… Simply having to pay ECT [Excess contributions tax] isn’t unjust, unfair or otherwise inappropriate. Paying ECT is an intended outcome of the law if your contributions to super exceed a contributions cap. Nor do unintentionally exceeding a contributions cap, misunderstanding the law or facts, or being given incorrect or incomplete advice amount to special circumstances on their own. Usually, these will simply be the circumstances in which you placed yourself rather than special circumstances. We [ATO] can only disregard or reallocate excess contributions if it’s consistent with the object of the ECT legislation to do so. [Otherwise] it would give an advantage to those who didn’t make sufficient effort to understand the law, or who chose advisers who didn’t understand the law, over those who understood the law and worked within its limits if we exercised the discretion just because someone made an error.
In my words, the ATO is forced to implement an unjust, unfair and otherwise inappropriate law. Saving for retirement should not be this difficult, or this financially dangerous!
Note: Just in case you had other ideas, the ATO is quoted as stating that “Excess contributions tax is not a penalty.” Hmmm, I don’t agree. For more information on the ATO’s approach to ECT, see SuperGuide article THE SOAPBOX: The most ridiculous super policy… ever!
Double tax for doing the right thing
The tax penalties get much worse for those individuals who also make significant non-concessional (after-tax) contributions to their super funds, while breaching the concessional cap.
Now, you may have to re-read what I’m about to write a few times because the terminology is confusing. Any concessional contributions in excess of the cap of $25,000 end up counting towards a person’s non-concessional (after-tax) contributions cap under the super rules. What this means is that if an individual exceeds the concessional (before-tax) cap, and the individual has also made non-concessional (after-tax) contributions up to their cap, then the excess concessional contributions can then force an individual to exceed the non-concessional contributions cap.
Hmmm, I know that the rules are confusing but bear with me. The excess concessional contributions are added to the level of non-concessional contributions, when assessing against the non-concessional cap. In effect, the excess concessional contributions are first hit with 46.5% (15% + 31.5%), and then hit again with another 46.5% penalty tax when they are treated as excess non-concessional contributions – a massive 93% tax on a single contribution!
In such extreme circumstances, a super contribution that was intended to help someone save for retirement has virtually disappeared (well, 93% of the contribution has gone in tax) due to a quagmire of bureaucracy and hastily drafted policy.
A matter of discretion
If you happen to receive one of these excess contributions tax assessments, then all hope is not yet lost. You may be able to apply to have your excess contributions allocated to a different financial year, or disregarded for the purposes of excess contributions tax.
For the ATO to show mercy, you must apply within 60 days of receiving the assessment and you must prove special circumstances. You can find more information and the ATO’s approach to excess contributions tax assessments by checking out the special page on the ATO website (Excess contributions tax – Applying to have your contributions disregarded or reallocated).
The ATO has released a practice statement (Practice Statement ‘PS LA 2008/1: The Commissioner’s discretion to disregard or reallocate concessional and non-concessional contributions for a financial year’ ) explaining when they would consider special circumstances for the purposes of the treatment of excess contributions. The extract below (paragraphs 36 and 37 of the practice statement) outlines when the ATO would NOT consider special circumstances:
36. It is not possible to identify every factor that might be relevant to considering whether the exercise of the discretion is appropriate or prescribe how one factor should always be considered. The following factors in isolation would not generally amount to the existence of special circumstances that make the imposition of the tax unjust, unreasonable or inappropriate:
- Financial hardship: it is common or usual, rather than ‘special’ for some degree of financial hardship to occur as a result of excess contributions tax being assessed. The imposition of the tax and corresponding liability to pay the amount assessed is an intended consequence of the law designed to discourage excess contributions. The financial hardship may be ameliorated if a person uses the release authority given by the Commissioner to release the amount of the excess contributions tax from the fund to pay the liability. A claim of financial hardship should generally be considered in light of the PS LA 2011/17 Debt Relief.
- Ignorance of the law: a claim that a person was ignorant of the law would not, generally speaking, be regarded as ‘special circumstances’ unless other factors exist which would make the ignorance or misconception reasonable or understandable in the circumstances, such as where incorrect advice was provided to the person by the ATO [Tax Office].
- Incorrect professional advice: As with ignorance of the law, this would not generally amount to special circumstances, unless there were other special factors leading to the mistake. For example, if the incorrect professional advice was based on a widely understood view of the law that was ultimately found by a court to be incorrect, the incorrect advice may constitute special circumstances. However, the mere fact that a particular mistake is of a type that is ‘not uncommon’ or results from an incorrect interpretation of a provision which some may find hard to apply, would not generally make the circumstances sufficiently special to warrant exercise of the Commissioner’s discretion.
- Retrospectivity of law or adverse effect of legislative changes: claims such as these would not be considered ‘special circumstances’.
37. However, an application based on a factor such as one of these must not be automatically rejected. Each individual case will present a unique set of circumstances that need to be considered and weighed up in forming an opinion. It may not be helpful to focus too closely on each particular circumstance and ask whether it is special. Of itself, one particular matter is unlikely to be special for there would be many other individuals in a similar situation. The question is whether, when the relevant circumstances of the individual and the making of the relevant contributions are looked at in their entirety, they may be fairly described as unusual, uncommon or exceptional so as to warrant the exercise of the discretion.
For your reference, the number of applications to disregard or allocate contributions, and the number that were successful, is listed in the table below.
|Number of applications to disregard or reallocate contributions for first 5 years|
|2007/2008 year||2008/2009 year||2009/2010 year||2010/2011* year||2011/2012|
|No discretion exercised||846||875||1,742||618||17|
Source: Excess contributions tax statistical report October 2012, ATO (www.ato.gov.au), number of applications at 4 July 2012.
Tips to help you avoid the ridiculous penalty tax on super contributions
Here’s a few suggestions to help you avoid falling into the unfortunate category of taxpayers having to pay ECT:
- Check with your employer about the level of super contributions that they have made on your behalf, so far, for the 2012/2013 financial year (1 July 2012 to 30 June 2013).
- You also need to track any voluntary concessional (before-tax) super contributions you may be making to your super fund.
- If you don’t want to be hit with extra super tax, you need to ensure that your current concessional super contributions, and any further concessional contributions (from your employer or you) going into your super account for the remaining months of the 2013 financial year keep you within your concessional contributions cap.
- Also check with your super fund to confirm whether all of those super contributions have reached your super account, and if not, when the super fund intends to process them, and when your employer plans to process future contribution payments for the 2012/2013 year.
You can then properly monitor your contributions for the year, and decide if a breach of the concessional contributions cap has taken place, or will take place.
If you have a superannuation salary sacrifice arrangement with your employer, then you also need to check the timing, size of these contribution payments, and the recording of these contributions with your employer and your super
Note: If you’re under the age of 50, your concessional contributions cap is $25,000. If you’re aged 50 years or over, your concessional contributions cap is also $25,000. The proposed continuation of the $50,000 concessional cap for over-50s is a dead duck, and yet another broken promise from the Federal Government.
The ATO has also released an ECT Learner Guide, which I outline in the SuperGuide article THE SOAPBOX: The most ridiculous super policy… ever! For your convenience, below is a list of the four ATO documents explaining the ECT regime:
- Super contributions – too much super can mean extra tax
- Excess contributions tax – applying to have your contributions disregarded or reallocated
- Excess contributions tax learners guide
- Practice Statement Law Administration PS LA 2008/1 (The Commissioner’s discretion to disregard or reallocate concessional and non-concessional contributions for a financial yea: To guide tax officers in the exercise of the discretion contained in section 292-465 of the Income Tax Assessment Act 1997)