To take the quiz and earn CPD for this article, you will need to read the corresponding article 'Asset test strategies in a post 1 January 2017 world' - the quiz questions relate to both articles.

The proposed life-time non-concessional contributions cap has generated renewed interest in excess non-concessional contributions. This article looks at the current workings of excess non-concessional contributions.

This article is for educational purposes only and is no longer available for CPD hours.

History

From 1July 2007, 100 per cent of excess non-concessional contributions were taxed at the top marginal tax rate. Furthermore, no excess non-concessional contributions were able to be released from super funds.

On 1July 2013, fairer treatment of excess non-concessional contributions was introduced. Since this date, excess non-concessional contributions are allowed to be released, following receipt of an Australian Taxation Office (ATO) release authority.

Determination of excess contributions

The ATO determines whether excess contributions exist based on information contained in a member’s personal tax return and information from annual member contribution statements provided by super funds.

Excess contributions remedies

Where members have excess contributions, there are three possible remedies:

• The member can apply to the Commissioner for contributions to be disregarded or allocated to another year.
• The member can apply for a refund of contributions made by mistake.
• Excess contributions can be released.

Disregarded or allocated to another year

To apply to the Commissioner for contributions to be disregarded or allocated to another year, members need to demonstrate that special circumstances apply.

Special circumstances are factors that are unusual or out of the ordinary and lead to an outcome that is unjust, unreasonable or otherwise inappropriate.

There is no particular formula or checklist to determine if special circumstances exist and each case is considered on its own merits.

Circumstances that would not generally be classified as ‘special circumstances’ include:

• the member not intentionally exceeding a cap.
• the member not knowing about or misunderstanding the law.
• the member receiving incorrect or incomplete professional advice.
• the member stating that electronic banking was not instantaneous.
• the member believing the assessment or determination by the ATO was unfair.

It’s important to note that the majority of applications for contributions to be disregarded or allocated to another year are not successful.

Refund of contributions made by mistake

Applications for a refund of contributions made by mistake are also strictly regulated under superannuation law.

It is necessary to demonstrate that an error has occurred, for example, as a result of an administration or system error. A super fund was able to return an amount to a member who had accidentally bPayed his rent to his super fund rather than to his landlord.

It is not possible for a superannuation fund to simply return contributions because they have resulted in excess contributions.

Excess contributions released

For contributions to be released, there are a number of different rules that must be followed.

Most notably for self-managed super funds (SMSFs), the ATO must issue an excess contributions determination notice before contributions can be released. An SMSF cannot simply return contributions because they have excess contributions.

Excess contributions errors

In some instances, an excess contributions assessment will arise because of reporting errors from incorrect information provided in a personal tax return. If this occurs, members need to lodge an amended tax return with the ATO and await a revised assessment.

Alternatively, superannuation funds may have reported contributions incorrectly. If this occurs, members need to contact their super fund and request that the fund re-reports to the ATO.

However, trustees will need to be satisfied that an error has genuinely occurred, not that it is more convenient for different information to be reported, as severe penalties can apply.

Associated earnings

Where excess non-concessional contributions exist, members are liable for an associated earnings penalty.

The associated earnings amount is a substitute for fund earnings on excess non-concessional contributions and is imposed to recognise that investment returns have been generated in a concessionally taxed environment.

The associated earnings amount applies from the start of the financial year in which the contributions were made up to the day the ATO issues the excess non-concessional contributions determination.

The interest rate used to calculate the associated earnings amount varies each quarter and is equal to the 90 day bank bill plus seven percentage points, which is currently around 9 per cent. The rate is expressed as a daily rate and interest is compounded on a daily basis.

Fortunately, the ATO calculates the associated earnings amount, however, there is no ability for the Commissioner to waive the application of associated earnings.

Members may minimise the amount of associated earnings payable by lodging their tax return and SMSF annual return as early as possible.

If an SMSF lodges its annual return on 1May, the associated earnings calculation applies for at least 670 days, being the number of days from the beginning of the previous financial year.

If the member and the SMSF lodge returns by 30September, the number of days reduces by approximately 200 days.

The associated earnings amount is included in the assessable income of a member and taxed at their marginal tax rate. Eighty-five per cent of the associated earnings can be released to pay the additional tax.

Case study: Associated earnings – Paul

Paul had excess non-concessional contributions for the 2015/16 financial year of $540,000. The ATO issues an excess non-concessional contributions determination on 1November 2016.

The associated earnings were calculated over the 489 days from 1July 2015 to 1November 2016 as follows:

0.02512978% x ($540,000 + sum of earlier daily amounts) for 489 days = $70,751

If Paul’s SMSF did not lodge its annual return until 1May 2017, this would be the earliest possible day that the ATO could issue an excess non-concessional contributions determination. The associated earnings would then be calculated over at least 670 days from 1July 2015 to 1May 2017 as follows:

0.02512978% x ($540,000 + sum of earlier daily amounts) for 670 days = $99,169

Administration of excess non-concessional contributions

The ATO determines that excess non-concessional contributions exist based on the information contained in the member’s personal tax return and information provided by super funds in the annual member contribution statements.

Where an excess exists, the ATO issues a determination notice to the member. The determination notice includes:

• the excess non-concessional contributions;
• the associated earnings amount;
• the total release amount
• excess non-concessional contributions + 85% of associated earnings;
• an election form.

Election form

When an SMSF member receives a release authority they can generally elect:

• to release the total release amount per the ATO determination;
• not to release the total release amount because the value of all their superannuation is nil;
• not to release the total release amount for some other reason.

The election form must be returned to the ATO within 60 days of being issued and must identify the super fund that an amount is to be released from.

Members may elect to have amounts released from multiple funds, however, the combined maximum for all funds must still equal the total release amount. Members cannot elect to have only part of the release amount released.

Once an election is made, it is irrevocable.

Election to pay the release amount

Where the member makes an election to pay the total release amount, the ATO:

• adds the associated earnings amount to the member’s taxable income;
• calculates the adjusted tax amount;
• includes a tax offset of 15 per cent of the associated earnings amount;
• issues an amended tax assessment to the member who then pays the additional tax liability;
• issues a release authority to the fund (or funds).

The super fund then has 21days from the date the release authority is issued to pay the release amount to the member.

Election not to pay the release amount because there is a nil superannuation balance

Where the member makes an election not to release any amount because their superannuation balance is nil, the ATO:

• adds the associated earnings amount to the member’s taxable income;
• calculates the adjusted tax amount;
• includes a tax offset of 15 per cent of the associated earnings amount; and
• issues an amended tax assessment to the member, who then pays the additional tax liability.

The ATO then issues a direction to the member confirming that they have no excess non-concessional contributions, even though no excess contributions have been released.

Election not to pay the release amount for some other reason

A member may elect not to pay the release amount for some other reason. Where this occurs, the election is irrevocable and the member has excess non-concessional contributions. The ATO will issue an excess non-concessional contributions tax assessment.

If no election is made, then no amount can be released from super. This has the same effect as making an election not to release and will result in an excess non-concessional contributions tax assessment.

Excess non-concessional contributions tax assessment

Liability for excess non-concessional contributions tax arises:

• where a member has excess non-concessional contributions before 1July 2013.
• where a member has excess non-concessional contributions since 1July 2013 and they do not elect to have the total release amount released from super.

The ATO issues an assessment which includes the amount of excess non-concessional contributions and the amount of excess non-concessional contributions tax (the excess non-concessional contributions amount taxed at the top marginal tax rate).

Payment of the excess non-concessional contributions tax is due in 21days from the date of issue.

The ATO also issues a compulsory release authority, which the member must provide to the super fund within 21days.

The ATO will issue a release authority directly to a super fund that holds an interest for the member if:

• the member does not provide the release authority to the super fund within 90 days;
• the member does provide the release authority to the super fund(s) within 90 days but the total amount paid by the super fund(s) is less than the release amount.

This may occur, for example, when a member has two super funds and a release authority is issued to only one fund that the member expects to hold the full release amount.

However, negative returns may have reduced the balance in the time between the member making the election and the release authority being actioned.

Disagree with assessment

Where members disagree with an excess non-concessional contributions assessment, they may request an amendment on the grounds that:

• the assessment is factually incorrect.
• the super fund has reported contributions incorrectly.
• the law has been incorrectly applied.

Members generally have four years to apply for an assessment to be amended.

Payment type

The released amount is a special type of benefit payment which is treated as a non-assessable non-exempt benefit payment to the member. The proportioning rule does not apply to released amounts.

Where the released amount is paid from an accumulation account, the release reduces the taxable component only.

Where the released amount is paid from a pension account, there is no adjustment to the tax-free and taxable percentages which are calculated on commencement.

The ordinary cashing order applies whereby a released amount will be taken, in order, from:

• unrestricted non-preserved benefits.
• restricted non-preserved benefits.
• preserved benefits

If the released amount is paid from an account-based pension, it will count towards the minimum annual pension.

If it is made from a transition to retirement pension, it will also count towards the maximum annual pension.

Case study – Glen

Glen had excess non-concessional contributions of $540,000 for the 2015-16 financial year.

The ATO issues Glen with an excess non-concessional contributions determination notice. The determination notice includes:

• the excess non-concessional contributions of $540,000;
• the associated earnings amount of $99,000;
• the total release amount of $624,150
• excess non-concessional contributions + 85% of associated earnings; and
• an election form.

Glen had approximately $1,400,000 in his SMSF accumulation account.

He makes a valid election to release the total release amount of $624,150 and returns the election form to the ATO within 60days.

The ATO issues a release authority to the SMSF requiring the SMSF to pay $624,150 to Glen, which it promptly does.

The full amount of the associated earnings of $99,000 is included in Glen’s personal assessable income and he is entitled to a tax offset of $14,850 ($99,000 x 15 per cent).

As the excess non-concessional contributions have been released, Glen no longer has excess non-concessional contributions.

Case study – Kathryn

Kathryn commenced a pension in the 2012-13 financial year with a 10 per cent tax-free component.

Kathryn made a non-concessional contribution of $450,000 during the 2013-14 financial year and immediately commenced a 100 per cent tax-free pension.

Kathryn made a non-concessional contribution of $90,000 in July 2015 on the mistaken belief that she qualified for the indexed three year bring forward. She immediately combined the amount with her 100 per cent tax-free pension.

In 2016, the ATO issued Kathryn with an excess non-concessional contributions determination notice. The determination included:

• the excess non-concessional contributions of $90,000;
• the associated earnings amount of $16,000;
• the total release amount of $103,600
• excess non-concessional contributions + 85% of associated earnings; and
• an election form.

Kathryn had $300,000 in one pension account, which has a 10 per cent tax-free component and $540,000 in her second pension account which was 100 per cent tax-free.

As Kathryn had no accumulation accounts, the law allows her to elect to release the release amount from an ‘interest’.

She makes a valid election to release the total release amount of $103,600 from her $300,000 pension account, which has a 10 per cent tax-free component and returns the election form to the ATO within 60days.

The ATO issued a release authority to the SMSF requiring the SMSF to pay $103,600 to Kathryn, which it promptly does.

The full amount of the associated earnings of $16,000 is included in Kathryn’s assessable income for the 2015-16 financial year and she is entitled to a tax offset of $2,400 ($16,000 x 15 per cent).

As the total release amount has been released, Kathryn no longer has excess non-concessional contributions.

Kathryn’s pension paid $103,600, which is approximately 30 per cent of the account balance.

As the highest minimum annual pension amount is 14 per cent of the account balance, no further pension payments are required.

Transition to retirement pension

If the pension was a transition to retirement pension, the maximum of 10 per cent tax-free component would have been breached and the exempt current pension income concession would be lost. In this scenario, Kathryn could consider rolling the pension back to accumulation phase prior to the release payment being made.

Kathryn has a $300,000 pension account balance with a 10 per cent tax-free percentage. If she rolls back to accumulation phase, the tax-free component of the accumulation account is $30,000 and the taxable component is $270,000.

The ATO issues a release authority to the SMSF requiring the SMSF to pay $103,600, which it promptly does.

After the payment, the tax-free component of the accumulation account remains at $30,000 and the taxable component has reduced to $166,400. Kathryn can then commence a pension with the remaining $196,400, which would then have a tax-free percentage of 15.27 per cent and a taxable percentage of 84.73 per cent.

One pension

As with the transition to retirement example, if Kathryn had only one pension, she may still be able to maximise the tax-free component by rolling the pension back to accumulation phase before the release payment was made.

Summary

In the event that members have excess non-concessional contributions, they must ensure that they pay attention to the determination issued by the ATO.

Members must make an election to have the total release amount released within the required timeframes.

The amount of associated earnings can be minimised by lodging the member’s tax return and SMSF annual return as early as possible.

To take the quiz and earn CPD for this article, you will need to read the corresponding article ‘Asset test strategies in a post 1 January 2017 world’ – the quiz questions relate to both articles.

QUESTIONS

For 0.5 CPD Hours (Critical Thinking), go to fpa.com.au/cpdmonthly and answer the following questions correctly.

1. When a super fund receives a non-concessional release authority it must pay the release amount:

1. To the ATO within 21days from the date the release authority is issued.
2. To the member within 21days from the date the release authority is issued.
3. To the ATO within 21days from the date the release authority is received.
4. To the member within 21days from the date the release authority is received.

2. Which of the following is true in respect of associated earnings?

1. They are calculated from 1 July in the year in which the contribution is made.
2. The interest rate used is the 90 day bank bill plus three percentage points.
3. The fund calculates the associated earnings amount.
4. The Commissioner may waive the amount.

3. Which of the following is not a possible remedy for excess contributions?

1. Apply to the Commissioner for contributions to be allocated to another year.
2. Apply to the Commissioner for contributions to be disregarded.
3. Apply to the fund for contributions to be disregarded.
4. Apply to the fund for a refund of contributions made by mistake.

4. Which of the following is not an option for a member who receives a non-concessional release authority?

1. Elect to release the total release amount.
2. Elect to release 85 per cent of the total release amount.
3. Elect not to release the total release amount because the value of all their super is nil.
4. Elect not to release the total release amount for some other reason.