Excess concessional contribution rules are intended to encourage individuals to contribute to superannuation within their limits, so it’s important to understand the process and outcome of exceeding either or both contribution caps.
There are limits on how much an individual can contribute to superannuation each year. Currently, this is an annual cap of $25,000 per annum of concessional contributions and $100,000 of non-concessional contributions. These limits are complicated somewhat by:
– The availability of the bring forward non-concessional contribution cap of up to $300,000 over three years for clients under age 65 at the commencement of the financial year. To be able to access the maximum $300,000, the person’s total super balance at 30 June of the previous financial year needs to be less than $1.4 million; and
– From 1 July 2019, the ability to carry forward and make a concessional contribution using any unused concessional contribution cap accrued since 1 July 2018 for up to five years. An individual’s total super balance must be less than $500,000 at 30 June to be able to utilise their unused cap in the next financial year.
The implications of exceeding both contribution caps have changed over the years. As it stands, the penalty if a client breaches one or both of their caps is not as onerous as it used to be. However, the excess contribution rules are still intended to encourage individuals to contribute within their limits and it is important to understand the process and outcome of exceeding either or both contribution caps.
Exceeding the concessional contribution cap
From the 2013/14 financial year onwards, under Section 291-15 of the Income Tax Assessment Act 1997 (ITAA 1997), where an individual has an excess concessional contribution in a financial year, the excess will be included in their assessable income and taxed at their marginal tax rate. The client will be entitled to a rebate equal to 15 per cent of the excess concessional contribution to account for the tax paid in the super fund. Further, to mitigate any benefit a person may receive from making excess concessional contributions and delaying payment of income tax, an excess concessional contributions charge (ECCC) will apply.
The process and options
Upon exceeding their concessional contribution cap, the client will receive an excess concessional contribution determination from the ATO. This will usually be in the following financial year, once the client’s super fund has finalised the report and the client has completed their tax return. Commonly, the ATO start issuing these determinations around November or December. For clients signed up to MyGov and linked to the ATO, the excess determination will be received online; others may receive a paper based determination via mail.
The determination advises the client that the excess contribution has been included as assessable income in their tax return and they receive an income tax return Notice of Assessment/Notice of Amended Assessment. The determination further outlines the actions required by the client:
– Within 60 days, the client can elect to release up to 85 per cent of the excess concessional contribution from super, which will be directed towards paying the additional tax. They need to nominate the amount they wish to release and from which super fund/s.
– The client can choose not to complete the release authority, and instead leave the excess in super and pay the tax liability stated in the determination personally.
Once an election to release is made, it cannot be revoked. The ATO will issue the member’s nominated super fund (or funds) with a release authority and the fund generally has 10 business days to pay the stated amount (or the total maximum release amount available if this is lower) to the ATO.
In turn, the ATO uses the released funds to pay the individual’s outstanding tax or debt liabilities. Any surplus money is refunded to the member.
Note: A super fund trustee is not required to release funds from a defined benefit interest.
Excess concessional contribution amounts released are non-assessable non-exempt income and are exempt from the proportioning rule.
Importantly, excess concessional contributions are counted under the non-concessional contribution cap unless the client elects to release the funds. Excess benefits released are subtracted from the non-concessional contribution cap based on a grossed up 100/85 of the amount released.
For example, assume Martha made an excess concessional contribution of $10,000. The maximum amount she can release is $8,500 but she chooses to only release $4,000. The amount assessed against her non-concessional contribution cap is now $10,000 – (100/85 * $4,000) = $5,294.
The excess concessional contribution determination also contains the amount, interest rate and period of the ECCC.
Calculation of the ECCC
The ECCC is:
– Applied to the additional income tax liability arising due to excess concessional contributions being included in the client’s income tax return.
– Calculated from the start of the financial year in which the excess concessional contributions were made and ends the day before the tax is due to be paid under the client’s first income tax assessment for that year.
– Calculated using a compounding interest formula based on the 90-day Bank Accepted Bill rate + 3%. As a guide, the ECCC rate for the January to March 2019 quarter was 4.94% pa.
A shortfall interest charge (SIC) is then payable from the date the first income tax assessment is due until the extra tax liability as a result of the excess contribution is due. If these charges are not paid by the due date, the client may become liable to pay the general interest charge (GIC) on the unpaid amount until it is paid. This is a higher rate of interest and in the April to June 2019 quarter was 8.96% pa. Unlike the SIC or GIC, the ECCC is non-deductible to the individual.
Where an individual is not liable to pay tax for the relevant financial year (even after the inclusion of the excess concessional contribution in their taxable income), they will not pay any ECCC.
Frank lodges his personal income tax return for the 2017/18 financial year on 31 August 2018 and receives a Notice of Assessment with payment due 30 September 2018. However, the ATO then determines Frank’s total concessional contributions in 2017/18 were $35,000 and on 1 November 2018, it provides an excess concessional contribution determination and Notice of Amended Assessment with payment due on 22 November 2018.
Frank is on the highest marginal tax rate and the additional tax he pays as a result of the excess concessional contribution is $3,200 calculated as follows:
– Tax on excess contribution = $10,000 X 47% = $4,700 less
– Tax rebate on excess contribution = $10,000 x 15% = $1,500
The ECCC is payable on the additional tax of $3,200 and applies for 456 days from 1 July 2017 until the day before tax under his first Notice of Assessment for that financial year is due to be paid – i.e. 29 September 2018.
Assuming an interest rate of 4.94% pa (daily rate of 0.01353425%), the ECCC is:
= (1.0001353425^456-1) X $3,200 = $203.70
Frank must also pay SIC on $3,403.70, being the additional tax of $3,200 plus the ECCC of $203.70. The SIC is applicable from 30 September 2018 (the payment due date under his original notice of assessment) to 21 November 2018 (the day before the payment due date on his amended assessment).
Assuming a rate of 4.94% pa (daily rate of 0.01353425%) over this 53 day period, the SIC is:
= (1. 0001353425^53-1) X $3,403.70 = $24.50
Furthermore, if the amount of ECCC charge or SIC remains unpaid after 22 November 2018 (the payment due date on his amended assessment), Frank will also be liable to pay General interest charges on any unpaid amount of income tax (which includes the excess contribution and ECCC) and SIC.
Exceeding the non-concessional contribution cap
From 1 July 2013, legislation introduced fairer treatment of excess non-concessional contributions. Excess non-concessional contributions can now be released following receipt of an ATO release authority. However, similar to the excess concessional contribution rules, an interest penalty is applied to recognise investment returns that have been generated in a concessionally taxed environment – this is known as the associated earnings.
The process and options
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.
Typically, the ATO will start issuing excess non-concessional contribution determinations around November or December of the following financial year, after the excess contribution was made and once it has received information from the super funds with regard to contributions and 30 June total super balance.
However, if the client has an excess concessional contribution that they elect not to release (and therefore counts under the non-concessional contribution cap), or contributes to a self-managed super fund whose reporting deadlines may be longer, the timeframe may be longer.
For clients signed up to MyGov with their account linked to the ATO, the excess determination will be online. Others will receive a paper-based determination via mail.
The excess non-concessional contribution determination will outline:
– The amount of excess non-concessional contributions;
– Associated earnings; and
– Total amount that can be released.
From 1 July 2018, if a client receives an excess non-concessional contribution determination, the easiest thing is to ‘do nothing.’ The ATO will send a release authority directly to the member’s super fund requesting release of the excess contribution plus 85 per cent of the calculated associated earnings. The super fund must generally respond within 10 working days and release the available funds to the ATO. The ATO directs the money to pay any tax or Australian government debts belonging to the member, with any remaining balance refunded to the individual.
The client will receive an amended tax assessment, which includes the associated earnings. A rebate equal to 15 per cent of associated earnings will apply to offset the tax paid in super.
If the member does not want to ‘do nothing’, they can within 60 days from the date of the excess determination elect to:
– Release the excess contribution plus 85 per cent of associated earnings from super. In essence, this is the same as ‘doing nothing’ except that the member can elect which super fund (or combination of) to send the Release Authority to. The member should also select this option if they have no funds remaining in super.
– Retain the excess non-concessional contribution in super. If this option is selected, the client will receive an excess non-concessional contribution tax assessment and the excess contribution will be taxed at 47 per cent. The ATO will issue a release authority to the client’s super fund for the amount of this tax. The client should also select this option if their only super interest is held in a defined benefit fund or a non-commutable super income stream and the fund cannot or will not voluntarily release the funds. In this case, they may have to pay the 47 per cent tax on the excess contribution personally.
How the associated earnings are calculated
The associated earnings amount is determined using three variables:
– The excess non concessional contribution amount.
– The associated earnings rate – this is the average of the GIC rates for the four quarters of the financial year in which the excess non-concessional contribution was made. As an example, the GIC for the 2017/18 financial year averaged 8.73 per cent.
– The associated earnings period – from 1 July of the financial year, the excess contributions were made until the date of the original excess non-concessional contribution determination letter.
– The associated earnings rate is applied on a daily compounding basis to the excess non-concessional amount over the associated earnings period.
– The withdrawal of the excess plus associated earnings is non-assessable non-exempt income. As the proportioning rule does not apply, the super fund is not required to deduct the amount from the member’s tax-free component of an accumulation account.
Sinead receives an excess non-concessional contribution determination on 1 November 2018, stating she exceeded her NCC cap by $120,000 in the 2017/18 financial year. The determination advises Sinead the associated earnings are $14,887, which is based on the ATO calculated average GIC of 8.73 per cent (daily rate of 0.023918%) and associated earnings period of 489 days (1 July 2017 – 1 November 2018). This is calculated as follows:
Associated earnings = (1.00023918^489-1) X $120,000 = $14,887
The total Sinead can release from super is $132,654 (excess NCC $120,000 plus 85 per cent of associated earnings). The associated earnings of $14,887 will then be added to her taxable income and she will receive an amended assessment. A non-refundable rebate equal to 15 per cent of the associated earnings ($2,233) will be available. If we assume Sinead is on the 39 per cent marginal tax rate, the additional tax she will incur is approximately $3,573.
Note: If Sinead had already withdrawn all her benefits from super, she would not have to release any funds but would still have the associated earnings included in her assessable income.
Alternatively, Sinead could elect within 60 days of receiving the determination not to withdraw the excess. She would then receive an excess non-concessional contribution tax assessment for $56,400 (47 per cent of $120,000) to be released from super.
Tips and Traps
A person who breaches their non-concessional contribution cap needs to prepare a tax return for that financial year, even if they wouldn’t otherwise need to. Take Peter, for example, who is 60 and receiving a tax-free pension income. He does not need to complete a tax return, as he has minimal investment income. However, in September 2017, he uses an inheritance to make a non-concessional contribution of $350,000. Because he has breached his non-concessional contribution cap, he will now need to complete a tax return for the 2017/18 financial year.
If a client exceeds their contribution cap and realises they have done so, they cannot proactively withdraw the excess themselves (assuming they had met a condition of release). They need to wait until the ATO issues the excess determination and then act in accordance with these instructions.
To minimise penalties from breaching their caps, clients should generally complete their tax return as quickly as possible, which may reduce the period over which interest is calculated.
A client can release funds from an account based pension. In this case, the withdrawal would be taken proportionately and would count towards the minimum pension payment.
Adding back excess concessional contributions or including associated earnings in assessable income not only impacts the client’s personal income tax, but may also have a subsequent affect on various social security benefits or tax rebates including:
ATO discretion to reallocate or disregard contributions
Section 291- 465 and section 292-465 of the ITAA 1997 provides the Commissioner with discretion to potentially disregard excess contributions or reallocate them to another financial year upon application by an individual in the approved form. Application must generally be within 60 days of receiving an excess determination unless an extension is granted.
Practice Statement Law Administration (PS LA) 2008/1 provides guidance on the Commissioner’s discretion to disregard or allocate excess contributions to another period. This discretion can only be applied when there are special circumstances and consistent with the objective of Section 291 and 292 of the ITAA 1997, to ensure that the amount of concessionally taxed super benefits that an individual receives results from contributions that have been made gradually over the course of their life.
A contribution counts in the financial year a super fund actually receives the money, not when the contributor pays the amount or when employer contributions are due to be made. For example, an employer is entitled to make super guarantee contributions for the quarter ending 30 June by 28 July (the next financial year). The fact a contribution accrued or was paid in one financial year but was made in another financial year is not in itself a ‘special circumstance’.
The expression ‘special circumstances’ for the purposes of excess contributions has been considered in a number of court decisions and application generally depends on the unique facts of the case.
The core idea of special circumstances is that there is something unusual to take the case out of the ordinary course which results in an unfair, unintended or unjust outcome. Other factors that may be considered a special circumstance include:
– If a contribution would be more appropriately allocated towards a different financial year.
– Whether it was reasonably foreseeable, when the contribution was made, that there would be excess contributions.
– Where the contribution is made by another person (for example, an employer), the terms of any agreement or arrangement covering the amount and timing of the contribution.
– The control the person had over the making of the contribution.
Table 1 summarises, based on PS LA 2008/1, where it is more likely that discretion to reallocate or disregard an excess contribution may be applied:
Where discretion may be applied
Discretion unlikely to be applied
An arms length employer fails to pay super guarantee on time and the shortfall is paid in a later financial year.
Making a personal deductible contribution but then having insufficient taxable income to offset the deduction.
An employer fails to follow the directions on a written salary sacrifice agreement.
A short delay in timing between the employer actually making the payment and the amount being received by the super fund is also to be expected.
Making a foreign super transfer and excessive and unexpected exchange rate fluctuations triggering an excess.
Making a foreign super transfer and not knowing the amount that will count towards their contribution cap or the date the transfer will be completed.
Receiving incorrect professional advice.
Not knowing the correct law or contribution limit that applies.
A person entering a re-contribution strategy (on this basis alone).
Where the Commissioner does not reallocate or disregard an excess contribution, the processes and implications outlined in this article of having an excess contribution would follow.
1. In 2017/18, Prashane had excess concessional contributions of $15,000 and excess non-concessional contributions of $20,000. He elects to release $10,000 of the excess concessional contributions in December 2018. His total excess non-concessional contributions for 2017/18 are now:
2. Alexis receives her Notice of Assessment for 2017/18 after completing her tax return with a due date of 1 October 2018. On 8 November 2018, the ATO provides an excess concessional contribution determination and Notice of Amended Assessment with payment due on 28 November 2018. Which is correct is relation to calculation of the shortfall interest charge?
a. Payable from 1 July 2017 until 1 October 2018 on additional tax paid as a result of excess contribution.
b. Payable from 1 July 2017 until 27 November 2018 on additional tax paid as a result of excess contribution plus excess concessional contribution charge.
c. Payable from 1 October 2018 until 27 November 2018 on additional tax paid as a result of excess contribution plus excess concessional contribution charge.
d. Payable from 1 October 2018 until 27 November 2018 on amount of excess contribution.
3. In August 2018, Matti retired and cashed out all his super. He receives an excess non-concessional contribution determination in January 2019 for the 2017/18 financial year. Which statement is correct?
a. Matti needs to pay 47% of the excess contribution to the ATO from his personal savings.
b. The calculated associated earnings on the excess contribution will be included in Matti’s assessable income (and a 15% rebate applied).
c. As all funds have been released from super, there is no need to release funds and no interest penalty is applied.
d. The excess non-concessional contribution will be included in his assessable income and taxed at his marginal rate (and a 15% rebate applied).
4. Increasing assessable income as a result of including associated earnings may impact which of the following:
a. Division 293 tax.
b. Medicare levy surcharge.
c. Child support.
d. All of the above.
5. A released excess non-concessional contribution plus 85% of associated earnings from an accumulation account, will always be withdrawn solely from the tax-free component of super.