Superannuation: What happens when caps are exceeded?

In a previous article we discussed the caps or maximums that apply to contributions that may be made to superannuation funds. This article explains the consequences of exceeding these contributions caps.

1. Exceeding the concessional contributions cap

From 1 July 2013, excess concessional contributions are included in the individual’s assessable income and taxed at their marginal tax rates in the year that the excess contribution was made.

Further, the individual will have to pay an additional excess concessional contributions charge (ECC) based on the increase in their income tax liability caused by the excess contribution included in their assessable income. The ECC is calculated as a percentage (currently 5.63% per annum) of the increase in the tax liability, for the period from the start of the income year in which the excess concessional contributions were made, until the day before the tax is due to be paid under the individual’s income tax assessment.

To reflect the tax already paid by the superannuation fund on the contributions, a 15% tax offset is applied against the increase in income tax.  The offset is calculated to be 15% of the amount of the excess contributions. Further, the employee can withdraw up to 85% of the excess concessional contributions from their superannuation fund to pay for the increased income tax.

Example: In the current financial year, Jerry, aged 47, salary sacrificed an additional $20,000 to his superannuation account. With his employer contributions, his total concessional contributions were $35,000. Therefore, the concessional cap has been exceeded by $5,000 ($35,000 minus $30,000 cap).

When Jerry lodges his income tax return he has taxable income of $150,000. The ATO will add the excess contribution of $5,000 to Jerry’s assessable income.

As a result of this inclusion, with Jerry’s marginal tax rate being 39% including the Medicare Levy, the additional tax payable is $1,950 (39% of $5,000). Jerry is entitled to a tax offset of $750, being 15% of the $5,000 contribution. This offset gives a total tax increase of $1,200 ($1,950 – $750). In addition, the ECC will be applied to the $1,200.

Jerry can elect to withdraw up to 85% of the excess contribution ($4,250) to pay the increased income tax and ECC. In this case, the $4,250 well exceeds Jerry’s additional income tax and likely ECC.

2. Exceeding the non-concessional contributions cap

Where an individual exceeds the non-concessional cap, the individual is liable to tax on the excess contributions at 49%. Given that non-concessional contributions are made out of post-tax income and have therefore already been subject to tax, the effective tax rate can be a staggering 96%!! (49% excess contributions tax plus 47% being the top marginal tax rate including medicare levy).

Further, the amount of the excess contributions tax must be paid out of your superannuation account regardless of whether that tax is paid from that amount.

The Federal Government has introduced a Bill into Parliament to bring the treatment of excess non-concessional contributions to be broadly in line with the treatment of excess concessional contributions as explained above at point 1. However, this legislation has not been passed at the date of writing (reference: Tax and Superannuation Laws Amendment (2014 Measures no.7) Bill 2014).

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