Know your limits and structure your contributions!
Within the constantly changing superannuation environment, a common risk that members face are being penalized for exceeding their contribution limits. For the current 2018 – 2019 financial years, the concessional contribution limit has been set at $25,000. (Please note that the non-concessional limit is $100,000 per year but this article does not cover the treatment of excess non-concessional contributions). It is important for members to be aware of these limits and structure their contributions accordingly.
The following is a summary of how excess concessional contributions are taxed:
- Excess concessional contributions will be taxed at an individual tax payer’s marginal rate and are included in their assessable income together with an ECCC (Excess Concessional Contributions Charge calculated by ATO which is effectively interest they are charging).
- They are entitled to a 15% non-refundable tax offset on the excess concessional contributions, as the superannuation fund has already paid income tax on the excess contribution.
- The liability for the excess tax sits with the individual. The individual can either a) elect to pay the additional tax personally or b) elect to have up to 85% of the excess concessional contribution released from their superannuation account to help pay for the tax.
The following example demonstrates how this would work:
- Joe has a concessional contribution cap of $25,000 for the 2017/2018 financial year. He made employer contributions $28,000 in that year, resulting in $3,000 of excess contributions.
The $3,000 is now included in Joe’s assessable income together with an ECCC. Joe’s marginal rate is 47%, resulting in $1,410 in gross tax payable (ignoring the ECCC). This gets reduced by the 15% tax offset on the excess contribution, which equals $450. Therefore, Joe has to pay a total of $960 on his $3,000 of excess concessional contributions.
Joe can now either pay this amount personally, or elect to have up to 85% of the excess concessional contributions released from their superannuation account. If electing for the superannuation fund to release the money, the 85% ($2,550) will be paid to the ATO by the super fund out of which the ATO deducts the tax payable of $960 (calculated above). The difference of $1,590 (assuming the individual has no other tax liabilities outstanding) is then refunded to Joe. This is the equivalent result if the individual had received the $3,000 amount as salary in the first place (with the only difference being the ECCC charged by the ATO).
If you pay the tax personally and don’t elect to have excess contributions released from the fund, it will also result in the excess being measured against the member’s non-concessional contribution cap. This may cause issues if the member is unable to make non-concessional contributions or already used their non-concessional cap.