I seem to have written about this excess superannuation contributions tax issue a lot lately, but it’s hard to avoid. And taxpayers, including SMEs, need to be careful they don’t overshoot the limits.
When taxpayers put more money into their super than the law allows (the so-called superannuation caps), they can get penalised (and at times, heavily penalised). Briefly, the concessional contributions cap is currently $25,000 ($50,000 for those aged 50 and over), and the non-concessional contributions cap is $150,000.
Concessional contributions are basically super contributions that are included in the assessable income of a complying super fund, eg. employer 9% contributions for employees, salary sacrifice contributions made by the employer. Non-concessional contributions are those that are not included in the fund’s assessable income, eg. personal contributions from the fund member’s after-tax income. The caps or limits were set with the aim of curtailing the accumulation of supposedly excessive superannuation benefits.
It might be noted that the concessional contributions cap of $50,000 for those aged 50 and over is due to expire on June 30, 2012. The Government has proposed to allow individuals aged 50 and over with total superannuation balances below $500,000 to continue making up to $50,000 per year in concessional contributions after June 30, 2012. This proposal however is still in the consultation stage.
Taxpayers who get caught between the cracks in the superannuation excess contributions tax system cannot expect much in the way of relief from the Tax Office, unless there is a legislative change. As I’ve noted before, the law is so tightly drafted that the Commissioner does not have much discretion to help people out. The Commissioner said his discretion is a “very narrow concession” and only applies where there are “special circumstances” (see below). While that’s a sore point with many, it’s simply what we have to deal with at the moment.
Under the relevant law, a taxpayer above his or her concessional or non-concessional contributions caps can apply to the Commissioner for him to exercise his discretion to disregard or reallocate excess contributions for a financial year. The Commissioner will only exercise his discretion where “special circumstances” apply, ie. where the resulting breach of a contributions cap is inadvertent and has arisen through no fault of the taxpayer.
Specific examples of situations where the Commissioner may be prepared to exercise his discretion favourably include:
However, the Commissioner may not exercise his discretion where:
A discretion is a discretion – it can be exercised either way, and the taxpayer can’t always be sure which way the Commissioner will go. That’s why many don’t like the Commissioner having too many discretions, and favour clearer more precise laws instead.
Some 15,000 excess contributions tax assessments have been issued since 2007 and about 98% of them have been maintained, so taxpayers’ don’t have a good win record here. In respect of those 15,000 assessments (mostly in relation to the 2007-08 year), the Tax Office has collected $100 million in tax to date.
Exceeding the caps can happen when, for example, an individual has more than one employer making the 9% super guarantee contributions for them. The ATO says it does not know exactly how many individuals in this situation have exceeded the concessional contribution caps. However, it has identified about 40,000 individuals who have apparently exceeded the contributions caps in 2007-08, and about 30,000 who have apparently exceeded the caps in 2008-09, so the problem is not a small one.
So, how does the ATO decide which taxpayers to look at? In selecting cases of likely or apparent over-contribution, the ATO uses what it calls a “risk based approach”. Broadly speaking, cases are selected and progressed, first to a pre-assessment letter and then to an assessment itself, in a risk-based order. Each case is allocated a “score” based on a range of factors particularly including:
It is understood that a Senate committee is looking to understand how it can ensure people have the opportunity to “do the right thing” on super and not suffer consequences unreasonably. There is apparently a recognition at government level that there is a need to deal with this problem to make sure people are not losing out on retirement savings that they should and would otherwise have had because they made an inadvertent error or their adviser made an inadvertent error.
The calls for this problematic area to be fixed grow louder!
The onus is fundamentally on taxpayers to make sure they get their super contributions right. For many, this may be relatively straightforward, but that’s not universally the case.
People who, in an income year, have worked for more than one employer will possibly have super in different funds. That’s a complication in working out if the contribution limits have been exceeded. Another problem is where an employer, or employees themselves, have been making salary-sacrificed super contributions. Getting a bonus or a larger than expected salary increase (however unexpected that may be!) also affect the total amount of super contributions made and hence contribute towards the caps.
Caveat emptor (let the buyer [or superannuation contributor] beware) has never been more so!
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions . 
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