Michael Forer
Technical

Adviser Alert - Excess Contributions Tax

By Michael Forer

Approximately 24,000 superannuation fund members throughout Australia will have now received a letter from the ATO advising that they may have exceeded a contributions cap in the 2007/08 year.

Contribution caps for the 2007/08 year were as follows;

Age on 1 July 2007 Concessional cap Non-concessional cap
Under 50 $50,000 $150,000*
50 – 64 $100,000 $150,000*
65 - 74 $100,000 $150,000
75 and over Nil Nil

* People under age 65, could bring forward future cap entitlement to enable contributions of up to $450,000 over three years.

Contributions exceeding these caps are subject to the following tax rates;

  • Concessional contributions – 31.5%
  • Non concessional contributions – 46.5%

The ATO will begin issuing excess contributions tax (ECT) assessments for the 2007/08 from July and the tax is due and payable 21 days after the notice of the assessment is received.

What to do if you receive a ECT notice.

Anybody who receives an excess contributions tax notification should immediately review their 2007/08 contributions to ensure that a mistake has not been made.

The Tax Office have warned that several super funds have double reported for their members when internal roll-overs from accumulation to pension accounts have taken place. Therefore, advisers should check with the member’s fund that any roll-overs have been reported correctly to ensure the ECT assessment has not been incorrectly calculated.

Additionally, the ATO may be able to disregard or reallocate contributions in special circumstances. A member who exceeded the contributions cap due to special circumstances, will need to demonstrate why they believe their circumstances are special.

The application to amend contributions must include information about the special circumstances that caused the member to exceed the contributions cap and evidence of any claims where possible. This may include showing:

  • that you could not have reasonably known the contribution would exceed the cap;
  • how much control you had over the amount of the contribution and when it was made, including the terms of any agreement you had with the contributor (for example, your employer);
  • that it is more appropriate to allocate the contribution to another income year (for example, if the contribution relates to a prior income year);
  • that your contribution was made to accumulate super gradually over time rather than to avoid paying tax; and
  • any other information you feel is relevant.

Paying the ECT

If the ATO determine that a member has to pay excess concessional contributions tax, an amount up to the amount of this tax may be withdrawn from super fund(s) to help you meet the obligation to pay the tax. To withdraw the amount from a super fund, a compulsory release authority that is sent with the notice of assessment should be used. The compulsory release authority provides the option for the member to instruct the super fund to pay the excess contributions tax directly to the ATO or to the member who may then pay the ECT.

The ATO have advised that a common mistake by members is paying the ECT liability but not withdrawing the money from their superannuation, or withdrawing the money as a benefit and not using the compulsory release authority. If this happens, a release authority will be sent directly to one of the member’s funds, asking them to withdraw the super and pay it to the Tax Office. It will also charge the member a penalty.

Another trap is using the compulsory release authority to withdraw more than the excess contributions tax amount. If a member does this, the amount may be treated as an early release of superannuation and a penalty may apply.

Therefore, if a member has an ECT liability, ensure the compulsory release authority is used and the correct funds are withdrawn from the member’s superannuation fund.

Avoiding future ECT

Monitoring of contribution levels to ensure that contribution caps are not exceeded is an ongoing process that can be particularly difficult where a member has multiple employers and/or multiple superannuation funds. At present, 24,000 ECT assessments have been issued for the 2007/08 year and given the reduction in the concessional contribution cap announced in the May 2009 Budget, this is likely to increase in future years.

IOOF Pursuit will not accept contributions that exceed the contribution caps, a product feature that can potentially save clients a significant tax liability and consequently a large headache for their adviser.

Of course, the problem of exceeding the contribution caps will still exist if a member has multiple super funds. Therefore, consolidation of clients super to a platform that monitors the contribution caps should be considered to ensure the caps are not exceeded and unnecessary ECT is avoided.