Damian Hearn
Technical

Timing of concessional contributions for employees: If you think you have control then think again!

By Damian Hearn

We are constantly reminded that tax effective contribution planning becomes tax inefficient when contribution caps are exceeded. Financial advisers seek to understand and avoid excessive contributions, but many clients have still been impacted.

Contribution planning from 1 July 2009 has become even harder, certainly for high income earners below age 50. The key message is more clients will come closer to the reduced concessional contribution caps and ongoing monitoring of your clients’ contribution arrangements is essential.

In this article we will focus on:

  • three quick facts that illustrate how your client does not have control over when their concessional contributions are made by their employer and assessed against the concessional contribution cap; and
  • some practical tips to assist with this situation.

Fact 1: Concessional contributions are reported against the contribution cap for the financial year as received by the fund

Concessional contributions (such as employer and salary sacrifice) are counted against the concessional contribution cap for the financial year received by a client’s super fund. Most importantly, if the concessional contributions are received after 30 June, the contributions will be carried forward and counted against the concessional contribution cap for the new financial year. The impact of carried forward concessional contributions is highlighted in the example for Helen.

Example

Helen (age 54) is employed as a Logistics Manager with a salary of $100,000 pa plus nine per cent superannuation guarantee (SG). Helen commenced salary sacrificing $41,000 into her super as at 1 July 2008 making her total employer contributions to $50,000 pa. Taking into account the reduction in the concessional contribution cap to $50,000 from 1 July 2009, Helen will reduce her salary sacrifice to $16,000 (ie $25,000 - $9,000 SG) to ensure she will not exceed the cap.

Unbeknown to Helen, her SG and salary sacrifice contributions for the June quarter of the 2008/09 financial year were received by her super fund on 10 July 2009. The salary sacrifice and SG contribution of $12,500 (ie $50,000 x 1/4) will be carried forward into the new financial year and counted against the 2009/10 concessional contribution cap.

 

Current financial year (2008/2009)

New financial year
(2009/2010)

9% SG contribution

$9,000

$9,000

Salary sacrifice amount

$41,000

$16,000

Carried forward salary sacrifice

($12,500)

$12,500

Total concessional contributions

$37,500

$37,500

Contribution cap

$50,000

$25,000

Excess contribution

$Nil

$12,500

Excessive contributions tax

$Nil

$3,938

Carry forward concessional contributions for financial year 2009/10: Even if Helen’s salary sacrifice contribution of $4,000 (ie $16,000 x 1/4) for the June 2010 quarter is received by the super fund after 30 June 2010, the 'carried forward salary sacrifice contribution' of $4,000 will not be sufficient to avoid the concessional contribution cap being exceeded for the 2009/10 financial year and the excessive contribution tax will apply.

Quick tips:

  • Clients like Helen, who are maximising the concessional contribution cap via salary sacrificing into super, will need to be aware of this issue earlier in the financial year. A subsequent reduction in the amount of their salary sacrifice would have been required as part of their annual review.
  • The Australian Taxation Office (ATO) has the power to disregard or reallocate to another income year. If your client has exceeded the contribution cap, the ATO will determine if it was reasonably foreseeable and whether, in particular, your client had control over the timing or making of the contributions.
  • Clients like Helen may NOT have a strong case to have the contributions disregarded or reallocated if they have failed to reduce their super contributions for the 2009/10 financial year especially if they have sought financial advice (see the Tax Commissioner’s views in Policy Statement LA 2009/1).
  • Be careful if your client’s new employer has different remittance dates for super contributions (including salary sacrifice) to the previous employer.

Important 2010/11 financial year: Financial advisers need to continue monitoring the carry forward concessional contributions into the upcoming financial year. This will also include clients who will be salary sacrificing their one-off bonus received in the June 2010 quarter.

Fact 2: Salary sacrifice contributions are not safeguarded by the SG requirements

Employers are not required to remit salary sacrifice contributions to an employee’s super account on a quarterly basis in the same manner as SG contributions (ie within 28 days after the end of the financial quarter). This means an employer could remit salary sacrifice contributions annually, and the timing of the salary sacrifice contributions can be a cause for concern.

Quick tips:

  • This is extremely relevant for small to medium enterprises that have been impacted by the GFC and have opted to delay remitting their employees’ salary sacrifice contributions into their super funds.
  • As highlighted, the ATO has the power to disregard or reallocate to another income year. Based on this fact, your client MAY have a strong case to have the contributions disregarded or reallocated since they did not have control over the situation.

Fact 3: Using a super clearing house can delay the contribution being received by a fund

Prior to the introduction of the contribution caps from 1 July 2007, the ATO confirmed within SG Determination 2005/2 that if an employer pays a super contribution through a clearing house, it is counted as being received by the super fund on the date received and not the date the clearing house receives it. This has created problems for the 2008 and 2009 financial years.

Quick tips:

  • For the current financial year, your client should have taken reasonable steps to reduce the amount of salary sacrifice contributions to avoid excessive contributions.
  • It may be possible for your client, who is employed within a small to medium enterprise, to discuss this issue with their employer and consider the possibility of delaying the June 2010 quarter contributions into July 2010.

Conclusion

As highlighted by this article the complexity and issues surrounding contribution planning and avoiding excessive contribution tax continue to be an area of focus. The IOOF TechConnect team has workshops available that cover all the relevant areas and the recent taxation ruling focusing on contributions. Contact your IOOF BDM for more details.