Limited relief and excess contributions tax
Deborah Wixted questions whether provisions of limited relief regarding excess contributions tax could be classified as ‘relief’.
In August 2011 the Government issued a consultation paper to progress the policy announcement made in the 2011 Federal Budget regarding the provision of limited relief to those who breach their concessional contributions cap.
The key details of this measure are as follows:
- A refund is available only to individuals with excess concessional contributions of up to $10,000 in a financial year. The $10,000 limit will not be indexed.
- The refund is only available for the first breach of the concessional contributions cap after 1 July 2011, with subsequent breaches not eligible.
- Excess contributions will be refunded to the individual and taxed as income in their hands, as an alternative to the deduction of excess concessional contributions tax. As a result, individuals not on the highest marginal tax rate will pay a lower amount of tax than would have been levied on the excess contribution.
- The refund of excess contributions will be optional, with individuals needing to elect to take up a refund offer made by the ATO. If the refund is not chosen, the existing excess contributions tax processes will continue.
When this measure was first announced in the 2011 Federal Budget, it was clear the measure should assist many individuals who unintentionally make a one-off breach of the concessional cap by a small amount. This was stated as the policy intent behind the measure. However, outstanding issues included:
- The unchanged complexity of the contribution cap rules may still see many clients penalised for a second concessional cap breach in the future.
- The interaction of the excess concessional contribution with the non-concessional cap.
- Relief for clients who breach their concessional cap by more than $10,000.
- The taxation treatment of the refunded contribution from the fund’s perspective.
- Relief for individuals who breached their concessional cap in the 2010/11 or previous financial years or for inadvertent breaches of the non-concessional cap.
This article will consider the key details of the proposed measure in light of these issues.
Refund only on the first breach below $10,000
The consultation paper makes it clear that only the first concessional cap breach of under $10,000 from 2011/12 onwards is eligible for a refund. A refund will not be available:
- For second and subsequent breaches, unless the original breach is amended following the provision of additional information to the Australian Taxation Office (ATO) or, a successful objection to the excess contributions tax assessment occurs, which results in no excess concessional contribution being recorded.
- Where the breach is $10,000 or less but the individual decides not to have the excess contributions refunded. This may be an appropriate course of action for those on the highest marginal tax rate, where there is no difference between income tax and excess contributions tax but the amount released from super as excess concessional contributions tax is considerably lower than that released under the refund.
- For part of an excess concessional contribution under $10,000
- For excess contributions made in the 2010/11 or earlier financial years
- For excess non-concessional contributions. However, where these arise from excess concessional contributions, applying the refund may mean excess non-concessional contributions are also eliminated.
No refund for breaches greater than $10,000
No relief is provided under the refund measure for an individual who breaches their concessional contributions cap by more than $10,000.
However, if an amendment is made to the excess contributions assessment that results in the excess contribution being less than $10,000, refund relief may then be available.
Therefore, those with excess contributions over the $10,000 limit may be well advised to thoroughly investigate the contribution information provided by their fund to ensure all opportunities are taken to reduce any excess and potentially qualify for refund relief.
Refunded excess concessional contributions treated as assessable income of the individual
An important consideration in the administration of the excess concessional contributions refund is how the refunded amount is to be treated, both in the hands of the individual member and also in the hands of the superannuation fund which received the original contribution.
Individual income – refunded excess concessional contributions, grossed up for 15 per cent contributions tax, will be treated as assessable income of the individual.
Adjusted taxable income (ATI) is used to determine a broad range of government assistance and taxation benefits, such as social security payments, Family Tax Benefit, Child Care Benefit, superannuation co-contributions, deductions for personal super contributions, Commonwealth Seniors Health Card, senior Australians tax offset and mature age workers tax offset.
The amount of refunded excess contributions could therefore have an effect on eligibility for these other measures, particularly if the refunded contributions would have otherwise been excluded from the person’s ATI.
Two matters remain unclear on this point:
- Where the excess contribution arises from a combination of reportable employer superannuation contributions and other super contributions, how should the refunded amount be characterised, both for ATI purposes and whether it is employment or non-employment income?
- As reportable super contributions themselves are included in ATI in some instances, the refunded excess may result in double-counting. This has been highlighted in the consultation paper as a matter requiring further consideration.
Individual non-concessional contributions cap
The consultation paper makes clear that refunded excess concessional contributions would not be counted to a person’s non-concessional contributions cap.
This is one of the more important aspects of this relief, as evidence suggests that there are many instances of individuals seeking to maximise their contributions under both caps, with excess concessional contributions then also resulting in excess non-concessional contributions and a substantial total tax liability.
By allowing the excess concessional contributions to be refunded, subject to personal income tax rates and not counted to the non-concessional cap, many individuals may well avoid a potential 93 per cent tax bill.
Individual superannuation balance
The individual’s superannuation balance will be reduced by the released amount. The released amount will be treated for proportioning purposes in line with the current release authority treatment: the proportioning rule will not apply, meaning that the released amount effectively comes from the individual’s taxable component.
However, current release authority treatment provides that for preservation purposes the released amount is deemed first to come from unrestricted non-preserved benefits, then restricted non-preserved benefits and finally preserved benefits. It remains to be seen whether this will also apply to the refunded amount.
Fund income
The operation of the refund process means that superannuation funds that receive contributions which are later assessed as excessive and refunded to the member are required simply to action a release authority provided by the ATO. With no amendments needed to the fund’s own income and taxation position and with the refund fitting within the existing release authority framework, additional administration costs should be avoided.
Summary
The refund of excess concessional contributions may assist some individuals to reduce their potential tax liability, particularly those who are not on the highest marginal rate of tax and who have also maximised after-tax contributions under the non-concessional cap.
It may also give additional options for those who identify the potential for excess contributions early in a financial year.
However, not all individuals with excess concessional contributions can or should use the refund, meaning close analysis of each situation will be needed.
Deborah Wixted is the executive manager technical services at Colonial First State.
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