Dealing with excess contributions


By Gabriela Rusu

Published December 2020


This article features in the November/December 2020 issue of Tax & Super Australia’s Outlook magazine, which is exclusive to members. Get the inside scoop, stay on top of your profession and access the many benefits and discounts that come with being a member of TSA. Find out more.

Making extra concessional or non-concessional contributions can help boost a person’s retirement savings. But fund members need to be aware of the implications for when they exceed the contributions cap.

Since 2013-14, when the excess concessional contributions (CCs) refunding scheme came into effect, individuals exceeding their CCs cap will accrue a tax liability.
The excess CCs amount will be added to the individual’s assessable income for the relevant year and taxed at their marginal tax rates plus an excess CCs charge (as explained below). The individual will, however, be entitled to a 15% non-refundable tax offset to compensate for the tax already paid by their fund(s) on the same excess amount.
The ATO will determine whether there are any excess CCs once the individual’s fund has finalised its reporting requirements and the individual has lodged their personal tax return for the relevant income year.
Upon exceeding their CCs cap, the individual will receive an excess CC determination from the ATO advising them that their excess CCs amount has been included as assessable income in their tax return. Together with the determination, the ATO will issue the individual with an income tax return notice of assessment or notice of an amended assessment.


CASE STUDY

  • Greg is 54 years old and subject to a marginal tax rate of 34.5% (including the Medicare levy).
  • Greg’s only superannuation interest is in his self-managed superannuation fund (SMSF). His total superannuation balance (TSB) on 30 June 2019 was $1.8 million.
  • Greg had super guarantee (SG) and personal deductible contributions totalling $30,000 in CCs made into his SMSF during 2019-20.
  • Greg’s CCs cap for 2019-20 was $25,000, giving him an excess CCs of $5,000.
  • The total CCs amount of $30,000 is reported to the ATO as part of the SMSF’s 2019-20 annual return.
  • Greg lodges his personal income tax return for 2019-20 on 31 August 2020 and receives a notice of assessment with payment due 21 September 2020.
  • However, the ATO determines that Greg has exceeded his CCs cap for 2019-20 by $5,000. On 1 November 2020, it issues Greg with an excess CCs determination and amended notice of assessment with payment due on 21 December 2020.

Firstly, the CCs (totalling $30,000) would be included in the SMSF’s assessable income for 2019-20 and taxed at 15% (that is $4,500).
Secondly, the ATO would add the excess CCs of $5,000 to Greg’s assessable income for 2019-20 and recalculate his income tax for that year allowing for a 15% tax offset to reflect the tax already paid by the SMSF. This gives Greg the following tax liability (see table 1 below):




EXCESS CC CHARGE

When an individual has their tax payable increased due to having their excess CCs included in their assessable income, they will also have to pay an excess CC charge (essentially an interest charge) that applies to the extra tax liability.
The excess CC charge:

  • applies from 1 July in the year in which the excess contribution was made until the day before the individual is due to pay their income tax liability under their first assessment notice for that income year
  • is calculated by the ATO and compounded daily at a rate equal to the 90-day bank accepted bill (as published by the Reserve Bank of Australia) plus a 3% uplift factor.
  • is contained (along with the period and rate of the excess CCs charge) in the excess CC determination received by the individual from the ATO, and
  • is not a deductible expense and the ATO cannot exercise its discretion to remit it.

Following on from Greg’s scenario earlier, the excess CC charge will apply to his extra tax liability amount of $975 (not the full $5,000 excess CCs) from 1 July 2019 to 20 September 2020 (being the day before tax under his first notice of assessment is due to be paid).


SHORTFALL INTEREST CHARGE

An individual’s tax liability may also increase by the shortfall interest charge (SIC) that applies to the shortfall between the amount of tax the individual paid originally, and the amount of extra tax identified in their amended tax return (which includes the excess CCs and applicable 15% tax offset).
The SIC rates are the same as the excess CC charge. Similar to the excess CC charge, the SIC is calculated and compounded daily by the ATO.
The SIC is applied to the shortfall amount from the time the original tax liability was payable until the day before the extra tax liability related to the amended assessment for the excess CCs is due. The SIC is charged on the total of the extra tax payable due to excess CCs, plus the amount of the excess CC charge.
In Greg’s case, Greg may need to pay the SIC on the extra income tax liability of $975 plus the excess CC charge amount. Greg’s SIC is applicable from 21 September 2020 (the payment due date under his original notice of assessment) to 20 December 2020 (the day before the payment due date on his amended assessment).
Many taxpayers seem to be unaware of the SIC until they receive an amended assessment from the ATO.


GENERAL INTEREST CHARGE

If an amount of excess CC charge and the SIC remains unpaid after the payment date, the individual may become liable to pay the general interest charge (GIC) on the unpaid amount from the day when the amount was due to be paid until it is paid.
In Greg’s case, if the amount of excess CC charge or the SIC is not paid by 21 December 2020 (the payment due date on his amended assessment), Greg will also be liable to pay the GIC on any unpaid excess CC charge or SIC.
GIC is calculated at a higher rate of interest in comparison to the SIC.
Unlike the excess CC charge, the individual can generally claim a tax deduction for both the SIC and GIC in the income year they are incurred. Also, the ATO can exercise its discretion to remit SIC and GIC in full or in part where it is fair to do so (see PS LA 2006/8).


GENERAL INTEREST CHARGE

The excess CC determination further advises the individual that they can choose to:

  • elect to release up to 85% of the excess CCs from their super fund

OR

  • do nothing and leave the excess CCs in superannuation.

Where the individual elects to have the excess CCs refunded, the individual must make an election to the ATO within 60 days from the date the excess CCs determination is issued. The election must specify a valid release amount (ie, up to 85% of the excess CCs amount) and the super interest(s) from which it is to be released. This option may be necessary if the individual does not have the funds to pay the extra tax using their own money.
Once an election to release is made, it cannot be revoked.
When the ATO receives the election, it will send a release authority to the member’s nominated super fund in respect of the specified amount to be released directly to the ATO. This amount will be offset against any outstanding tax debts before any remaining balance is refunded to the individual (as though it were a personal tax refund).
Using Greg’s case, Greg can elect to release up to 85% of the excess CCs of $5,000 (that is 85% x $5,000 = $4,250) from his SMSF. If this option is selected, the extra tax bill of $975 would be covered from his super account rather than from his own funds. Importantly, no refunding should happen until the ATO sends a release authority to his fund.
Where an individual chooses not to have the excess CCs refunded, any excess CCs that are kept in the fund will count towards their non-concessional contributions (NCCs) cap. This might result in the individual exceeding their NCCs cap if:

  • other NCCs have been made during the relevant financial year (or in a previous year under the bring-forward rule)
  • the individual’s TSB was $1.6 million or more at the previous 30 June, resulting in the individual’s NCCs cap for the relevant year being $0.

Note that, unlike NCCs, the ability to make CCs is not limited by the size of the individual’s TSB on the previous 30 June.


EXCEEDING THE NON-CONCESSIONAL CONTRIBUTIONS CAP

Like the process for excess CCs, the ATO will determine whether there are excess NCCs based on the information reported by their super fund(s) and the information contained in the individual’s tax return. When an individual exceeds their NCCs cap for the 2013–14 income year onwards, they are issued with an excess NCC determination by the ATO. Again, the individual has 60 days from the date this determination is issued to elect how the excess NCCs amount is to be treated. In this case, they can:

  • elect to release their excess NCCs and 85% of the associated earnings from their nominated super fund (as shown in their excess NCC determination),

or

  • elect not to release and be assessed for excess NCCs tax.

The ATO calculates the associated earnings amount by multiplying the excess NCCs by the GIC rate. It applies from 1 July in the year the contributions are made until the day the ATO issues the excess NCC determination.
Upon receiving the election form, the ATO will send a release authority to the nominated super fund, which will release the amount specified in the release authority to the ATO. The release amount can then be used by the ATO to offset any outstanding tax liability the individual may have and return the remaining balance (if any) to the individual.
It is important to note that, since 1 July 2018, when the individual has not made an election to release within 60 days, the ATO’s default position is to issue an excess NCCs release authority to their super fund (other than a defined benefit fund) so that the relevant amount (being the excess NCCs plus 85% of the associated earnings) can be paid out of super. However, the individual may still request the ATO to not release the relevant amount by electing for $0 to be released from their fund (within 60 days). While this action will stop the ATO from sending a release authority (after 60 days) to the individual’s super fund, any excess NCCs amount will be taxed at the top marginal rate of 47% (including the Medicare levy).
Note, while an individual may choose to withdraw an amount from their superannuation account to pay their tax liability for excess CCs, it is mandatory for their excess NCCs tax liability to be released from an individual’s superannuation interest.
Continuing with Greg’s case of excess CCs, if Greg chooses not to release his excess CCs (up to $4,250), the full excess CCs amount of $5,000 will count towards his NCCs cap for 2019-20. This is an issue for Greg because his NCCs cap for 2019-20 is $0 due to his TSB at the previous 30 June (in this case, 30 June 2019) being more than $1.6 million. Thus, the full $5,000 excess CCs amount will be in excess of his $0 limit.
Greg will receive an excess NCCs determination from the ATO advising him of the excess NCCs amount of $5,000 and the associated earnings amount that can be released. If Greg does not make a request for the release of any amount from his SMSF within 60 days of the issue date of his excess NCCs determination, the ATO will issue a release authority to Greg’s fund to seek the release of the excess NCCs ($5,000) plus 85% of the associated earnings. Under this scenario, Greg will only have to pay tax on 100% of the associated earnings, which will be included in his assessable income and taxed at his MTR less a 15% tax offset.
If, however, Greg wants to retain as much of his contributions into super and requests the ATO not to release his excess NCCs ($5,000) plus the 85% of the associated earnings, Greg will also need to pay excess NCCs tax on the excess NCCs amount of $5,000 (that is $47% x $5,000 = $2,350). The ATO will issue Greg with an excess NCCs tax assessment and his SMSF with a release authority equal to the tax liability of $2,350). Note the excess NCCs tax is imposed on Greg who must withdraw it from his superannuation interest.


THE RELEASE AUTHORITY PROCESS

From 1 July 2018, there are new streamlined processes to release amounts from superannuation, simplifying the administrative process for releasing superannuation for both individuals and their fund(s).
Under streamlining legislation, all excess contribution release authorities for the 2013-14 income years onwards are to be issued by the ATO directly to superannuation providers, and all payments for a streamlined release authority are to be made to the ATO.
A super fund (other than a defined benefit fund) that has been issued a valid release authority from the ATO is required to pay the ATO the lesser of:

  • the amount stated in the release authority
  • the total amount that could be paid at the time from the member’s super interest(s).

Super providers are generally required to make payment and return a release authority statement to the ATO confirming the amount that was released (or any amount that could not be released and the reason why it could not be released) within 10 business days of the issue date of the release authority. The ATO, however, has temporarily extended this timeframe from 10 to 20 business days until the streamlined release authorities process can be actioned electronically (via SuperStream).
Administrative penalties may apply where a person or super fund does not comply with their obligations in relation to a release authority. The ATO can, however, exercise its discretion to remit all or part of each of the administrative penalties imposed (usually when the ATO is satisfied the person/super fund has made a genuine attempt to comply with their obligations).
Any amounts refunded are exempt from the proportioning rule (that prevents a member from choosing which components to withdraw when a superannuation benefit is paid). This means the released amounts do not have to be divided between taxable and tax-free components in the same proportion as the total balance of the superannuation interest they are paid from.
Furthermore, there is no requirement to release such amounts from the super fund that received the contributions in the first place. Consequently, members with multiple super funds and/or multiple superannuation interests in a single fund (eg several pensions and an accumulation account) are not only able to choose whether or not they have the amount specified in the release authority refunded but also the super fund and the account balance within a particular fund.
This approach opens up new planning opportunities for those with excess contributions. For instance, it may be possible to receive the refund from a fund that may only have a taxable component. Also, where a super fund holds multiple interests for the member and their value exceeds the amount specified in the release authority, the member may choose to release the amount from an account with a high taxable component rather than an account with a high tax-free component.
For members in receipt of a transition to retirement income stream (TRIS) that is not in retirement phase (ie the member has not yet retired or reached age 65), it is important to remember that any released excess contribution amount will count towards their TRIS’s 10% limit. If they are concerned about the 10% limit, they may consider rolling back the required amount to accumulation phase and pay it from the accumulation interest rather than paying the released amount directly from the TRIS. By doing so, their maximum 10% limit will not be affected.
It is also worth noting that because the released amount is treated as a superannuation benefit, the cashing order for a benefit paid to satisfy a release authority remains the same — ie firstly, from any unrestricted non-preserved benefits until that is exhausted, then from any restricted non-preserved benefits and, finally, preserved benefits. This cashing order will allow members with multiple super interests and different preservation components (ie, one balance has a high unrestricted non- preserved component but the balances of the other interests are fully preserved) to keep their unpreserved balances intact by deliberately choosing to withdraw the amount specified in the released authority from an account that contains only preserved benefits.


WHAT HAPPENS IF A MEMBER HAS A DEFINED BENEFIT INTEREST?

A defined benefit fund may voluntarily comply with the release authority (depending on the rules of the fund).
As a super fund trustee is not required to release funds from a defined benefit interest, when the individual’s only super interest is held in a defined benefit fund and the fund cannot or will not voluntarily release the funds, the individual must elect not to release and pay any excess contributions tax liability (including the 47% on any excess NCCs) personally (ie from their own resources).

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