The Tax Office has been busy working through more than 30,000 letters sent to individuals about potential excess contributions assessments for the 2007/08 financial year. The potential impact of excess contributions tax on these individuals makes the taxpayer quite nervous as the tax penalty regime for breaching the contributions caps is horrendous.
When the Minister for Financial Service, Superannuation & Corporate Law, the Hon. Chris Bowen presented at the SPAA Conference last week, he was given a verbal barrage by well respected lawyer Daniel Butler about the harshness of excess contributions tax, where a rate of up to 93% can apply – 15% contributions tax + 31.5% excess contributions tax (breach of CC cap) + 46.5% excess contributions tax (NCC cap). I guess you leave yourself open for such a barrage if you are prepared to take questions from the floor!!
With changing concessional contribution caps for the 2009/10 financial year, there is a fairly high chance that many individuals will get caught up in contributions being deemed excessive.
Take the following examples to demonstrate some common arrangements that can get caught with excess contributions:
Timing of contributions paid by an employer for salary sacrifice arrangements changing from $100,000 to $50,000
An employer has obligation to make the compulsory Superannuation Guarantee Payment (SGC – 9%) 28 days after the end of the month. A SMSF is required to report contributions when they are received. Where timing of payments aren’t considered, an individual could end up with an excess contributions assessment.
John (53) was salary sacrificing his to the concessional contribution cap in 2008/09 of $100,000, which was paid in equal monthly instalments of $8,333. As a result of the halving of the contribution caps, John rearranged his salary sacrifice arrangement to $50,000 for the 2009/10 financial year. An amount of $4,167 was now being paid to his SMSF. The employer would make John’s payments within 28 days after the end of the month in accordance with their obligations.
In reporting concessional contributions for the 2010 financial year, it is noted after year end his employer has contributed $54,166 on behalf of John, being 11 months x $4,167 + 1 x $8,333, being the June 2009 amount paid in July 2009. As a result, the ATO will issue John an excess contributions tax assessment for $1312 ($4,166 x 31.5%).
It is important to note that this excessive amount then counts towards the non-concessional contribution (NCC) cap. Should John have made a $450,000 non-concessional contributions in the current year, or any of the two prior years, then this amount will again be in excess of the cap and a further 46.5% tax would apply ($1,937.19). Therefore, a 93% tax rate will have applied to this excessive amount, leaving only $292 left of the contribution for John.
What’s the solution for John?
It could be argued that Commissioner’s discretion may apply to the above example as the timing of such contributions is outside of control of the fund and member.
ATO Practice Statement PSLA 2008/1 notes that the Commissioner has ‘discretion’ to disregard contributions or reallocate contributions to another financial year if it is appropriate they be referrable to a different year. These discretionary powers only extend to ‘special circumstances’ where amounts may be unusual or out of the ordinary, outside the individual’s control over the making of the contribution and the imposition of excess contributions tax would be unjust, unreasonable or otherwise inappropriate. Example 1 within PSLA 2008/1 discusses this type of issue with a prospective salary sacrifice arrangement that are outside the control of the individual.
Whilst this issue for John may have been readily recognised shortly after the financial year, no action can be taken on the matter until an excess determination has been issued. At that point in time, John has 60 days in which to apply for relief.
An alternative solution
Whilst it appears recognised within PS2008/1 that Commissioner’s discretion would apply to John’s circumstances, an alternative solution that would remedy this timing issue each year is the use of a Contributions Reserve. Where an amount is contributed into a fund on behalf of a member, it must be allocated to the member within 28 days. In accordance with section 115 of the SIS Act and subject to the fund’s trust deed, such an amount can be held in a Reserve (or suspense account) for the benefit of the member. Where any amounts are paid into the fund (as concessional or non-concessional contributions) during the month of June, such amounts can be ‘held over’ until the following financial year to be allocated.
For John, the May 2010 payment received by his SMSF in June 2010 of $4,167 could be allocated to a Contributions Reserve and held in there as at 30 June 2010. It will not be counted towards the concessional contribution cap until such a time that it is allocated. Therefore, by using this strategy, John has reduced his concessional contributions for the year to $49,999. He will however need to incorporate this amount into the following financial year, therefore meaning a similar strategy will be required to operate in June/July each financial year assuming he is making concessional contributions up to the cap, or reducing his contributions for the following year.
The 2009/10 financial year has been one of significant change for many clients who had salary sacrifice arrangements adjusted. The ATO in their role of tax collector has written to clients in the current year where their prior year contributions were higher than the reduced cap. The ATO will show no mercy for those who don’t get the contributions right, unless it’s out of your control. So, it is important that you review current contributions and act accordingly to ensure that an excess contributions tax assessment won’t occur.