The recent release of the 2010 ATO excess contribution tax statistics for concessional contributions showed a 296% increase to date in the number of people caught up in this ongoing saga. The key issue that triggered this enormous spike was the Labor Government’s decision to halve the concessional contribution caps from:
- Under 50 – $50,000 down to $25,000; and
- 50 and over – $100,000 down to $50,000
Many of these people got caught in the timing of their existing salary sacrifice arrangements, where it is not commonly understood that employers and super funds having different reporting obligations. This event is likely to occur again in 2012/13, where the concessional contribution cap is to reduce to $25,000 for those 50 years of age and above. The only exception to this may be the proposed extension to the concessional contribution cap for those people 50 and above who have an account balance of less than $500,000.
To understand this issue, let’s take a look at the following example:
John (over 50) is salary sacrificing to his $50,000 concessional contribution cap limit for 2011/12. His June 2011 payment of $4,166 has to be paid by his employer prior to 28 July, which meets their SGC obligations as an employer. John’s SMSF when it receives the payment in July, will report the amount for the 20012/13 financial year (not 2011/12). Unless John is eligible for the extension to the concessional contribution caps for those over 50 with an account balance of less than $500,000, his concessional contribution cap next year will reduce to $25,000.
The super fund will report the following contributions for John in 2012/13:
- $4,166.67 in July 2012 +
- 11 x $2083.33 for August to June 2013 inclusive
This totals $27,083.33 meaning John has $2083.33 of excess contributions subject to tax at 46.5% (15% contributions + 31.5% penalty tax).
But what about the ability to now refund concessional contributions?
Whilst the Government provides (since 1/7/2011) a ‘once-off’ refund for individuals who breach their concessional contributions by less than $10,000, to rely on this refund mechanism in my view is playing a dangerous game. Whilst an amount may be able to be disregarded by the Commissioner and re-assessed in John’s personal tax return, what if John had previously breached the cap in the 2011/12 financial year?
Many members and advisers would be best served to start reviewing salary sacrifice arrangements now to avoid the anguish.