Whilst the issues of excess non-concessional contributions have not been anywhere near as extensive as concessional contributions, regular problems have existed for individuals who were subject to a punitive tax at the top marginal tax rate for breaches of this post-tax contributions cap.
In the Federal Budget, the Government announced that it will allow for an individual who exceeds their non-concessional contribution cap to have this amount returned to them from 1 July 2013. Any earnings generated from this contribution must also be returned and included within the assessable income of the individual taxpayer (taxed at their marginal tax rate). Failure to return the excess contribution will mean the contribution will continue to be taxed at the top marginal tax rate in the fund.
This measure is in response to a policy recommendation made in the Inspector General of Taxation (IGT), which released a report on the Australian Taxation Office’s approach to superannuation excess contributions tax. The IGT made nine other recommendations, which seek to improve the administration of the excess contributions tax, including through further ATO assistance being provided to taxpayers in monitoring their contribution levels.
Details of the IGT report can be found here,
How will the earnings be calculated?
This is currently unknown. The IGT’s report notes some of the administrative challenges confronting this legislation to deal the refunding of earnings from excess non-concessional contributions and including these amounts are assessable to the individual taxpayer.
Previous considerations proposed by Treasury (as part of the Simpler Super reforms) included any earnings to simply be taxed at the top marginal tax rate – this however provided administrative difficulties and costs. Stakeholders were previously concerned with the difficulties in calculating the fund’s earnings on those contributions given the diversity of ways in which a fund can invest, along with potential liquidity issues with refunding such an amount. Conversely, by applying a rule as a proxy for an actual earnings rate had the scope to for some taxpayers to gain an advantage whilst others were disadvantaged.
The IGT suggested within the report that there would be significant benefit in undertaking broad community consultation on this matter. I’m thinking this will be a good idea?
Whilst this is a positive move conceptually, do you think this refunding mechanism for earnings will pose any major problems?