As the pain of the Federal Budget starts to set in, the Budget Repair Levy looms large not just for individuals on the top marginal tax rate, but it will also have an impact on superannuation rates that are linked to this highest tax rate.
With the Superannuation (Departing Australia Superannuation Payments Tax) Amendment (Temporary Budget Repair Levy) Bill 2014 having now passed both the houses in Parliament, changes lie ahead in the 2014-15 income year. For certain superannuation items, the budget repair levy will add an additional 2% on top of the top marginal tax rate (45 per cent) and Medicare levy (currently 1.5 per cent, but legislated to increase to 2 per cent from 1 July 2014) to maintain the integrity and ensure the fairness of the tax system, and minimise opportunities for avoiding the levy.
It is note that the budget repair levy will increasing the following tax rates:
- Non-complying super fund tax rate from 45% to 47%;
- Non-arm’s length component of the taxable income of a super fund from 45% to 47%;
- Non-TFN contributions income of a super fund from 47% to 49% (less the ordinary rate of tax paid by the fund or provider)
Departing Australia Superannuation Tax Payments (DASP) will also be affected, with two rates increasing to incorporate the levy:
- DASP payments from a tax super fund will be subject to a tax rate of 38% during the period that a levy applies; and
- DASP payments from an untaxed super fund will be subject to a rate of 47%.
Excess Non-Concessional Contributions Tax
Section 4 of the Superannuation (Excess Non-concessional Contributions Tax) Act 2007 imposes excess non-concessional contributions tax, which is payable under section 292-80 of the ITAA 1997.
Section 292-80 of the ITAA 1997 provides that this tax is payable by an individual if they make excess non-concessional contributions in a financial year. Subdivision 292-C of the ITAA 1997 sets out the:
- Thresholds where non-concessional contributions become excess non-concessional contributions, and
- How to work out the amount of an individual’s non-concessional contributions.
As a result of the levy the rate at which excess non-concessional contributions tax is payable will increase from 47% to 49% of an individual’s excess non-concessional contributions for a financial year (which is the sum of the maximum income tax rate under Part I of Schedule 7 to the Income Tax Rates Act 1986 (currently 45%), the Medicare levy rate (2%) and the new levy rate (2%).
It is important to note that excess concessional contributions made by a taxpayer are not subject to excess contributions tax from 1 July 2013. Instead, they are included in the taxpayer’s taxable income and taxed at (broadly) the taxpayer’s marginal rate, including the Medicare levy rate (if applicable), and in the relevant years, the rate of the new levy. In addition, unless the taxpayer chooses to withdraw the amount from superannuation, the amount will also become a non-concessional contribution for the relevant financial year.
If a taxpayer chooses not to withdraw the amount and have it become a non-concessional contribution, the amount will be subject to the normal thresholds for non-concessional contributions in respect of the taxpayer for that financial year. If the taxpayer exceeds the relevant thresholds, some or all of the excess concessional contribution may also be an excess non-concessional contribution.
In this case, the contribution will, in effect, be subject to more than one type of income tax, being both included in the taxpayer’s assessable income and then subject to excess non-concessional contributions tax. In the absence of any amendment, the total rate of tax on such a contribution could reach 98% if the taxpayer is subject to the highest rate under Part I of Schedule 7 to the Income Tax Rates Act 1986 (currently 45%), the Medicare levy (2%) and the new levy rate (2%).
While few taxpayers are likely to choose to retain the excess concessional contribution in superannuation where this outcome would result, the overall tax payable on the contribution in this case will be limited to a maximum rate of 95% to which an excess concessional contribution can be subject. The overall maximum rate will be given effect by reducing the rate of non-concessional contributions tax that would otherwise be applied.
John (46) mistakenly makes $35,000 of concessional contributions (CC) for 2014-15, an excess of $10,000. This CC excess from 1 July 2013 is automatically refunded as assessed to John with an excess concessional contribution charge (ECCC) and shortfall interest (SIC) applied.
Where John does not release an amount from super to pay his individual amended assessment, this excess will remain as excess Non-Concessional Contributions (NCCs). During the financial year, John has already triggered the bring forward rule in 2013-14 having contributed $450k.
John has taxable income of $250,000 for the 2014-15 income year, meaning the excess concessional contribution will be subject to the top marginal tax rate, Medicare levy and Budget Repair levy (49%), along with a further 49% as excessive non-concessional contributions. – this meant that John would be subject to tax on the contribution at 98%. The has however limited the maximum tax payable to 95%, by reducing the rate of NCC tax that would otherwise apply.