Changing landscape when dealing with excess contributions?

May 22, 2012 By 1 Comment

Much has been talked about of the budget announcements impacting contributions, in particular a flat $25,000 concessional contribution cap that will apply across all individuals from 1 July 2012.  Whilst concessional contributions have been impacted, non-concessional contribution amounts will remain at $150,000 p.a. with the bring forward rule available for those under age 65.

Given the statistics that resulted from the last halving of the concessional contribution cap (see post, latest statistics on excess contributions tax), I would envisage further excess contributions tax issues resulting from many individuals 50 and over again requiring to change salary sacrifice arrangements down from $50,000 to $25,000.

The ‘get out of jail free’ card was always handy when playing Monopoly, and importantly we now have something like this available (in several forms) when it comes to dealing with excessive contributions.  These remedies outlined below may assist with any concessional contribution or non-concessional contribution cap breach:

  • Once off-refund of excess concessional contributions – Timing is everything when it comes to making contributions, in particular where employer obligations for SGC (and salary sacrifice) don’t mirror when a contribution is received and reported by a SMSF for contribution cap purposes.  Whilst many people got caught previously in the 2010 FY due to this timing issue, this time around any excessive amount of $10,000 or less can be disregarded by the Commissioner and be re-assessed within the individual’s tax return for the financial year.  Subject to their own marginal tax rate, this may provide a better outcome.  Read previous post on proposed changes to refund excess contributions (to be effective from 1 July 2011).
  • Contributions reserving – Another ‘get out of jail’ strategy was to effectively park any June contributions into a holding account or reserve within the SMSF, subject to the fund’s trust deed not prohibiting the use of reserves.  We have recently seen clarity provided by the ATO in the use of this strategy through ATOID 2012/16, which states that whilst the contribution for income tax purposes is assessable in the year paid into the fund, for contribution cap purposes, it counts in the year in which it is allocated.  See previous post for further details.  The use of a contributions reserving strategy can apply equally to non-concessional contributions.
  • De-minimus test – this change in view in March 2012 from the Australian Taxation Office certainly hasn’t made any headlines, but provided a significant shift in thinking by the Commissioner in collecting large ECT amounts triggered by small amounts.  The ATO are currently working through a series of these assessments previously raised to effectively refund an individual as a result of a disproportionate ECT liability due to a small breach of the concessional and non-concessional cap.  To date, we have no guidance on what constitutes a small amount to be disregarded.  More information on this can be found in my previous post, de minimus to help with contribution maximis
  • Returning Amounts – SIS Regulation 7.04(3) outlines that a fund can not accept a fund-capped contribution; that it a contribution which is greater than three times the non-concessional limit for someone under 65 years of age, or more than the non-concessional limit where someone is 65 years of age older.  Where a single contribution is made into an SMSF that is excessive, the trustees are obliged to return the excessive amount.  ATO ID 2009/29 outlines that there is effectively no timeframe to return the excessive contribution as it should not have been accepted by the super fund in the first place.  As a result, if an individual makes a single excessive contribution they have the ability to retain this amount without being subject to excess contributions tax.

Ongoing management of contribution caps is still the most important role you play to ensure that an individual does not breach their contributions caps.  Whilst still far from perfect, at least the law provides some opportunities to use the ‘get out of jail free’ card to address any potential excess contributions tax issues.

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You can budget on a super surcharge!

April 29, 2012 By 5 Comments

The media was a buzz over the weekend regarding the proposed budget announcement to increase the contributions tax rate from 15% to 30% for individuals who earn more than $300,000 p.a.

In 1996, the Coalition Government introduced the super surcharge to help ‘fix the mess’ of the previous Labor Government. This time, it appears the Labor Government is introducing this to fix their own mess, as they continue their pursuit to deliver a budget surplus.

Building greater equality into tax concessions isn’t going to come with any major objection as the introduction of the additional tax rate will supposively only affect 1.2% of the population.

Interestingly from reading various media sources, the inclusion of tax-free benefit payments (pension & lump sums) post 60 could capture more people than anticipated if appropriate planning does not occur.  A simple recontribution strategy appears it could affect the calculation should the individual also be making concessional contributions.

It is highly likely the sector impacted the most by this additional contributions tax will be SMSFs. I think it would be a fair assumption that a large number of individuals with taxable incomes in excess of $300,000 are likely to only to be able to contribute $25,000 for 2012/13. This will either be due to the individuals:

  • being under age 50, or
  • the taxpayer is over 50 and their account balance will be greater than $500,000.

Whilst the maximum salary on which an employer has to pay compulsory super is 175,280 (2011/12), some employers may pay the SGC for an individual based upon their salary level.  For somebody earning $300,000, 9% SG contributions would be $27,000, meaning not only 30% contributions tax, but 46.5% excess contributions on amounts above $25,000.

With a broad income test that is likely to apply, there will be very little by way of strategy to avoid reaching the $300,000 threshold.  But, as always, the devil will be in the detail.

Budget night on 8 May 2012 is again shaping up to include further changes to superannuation…

Filed Under: Contributions, Professionals, SMSF, SMSF Strategy Tagged With: , , , , , , , , , , ,

Anti detriment is back as a popular strategy for SMSFs

July 10, 2011 By Leave a Comment

The use of anti-detriment within SMSFs as a strategy has been stymied over the past couple of years since the Australian Taxation Office (ATO) indicated that any allocation from a reserve for the purposes of paying this tax saving amount was to be counted as a concessional contribution.  Subject to the amount of the allocation, and other levels of contributions, it appeared likely that this amount was going to incur excess contributions tax (ECT).  As a result, the benefit of the strategy would be eroded by the potential excess contributions tax.

There has been some uncertainty within the industry about the amount to be included for the calculation of the anti-detriment tax deduction since the introduction of section 295-485 of the Income Tax Assessment Act 1997 (ITAA 1997).  The old section 279D within the ITAA 1936 required the whole balance to be paid out as lump sum to qualify for the deduction.  However, this didn’t necessarily appear to be the case when interpreting the new laws.

A question was raised at the March 2011 NTLG Superannuation Technical Committee meeting as to how much of a member’s account balance must be paid as a superannuation lump sum in order for a super fund to qualify for a tax deduction under section 295-485 of the ITAA 1997?

The good news from the ATO’s interpretation is that the tax deduction for the tax saving amount can be claimed on the amount paid out as a lump sum; it does not require the entire benefit to be paid out (as a lump sum).  In other words, a member could receive a combination of income stream and lump sum and claim the deduction for the tax saving amount on the proportion paid as lump sum only.

To demonstrate this, let’s use the following example:

ANTI DETRIMENT example

Frank (58) recently died and was survived by his wife, Maria. He had a balance of $550,000 in his SMSF, in which Maria wishes to take a lump sum of $150,000, with the balance to be taken in the form of an account based pension.

Use the SMSF Academy Anti-detriment calculator

From the above calculation, the tax saving amount is calculated as $72,056 on the entire benefit.  As $150,000 has been taken as a lump sum, the proportionate tax saving amount is $19,652 (15/55 x $72,056).  This would mean that an amount of $169,652 would be paid to Maria by way of lump sum. The SMSF would be entitled to a tax deduction of $131,013 ($19,652/0.15).

The ATO’s views expressed from the NTLG March 2011 meeting in my view brings anti-detriment right back into play as a key estate planning strategy for SMSFs.  Whilst still having to consider the issue of allocations from reserves as concessional contributions, there appears now to be a greater scope for planning around the level of deduction that may be required within fund, rather than simply determining it based on the deceased member’s entire benefit.  This deduction may be used to mitigate CGT or simply to benefit future generations of fund members.

Furthermore, there is greater scope to consider how the anti-detriment amount may be ‘funded’ within the SMSF without necessarily having to use reserves.

This positive news means all advisers dealing in the area of SMSFs should again turn their attention to how this strategy may benefit their client’s overall estate plan.

Register your interest to attend the SMSF Academy InPractice August Webinar on Anti-detriment and Future Liability to pay benefits.  Free for SMSF Academy members, $77 for non-members.  Details of this session to be announced shortly.

Filed Under: Estate Planning, Professionals, SMSF, SMSF Strategy Tagged With: , , , , , , , , , , , , , , , , ,

Extended contribution caps to cause more pain with Excess Contributions Tax

May 17, 2011 By 2 Comments

The extension to the contribution cap rules is going to become a massive headache for super fund members and advisers

The reaffirmation in the Federal Budget of the concessional contribution cap extension for those over 50 years of age where their account balances are under $500,000 is likely to bring further problems to the already growing area of Excess Contribution Tax (ECT).

Whilst the government has announced relief in the Federal Budget for excessive amounts of less than $10,000 to be refunded back to individuals (and assessed personally), this $25,000 extension to the contribution caps from 1 July 2012 poses a significant problem for those who incorrectly calculate their member account balance (under $500k).

There has been a significant amount of submissions made to Treasury on their discussion paper regarding these proposed changes.  The concerns of industry about the administrative difficulties of this legislation appears to have fallen on deaf ears (even though I recently heard Minister Shorten at a breakfast call this proposed legislation “Nightmare on Contribution Street, Part V”).

So how do we deal with a situation where a member has exceeded their contribution cap by $25,000 under the guise that their account balance was less than $500,000?

Under the proposed changes announced within the budget, a member appears to have no ability to remedy to this situation and is likely to be issued with an ECT assessment of $7,875 on the concessional contributions ($25k x 31.5%). Worse still, where the member has already reached their non-concessional contribution limit, a further ECT notice will be issued for $11,625 ($25k x 46.5%), being a breach of the non-concessional contribution (NCC) limit.  A 93% tax bill on the $25k contribution above the ‘ordinary’ concessional contribution limit!!  How is taxing somebody $23,250 on a $25k contribution providing an incentive to save for retirement?

How could you get the $500,000 balance wrong?  Consider some of the following ways:

  • Some or all of the SMSF assets have not been valued to market value (Stronger Super recommendation with likely effective date from 1 July 2012);
  • Member has additional superannuation outside of the SMSF (e.g. Lost Member Account) that gets aggregated when counting total member benefits by the Australian Taxation Office;
  • Benefit amounts taken (i.e. pensions and lump sums) have not been added back to determine the $500,000 account balance (this is 1 of 3 alternative options within the consultation paper)
  • An amount held within Fund Reserves has not been attributed back to the members for the purposes of the account balance calculation (as recommended within the consultation paper)
I believe that it would be in the government’s best interest to allow for a release authority on contributions up to $25,000 (rather than $10k) to ensure that people are not unfairly caught in believing they qualified for the extended cap. Any amount returned to the member would be taxed at the individual’s marginal tax rate.
Let’s hope we can see some common sense prevail when this legislation is being drafted and eventually introduced.  I’m not one for holding my breath though…

Watch our previous FREE webinar or “Dealing with Excess Contributions Tax”

Filed Under: Contributions, Opinion, Professionals, SMSF Tagged With: , , , , , , , , ,
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