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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Get your June salary sacrifice amounts in order now to avoid excess contributions tax

April 12, 2012 By Leave a Comment

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.

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Latest ATO statistics on excess contributions

April 1, 2012 By Leave a Comment

The Australian Taxation Office last Friday provided an update to the Excess Contributions Tax (ECT) statistics.  Many in the industry have been waiting to see the impact of the Labor Government’s decision to halve the concessional contributions cap for the 2009-10 financial year.  As you can see from the chart below, it was significant, with 45,330 ECT notices issued for breaches of the concessional contribution cap.  This represented a 296% increase over the previous financial year, collecting $130.9 million in taxes.

Whilst it is encouraging that both the Federal Government and ATO have now responded to these issues of excess contribution tax (see ‘once-off refund’ and ‘de-miminis test’), it is quite clear that ‘horse had bolted’ by this stage, given the amount of assessments issued in for 2009-10 financial year… and aren’t finished yet for that financial year!!

Interestingly when looking at the following chart, we have progressively seen a reduction in the level of excess concessional and non-concessional contributions (however, not where caught with both CC & NCC).  The average excessive concessional contribution for 2009-10 is $2,888, well inside the proposed ‘once-off’ ECT refund limit of $10,000.  Non-concessional contributions have dropped extensively as well.

It appears only now are people who contribute to superannuation understanding the importance of appropriately planning and managing their contribution limits.  This problem has not only impacted members, but also professional service providers (e.g. advisers, accountants, etc.) who may have been implicated in any cap breach.

People impacted by inadvertent breaches where small amounts have triggered large excess contributions tax liabilities are currently being refunded these tax amounts by the ATO.  For the rest of us (including Minister, Bill Shorten), breaching your excess contributions tax limit can become a costly exercise that requires greater attention.

Filed Under: Contributions, SMSF, SMSF Compliance, Trustee education Tagged With: , , , , , , , , , ,

de minimis to help with contribution maximus

March 18, 2012 By Leave a Comment

For several years now, many people and professional bodies within the financial services industry have been pushing to address the inequalities in respect to excess contributions tax (ECT).  So it was pleasing recently to read via Peter Burgess, National Technical Director of SPAA that the Australian Taxation Office (ATO) had recently indicated in a Superannuation Consultative Committee (SCC) meeting that they will now look to apply the ‘de-minimis’ test in deciding whether or not to raise an ECT assessment.

What is the de minimis test?

This is a Latin term, which is a shortened form of the expression “de minimis non curat lex” meaning ‘the law does not care about very small matters’. It is often considered more efficient to waive very small amounts of duties and taxes rather than collect them.  For ECT purposes, it appears that the ATO is looking to apply this rule to small amounts that have created sizeable excess contributions tax liabilities.

How will the de minimis test apply?

To understand further, let’s take a look at an example:

Ben during the current financial year (2011/12) made self-employed contributions totalling $50,000 in which he wishes to claim a tax deduction.  He also made $150,000 of non-concessional contributions.  At the start of the following financial year (2012/13), he makes a further $450,000 non-concessional contribution.  When completing Ben’s tax return, his accountant advises that the maximum self-employed tax deduction that can be claimed is $49,900.  As a result, $100 is now treated as a non-concessional contribution, which triggers the bring forward rule in the 2011/12 financial year ($150,100).

In the 2012/13, Ben now has an excess non-concessional amount of $150,100, meaning an excess contributions tax liability of $69,797 ($150,100 + $450,000 – $450,000 = $150,100 x 46.5%).

Applying the de minimis test, the ATO will appear to disregard the $100 contribution that triggered the ECT liability.

What amount is a “small amount” and how could it apply?

Good question, no indication has been provided on these matters.

In terms of how it could apply, the above example is just one way how the ATO may apply the de minimis rule.  Similar scenarios with small contributions made by an employer on behalf of a member may also apply (i.e. insurance policy premiums).  How else do you think it could apply?

I believe the ATO has commenced reviewing individual cases and contacting those with inadvertent breaches.  These ECT liabilities to be refunded will go back to the introduction of Simpler Super from 1 July 2007.  Furthermore, refunded amounts will be allowed to be returned to the super fund without impacting contribution caps of these individuals

With the Labor Government committed to providing a ‘fairer’ superannuation system, this outcome appears certainly a step in the right direction…

Filed Under: ATO, Contributions, SMSF, SMSF Compliance Tagged With: , , , , , , , , , , , ,

ATO releases interpretative decision on allocation of June contributions

March 15, 2012 By Leave a Comment

The ATO has released ATO ID 2012/16 which addresses the timing issue of when a concessional contribution is made on behalf of a member in one financial year but is allocated in the following financial year for the purposes of the contribution caps.

Until the release of this ATOID, the industry has been relying on minutes from the ATO NTLG Superannuation Technical Sub-Group dating back to June 2009 regarding the Commissioner’s interpretation of calculating a member’s concessional contributions under section 292-25 of the Income Tax Assessment Act 1997 (ITAA 1997).  This strategy to effectively ‘park’ concessional and/or non-concessional contributions made in June has become popular to:

  • manage potential excess contributions problems; or
  • use as a strategy to transfer assets into a fund where the value may be greater than the cap but can be amortised over two financial years (e.g. business real property transfer)

ATO ID 2012/16 confirms that an amount made in June is not counted as a concessional contribution in the financial year it is made, but the year it is allocated.  Importantly the deduction for the taxpayer is available in the year the contribution is made.  In addition, the concessional contribution is subject to contributions tax in the year the payment is made.  The allocation of the contribution for member reporting purposes is reported in the following financial year.

Can a member ‘double dip’ on the concesssional contribution limit?

Yes they can.  The taxpayer (assume under 50) could have $25,000 concessional contributions made during the year, then make an additional $25,000 in June, enabling a $50k tax deduction.  $25k is allocated to the member in the current financial year, with the $25k in June taxed within the fund, but the allocation not occurring until the following financial year (before 28 July).  For those over 50, the timing of notices can be very important in particular if members are commencing a pension.  Furthermore, you need to be conscious amounts to be held over for the 2012/13 year with the transitional period of the contribution caps ceasing.   You may also need to determine whether the member’s account balance is under $500,000 to see whether an income to be allocation in the following year can be $25k or $50k.

Does it need to be a Contribution’s reserve?

No, interestingly in both the ATOID and NTLG minutes the ATO make reference to the amount being temporarily held within a ‘holding account’ or suspense account.  There is no requirement for a reserve to be created to hold the contribution.  It would be fair to say that the ATO aren’t too fond of the word “reserve’ and their use within the SMSF environment.  You may see many deeds referencing the use of a reserve to hold the contribution.  Therefore, whilst not preferred by the ATO, you still need to remember that the fund must comply with the requirements of its governing rules (trust deed).

With the ‘once-off’ refund of Excess contribution for concessional contributions available for the current financial year, we now have a couple of mechanisms to assist in dealing with potential excess contribution problems.  There are also opportunities to use this strategy to reduce the impact of large capital gains from the disposal of assets through having two bites of a contribution limit in the one financial year.

As they say…. it is all in the timing!!

View ATO ID 2012/16 here

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