In Part 3 we investigated the maths behind excess concessional contributions tax. Bill’s example showed that, after undergoing this somewhat convoluted exercise culminating in a release of 85% of the excess contributions, he hasn’t achieved any advantage so why is this action being considered by some as a deliberate SMSF strategy?
If the 15% contribution tax could be reduced that would help. Excess franking credits in the fund would reduce the tax but those credits would be returned as tax refunds in any case so that’s irrelevant. Prepayment of expenses or investing in tax effective investments are also irrelevant as these could have occurred in any case.
It might be said that this is a mechanism to move more contributions into the superannuation environment by electing to leave them in the fund, but this could have been achieved by making non-concessional contributions. Further, if the non-concessional cap had already been fully used, failing to withdraw 85% of the excess concessional contribution would invoke the top marginal rate of tax on the excess which would be calamitous.
The only possible advantage is one of timing.
From a personal tax perspective it might be thought that, as Bill’s excess contribution is not assessed until later, he could move the assessment into a future financial year of lower income however this won’t happen as the assessment is always applied to the year of the contribution.
From a superannuation perspective, if Bill had made the excess contribution on July 1st his SMSF would not have to pay the 15% contribution tax until the fund assessment which could possibly be delayed some 22 months to the May lodgement date. This would delay the release of the excess contribution so enabling the fund to invest the additional $100k for, maybe, close to 2 years. The 3.91% charge is not applied to the excess contribution. It is only applied to the amount of additional tax so an argument could be made that the fund returns could be enhanced by its temporary possession of an extra $100k. The problem is that we would only know if this has been advantageous in hindsight. A period of negative investment returns would result in the fund balance retreating as the amounts that must be withdrawn are fixed.
Even if the investment result was positive this would be reduced by the cost of advice, implementation and administration. In addition, the ATO are sensitive to deliberate schemes to circumvent the contribution rules so the fund would be exposed to ATO scrutiny which could result in enforcement action – especially if this process is repeated a second time.
The obvious conclusion is that deliberately making excess concessional contributions is a high-risk strategy of indeterminate result. I certainly wouldn’t do it in my fund.
