Excess Contributions Part 2 – Extra Tax
Excess concessional contributions are subject to a maximum of 32% (including medicare levy) in extra tax. This is not a flat rate of tax. It can be less as it’s paid by the member personally, not the super fund, and calculated by adding the excessive amount to the member’s declared income in the year of contribution. Accordingly, only a member with personal taxable income above $180k (including the added back excess contribution) will pay this amount. The ATO makes the assessment based on the data they receive from super funds and the member’s tax return. This tax is in addition to the 15% contributions tax levied by the fund. The result can therefore be tax (including medicare) of 47% on excess concessional contributions.
The member may elect to release up to 85% of the excess contribution. The personal tax will still be due even if this amount is released. The amount is paid to the ATO and released to the member after deduction of any tax liability.
If the member does not elect to release the excess concessional contribution there may be other tax implications as the excess will now be counted against the member’s non-concessional cap. If the member has utilised all their non-concessional cap the excess concessional contribution will now be an excess non-concessional contribution as well. If the member does not elect to release it, it will attract a further 47% tax impost so increasing the potential total maximum tax to an eye watering 94%.
But that’s not all. To guard against excess contribution strategies there is also an assumed rate of return which creates an excess contributions charge (ECC charge). This is calculated from 1st July in the year of contribution (even if it was made nearly a year later on 30th June) to the day before the tax is due to be paid under the member’s first income assessment for that year. If the member is tardy in lodging their personal tax returns, say a year later than they should have, the excess contributions charge is calculated for an extra year as well. The rate is the monthly average yield of the 90-day Bank Accepted Bills published by the RBA plus 3%, currently 3.91% per annum compounding daily.
It would be too easy if this was the only consideration. A shortfall interest charge (SIC) may also be incurred at the same rate as the excess contributions charge. Which applies depends on whether the super fund lodges it’s return before the member (ECC) or after the member (SIC). The result is much the same but you can never have too many acronyms, it seems.
But there’s more. If the assessment is not paid in time the general interest charge (GIC), currently 7.91% per annum, is applied to the outstanding tax as well.
The excess contribution tax determination cannot be issued until both the member’s personal tax return and that of the fund is lodged so any significant delay in either could result in material additional charges.
Part 3 will consider the maths.