Effective from 1 July 2013, there have been changes to the tax applied to excess concessional contributions.
Concessional contributions are generally contributions made by or for individuals that are deductible to the contributor and are assessable in the hands of the superannuation fund. Concessional contributions include, but are not limited to, all employer contributions (including superannuation guarantee and salary sacrifice) and personal deductible contributions.
Last financial year, pre-tax and other concessional super contributions were capped at $25,000 pa, regardless of your age. This cap will increase to $35,000 pa from:
- 1 July 2013 for people aged 60 and over, and
- 1 July 2014 for people aged 50 and over.
Excess contribution tax arrangements
Prior to 1 July 2013, concessional super contributions in excess of the cap were taxed at 31.5% in addition to the standard 15% tax payable on concessional contributions. The new legislation repeals this excess contributions tax and provides that excess concessional contributions (CCs) will be included in an individual’s assessable income and subject to a charge (the excess concessional contributions charge) to account for the deferral of tax.
A 15% non-refundable tax offset will apply reflecting the tax on the contribution paid by the superannuation fund.
The excess concessional contributions charge (ECCC) is payable on the amount of tax attributable to the individual having excess CCs at the 90-day bank accepted bill rate (published by the Reserve Bank) plus 3%. The charge will be calculated and compounded daily from the beginning of the income year in which the excess CCs were made.
The legislation also provides for individuals to have up to 85% of the excess contribution refunded from superannuation.
All excess contributions which are not refunded will count towards the non-concessional contributions cap. However, where the individual chooses to have all or part of the excess contributions refunded, the amount that counts towards the non-concessional contributions cap will be reduced by the grossed up value of the amount of CCs refunded.
The changes will make the excess contributions tax arrangements fairer, as those individuals who are not on the top marginal tax rate will no longer have their excess concessional contributions taxed at this effective rate. The intention is to ensure that individuals who make excess CCs are in a broadly equivalent position to individuals making non-concessional contributions.
In 2013/14 John has concessional contributions totalling $35,000. Assuming a cap of $25,000, he has exceeded the cap by $10,000. John’s marginal tax rate is 32.5% (plus Medicare levy).
As a result of the excess CCs, his assessable income for the 2013/14 year will include an additional $10,000.
At his marginal rate, this will mean an additional $3,250 (plus Medicare levy).
John will be entitled to a tax offset of $1,500 (15% of $10,000) reflecting the tax payable by his superannuation fund on the $10,000.
This means his additional tax liability will be $1,750 (plus Medicare levy). John will also be liable to pay the ECCC on this amount calculated and compounded daily from 1 July 2013 up until the day John is first due to pay his income tax liability for the 2013/14 year.
In the absence of these legislative amendments, John would be required to pay excess contributions tax of $3,150 (31.5% of $10,000).
For further information on these changes, or to discuss the impact on your personal financial situation, please contact us.