Maximising Super Contributions – Beware

Super contributions

The super contribution rules changed from July 2007

If you’re planning on maximising your super contributions, it pays to be vigilant when managing and implementing your strategy. There can be a nasty sting in the tail if you’re not careful.

Prior to the introduction of “Simple Super” there was a limit on the amount of pre-tax contributions you could make to super. But after-tax contributions were unlimited.

The “Simple Super” changes not only put a limit on after-tax contributions. They also changed the nature of pre-tax contributions.

Under the old rules, your employer policed the level of pre-tax contributions they made to your super. They had a tax incentive to make sure you did not breach your pre-tax contribution cap. If the limit was breached, they missed out on the deduction. There was no penalty to you.

Since July 2007, your employer is no longer responsible for monitoring contribution caps. The responsibility has shifted to you and along with it comes some onerous penalties for breaches.

A real world excess super contributions example

The following is a real example that demonstrates potential pitfalls.

On 18th July 2007, Ross commenced work with his new employer. It was agreed that the maximum pre-tax super contributions would be made on his behalf. Prior to the end of the 2007/08 year, Ross also chose to make the maximum annual after-tax contribution of $150,000 to his super account.

The following year, the employer again made the maximum pre-tax contributions for Ross. During that year, Ross also had a sizeable financial windfall. He decided to make an after-tax contribution of $450,000 using the “bring forward” rule that allows him to bring forward three years worth of after-tax contributions.

A summary of his contributions and the respective limits are shown in the table below:

Contribution

Type

2007/08

Limit                       Contribution

2008/09

Limit                    Contribution

Pre-Tax $50,000 $50,000 $50,000 $50,000
Post-Tax $150,000 $150,000 $450,000 $450,000

All looks fine. Ross has implemented his strategy within the required limits.

In July 2009, Ross receives a notification from the ATO stating that he has beached his pre-tax limit for the 2007/08 year. The penalties are substantial.

Ross did not realise that his previous employer was obliged to make one final Super Guarantee contribution to his super account. This contribution of $900 was received by his super fund in July 2007. While only a relative small amount it had some nasty tax consequences.

Ross has now breached his pre-tax limit in 2007/08 by $900. This amount is subject to penalty tax of $283.50 and is treated as an after-tax contribution. The re-classification of this contribution now means that Ross has breached the $150,000 post tax contribution limit in 2007/08.

Rather than apply penalty tax to this breach, he is deemed to have elected to use the “bring forward” rule in 2007/08. This means that he is restricted to making no more than $450,000 of after-tax contributions in the three years to 30 June 2010. The resulting revised limits and contributions are shown below:

Contribution Type 2007/08

Limit                    Contribution

2008/09

Limit                  Contribution

Pre-Tax $50,000 $50,000 $50,000 $50,000
Post-Tax $450,000 $150,900 $299,100 $450,000

The $450,000 contribution that Ross made in 2008/09 takes him over his three year limit. Ross is deemed to have added a total of $600,900 of after-tax contributions in the three year window; a $150,900 breach of the limit.

Penalty tax of a staggering $70,169 is applicable for a $900 miscalculation!

Monitor your super contributions

The following practices will help you avoid inadvertently breaching super contributions caps:

  • Keep a register to monitor your contributions over time. Knowing your historical contributions is critical when you are considering using the “bring forward” election;
  • If you want to maximise your contributions, allow a little leeway for miscalculation. This is particularly important if you are not controlling the payment of the contributions;
  • Be especially careful if you have more than one employer (e.g. company directors). Regularly review your super contribution arrangements with your employer(s) to ensure that you remain within the caps;
  • Be wary if 30 June falls on a weekend. You may find that a regular contribution to be made on 30 June is inadvertently processed on the Monday (in the following financial year). Your super account will be credited with the contribution on the day the super trustee receives the contribution, not when it is meant to be paid; and
  • If you have a self managed super fund, be careful about inadvertently paying the fund’s costs from your personal account. These can be treated as after-tax contributions and may trigger a breach.

Many breaches only come to light a year or two after the event. The ATO has finished assessing taxpayers’ contributions for the 2007/08 year. It will be some months before they complete the assessments for the 2008/09 year.

Unfortunately, this leaves some uncertainty for those planning to maximise their super contributions in 2009/10. Given the potential consequences, a little caution may be warranted.

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2 comments

  1. Max Bernardi says:

    This issue needs to be addressed by the ATO. It doesn’t seem fair when you inadvertently brach the cap. Particularly if its not picked up until well after you can do anything about it.

    I found these 2 examples of people inadvertently breaching the cap – tough medicine!

    A sole trader who made a contribution that consisted of both Concessional and Non-concessional contributions. It was subsequently determined that the sole trader did not have adequate Taxable Income to claim the Concessional contribution as a tax deduction and varied the amount claimed, thus creating an excess Non-concessional contribution.

    The ATO commented that:

    o discretion is taken on a case by case basis and can only be taken when an assessment of Excess Contribution’s Tax (ECT) is made;
    o ECT is a tax and not a penalty;
    o If discretion is not exercised a person dissatisfied with the decision may request a review.

    A person gave their financial planner some cheques in June for the purpose of making superannuation contributions. The intention was to deposit some these cheques immediately and others in the new financial year. The financial planner accidently presented all the cheques in June. This led to an excess Non-concessional Contribution.

    During the discussion in the meeting it was agreed that there was no suggestion that the error was caused by ignorance of the law, poor advice, or a misunderstanding of the tax consequences. There was, however, a clear intention to bank the relevant cheque in July, thus the mistake being a cheque being banked incorrectly.

    In this example the ATO declined to exercise its discretion. The ATO provided further explanation saying that they have no firm view on mistake and restitution in the context of superannuation contributions. Further, the ATO is currently considering the effect of clauses within superannuation fund trust deeds that may allow the return of contributions.

    February 11th, 2010 at 9:20 pm

  2. Professional Planner says:

    Excess contributions tax “politically insane”: The Australian Taxation Office’s (ATO) interpretation of excess c… http://bit.ly/f9oepl

    February 28th, 2011 at 4:49 pm

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