THE federal government has introduced to Parliament amendments to superannuation laws, saying they would make super simpler and fairer. One amendment relates to the 2011 budget measure that was meant to provide relief from excess concessional superannuation contributions tax.
Far from fixing this oppressive tax, the changes are an example of a government wanting to be seen to be doing something when, in fact, because of the way the legislation has been drafted, the benefits for many taxpayers will be almost non-existent.
The main reason is the complicated way the excess contribution tax relief measures will work. When they were announced, having a one-off excess contribution of up to $10,000 not being subject to the 46.5 per cent penalty tax appeared to go some way towards fixing the problem.
In reality, because of how the maximum $10,000 excess contribution limit is applied, and how a person qualifies for the tax relief, the benefit received could be small. We, in fact, still have a penalty tax system that in exceptional circumstances can impose a penalty tax of 93 per cent on an excess super contribution.
The new legislation will apply only to people who have an excess super contribution after July 1 this year if the following conditions are met:
The amount of the excess contributions must be $10,000 or less.
They have not had a previous excess concessional super contribution in a year after July 1, 2012.
They have lodged a tax return for the year the contribution relates to within 12 months of the end of that year, or within a longer period that the Tax Commissioner allows.
Under the relief measure, anyone who qualifies will have the excess contribution refunded by their super fund and, instead of paying 46.5 per cent penalty tax, will pay tax on the excess at their applicable marginal tax rate.
Once the Tax Office becomes aware of an excess contribution, and the qualifying conditions have been met, a notice of offer to accept the refund of the excess contributions will be issued. The person will have 28 days to accept the refund offer before it lapses.
The wording of this part of the legislation is where the potential benefit of the relief measures is watered down to being almost non-existent. If an offer is not accepted, the person will not be entitled to receive another offer.
This means a person with an excess super contribution of $100 in this or a later financial year, who accepts the refund and saves penalty tax of $46.50 at the expense of paying $31.15 income tax, will not be entitled to receive tax relief from any future excess super contributions.
If, on the other hand, the person rejected the refund offer and paid the excess super contributions tax of $46.50, doing so in the belief that it would be better to have the relief apply to a greater excess contribution in the future, by having rejected the refund offer they will also not be eligible for the relief on any future excess contributions.
The new legislation is a sleight of hand that any magician would be proud of. Maximising tax collections has again triumphed over fairness and equity.
Max Newnham's book, Funding your Retirement A Survival Guide, is available in bookstores and as an e-book.
Frequently Asked Questions about this Article…
What change to excess concessional super contributions has the federal government proposed?
The government has introduced amendments to allow a one-off refund for excess concessional super contributions of up to $10,000 for people who meet strict conditions. Instead of the automatic 46.5% penalty tax, qualifying taxpayers will have the excess refunded by their super fund and pay tax on that excess at their applicable marginal tax rate.
Who qualifies for the new excess super contribution tax relief?
To qualify you must have an excess concessional super contribution of $10,000 or less after July 1 this year, not have had a previous excess concessional contribution in any year after July 1, 2012, and have lodged the relevant tax return within 12 months of the end of that year (or within a longer period the Tax Commissioner allows).
How does the refund and tax process work if I qualify for relief on an excess super contribution?
Once the Tax Office becomes aware of the excess and you meet the conditions, it issues a notice offering a refund of the excess. Your super fund will refund the excess contribution, and you will pay tax on that refunded amount at your normal marginal tax rate instead of the 46.5% penalty tax.
Is the refund offer automatic and how long do I have to accept it?
A notice of offer will be issued by the Tax Office and you will have 28 days to accept the refund offer. If you do not accept within that 28‑day window the offer lapses and the legislation says you will not be entitled to receive another offer.
If I accept the refund offer once, can I get relief for future excess contributions?
No. The legislation states that if you accept the refund offer you will not be entitled to receive another offer for any future excess concessional super contributions. The same applies if you reject the initial offer and pay the penalty — you also won’t be eligible for the relief in future years.
Will this change eliminate the risk of heavy penalty tax on excess super contributions?
No. The amendment limits relief to small, one-off excesses (up to $10,000) and only for those who meet the eligibility tests. The article notes that Australia still has a penalty tax system that, in exceptional circumstances, can impose a penalty tax of up to 93% on an excess super contribution.
Why might the benefit from the $10,000 excess contribution cap be small for many taxpayers?
Because of the way the $10,000 maximum is applied and the strict qualifying conditions, the actual tax saving for many people could be modest. The article gives an example: a $100 excess that avoids a $46.50 penalty but instead incurs $31.15 of income tax yields only a small net benefit, and accepting that relief would also forfeit future relief eligibility.
What is the overall criticism of the new excess super contribution relief in the article?
The article describes the legislation as poorly drafted and characterises it as a 'sleight of hand' — saying it appears to be aimed at showing action has been taken while, in practice, the benefits for many taxpayers will be almost non‑existent and maximising tax collection has trumped fairness.
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