Mistakes with excess contributions easy to make

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You would think that 45,000 people couldnt be wrong, particularly when they are trying to do the right thing. But apparently they can.

Last year, 45,350 taxpayers were pinged for putting too much money into super. And thats an incomplete figure. The Tax Office says further assessments are still to be issued.

Penalty taxes on these contributions topped $130 million, with the bulk of those hit slugged for putting too much aside in concessional or pretax contributions.

So how can so many people get something so simple so wrong?

Its a question the government needs to give urgent thought to, with its proposed measures to further limit super contributions from July 1.

But first a quick recap.

When the Howard government introduced tax-free super benefits, it also did away with the clunky reasonable benefits limits, which restricted how much money you could take out of super on a concessionally taxed basis.

Instead, it came up with the much simpler idea of limiting how much people could put in.

So far, so good. The original limits were generous. If you were 50 or older you could put in up to $100,000 a year of concessionally taxed money and if you were under 50 the limit was $50,000. These amounts would be indexed in $5000 increments.

But amid subsequent budget-cutting, the Labor government halved these limits, also delaying the promised index increases.

Those limits are now $25,000 for the under-50s and $50,000 for older contributors. As the caps have tightened, the number of people exceeding them has grown, with numbers in 2009-10 (the first year of the lower caps) almost three times those of the previous year.

From July 1, the government is planning to tighten the caps further.

The limit for the over-50s will be scaled back to $25,000, though those with less than $500,000 in super will still be eligible for the existing $50,000 cap.

Thats right  another complication. Not only will fund members now have to take care not to exceed the designated caps they will also have to ensure they are using the correct cap or pay a high price for getting it wrong.

The super industry has been warning the government this could lead to higher costs for all super fund members and confusion for those affected.

As the Association of Superannuation Funds of Australia has pointed out, the last thing anyone wants is a repeat of the old super surcharge for higher-income earners that cost more to implement than the $500 million raised in the first year of operation.

As to why so many people seem incapable of performing apparently simple sums, as one of the 45,000, I can report first hand that its easier said than done.

Because your concessional contributions include both your employers compulsory super payments and any pretax extra contributions you make, such as contributions made through a salary-sacrifice arrangement, you dont just need to keep track of how much money youre putting in.

Yes, you should have a fair idea of how much your employer is contributing, but excess contributions are calculated according to when the money hits your super fund, not when you become entitled to it.

One early or late employer payment can result in contributions being pushed into a different financial year than you may have reckoned on, tipping you over the limit. Or, as we saw last year, an extra pay period that arose simply because of how the dates fell can lead to an excess benefits problem.

For those who merely exceed the concessional caps, this is bad enough. The result is a tax assessment at 46.5 per cent on the amount by which youve gone over  more than most peoples marginal tax rate.

But for those who are trying to boost their kitty by making after-tax contributions as well, the results can be disastrous. If they breach the non-concessional caps as well, penalty taxes of 93 per cent can apply and there have been cases where an excess contribution of just a few hundred dollars has generated a tax bill in the tens of thousands. (Dont ask.)

The government has introduced measures where excess concessional contributions up to $10,000 will be able to be refunded on a first-time-only basis. But that is not enough.

For starters, it will only apply to breaches in this or later financial years, which doesnt help the nearly 76,000 people who have been levied with excess benefits tax on their concessional contributions in the past three years.

Nor does it address the very real, though rarer, cases in which a few extra dollars have led to ridiculous penalties. And while the Tax Office has power to exercise its discretion on excess benefits, it can only do so in very limited circumstances.

When he convened his panel of experts to discuss further ways of improving the super system, the Minister for Financial Services and Superannuation, Bill Shorten, said one of the groups first priorities would be to consider the compliance cost issues raised by industry in relation to proposed new caps.

How to treat excess benefits is an essential part of that discussion.

Unless the excess benefits problem is fixed and complying with the caps made easier, there is a real danger that people trying to save for retirement will continue to be slugged with high penalty taxes, or ensure they avoid the problem by staying well below the caps  at the expense of their retirement savings. And yes, that is what I have done.

Twitter: @sampsonsmh

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