More chaos over 'excess' super contributions

It's the problem that just won't go away. Excess super contributions continue to cause grief for those saving for retirement and the government's proposed relief has been likened to applying a Band-Aid to a problem that requires surgery.

It's the problem that just won't go away. Excess super contributions continue to cause grief for those saving for retirement and the government's proposed relief has been likened to applying a Band-Aid to a problem that requires surgery.

Excess super contributions occur when you receive concessional or pre-tax contributions totalling more than $50,000 in any year for those aged 50 or more, or $25,000 for under 50s. (There is a limit on non-concessional or after-tax contributions and a proposal to cut the limit for the over 50s to $25,000 if they have more than $500,000 in super from next year - but let's keep this simple.)

Concessional contributions include any contributions your employer makes to your fund, your own salary-sacrifice contributions and any deductible personal contributions, if you're able to make them. They also include amounts you might not know about, such as expenses paid by your employer to meet fund costs, such as insurance and administration.

Your concessional contributions are also counted in the financial year they are credited to your fund, not when you should have received them. This means fund members are at the mercy of employers' payroll departments.

If your employer makes late contributions one year and they hit your fund after July 1, they're automatically included towards the following year's contributions and might push you over the cap.

Even when employers do the right thing and pay on time, employees can have problems. Because of when the dates fell, many employers had 27 fortnightly pay cycles in the 2010-11 financial year, rather than the usual 26. If you were calculating your salary-sacrifice contributions based on your fortnightly pay - and running close to your limit - you could have a looming excess contributions problem.

As the disaster stories of this seemingly innocuous tax filter out, it appears super funds are also generating excess contributions grief for members.

The head of superannuation for the Institute of Chartered Accountants in Australia, Liz Westover, has come across several cases in which contributions have been double-counted thanks to the way they have been reported.

The cases have mostly involved self-employed fund members who can make tax-deductible personal super contributions so long as they receive less than 10 per cent of their income from an employer.

When these members contribute to the fund, they also lodge a form signalling their intent to claim a personal deduction so the fund knows it is a concessional, rather than non-concessional contribution.

Westover says the problems she has come across occurred because the funds reported these as employer contributions to the Australian Tax Office. But when the ATO ran its data matching, it found claims for personal deductions of the same amount. Whammo. It figured the taxpayer had received two concessional contributions and exceeded the limit.

While this is clearly a mistake and the cap had not actually been exceeded, it is causing unnecessary angst and expense for the people who get a letter from the ATO containing an unexpected excess contributions tax bill.

Tax on excess contributions is levied at the top marginal tax rate of 46.5 per cent - more than many of them would have paid if they had simply taken the money as salary.

In many cases, Westover says, accountants are forgoing fees to help clients sort out these problems that were neither of the fund member nor the accountant's making.

In other cases, members are having to pay accounting bills for a mistake that shouldn't have happened. In one case, Westover says the taxpayer has since left the fund and it is refusing to re-report the contributions so the problem can be sorted out.

In another case, a taxpayer is still trying to track down where a mistake was made, getting little help from her super fund and racking up accounting fees. Initial efforts by her fund to correct the problem were incorrectly submitted, resulting in "an even crazier excess".

But perhaps the craziest assessment the Herald has heard of involves a taxpayer who, thanks to the automatic rounding of cents to the nearest dollar in tax returns, was hit with excess contributions tax on a 25? excess contribution that never existed.

But hasn't the government moved to fix these problems?

The Assistant Treasurer, Bill Shorten, indeed announced "relief" for people with excess contributions in the May budget. A consultation paper was released this week.

But it is a case of too little, too late for many investors.

Significantly, the limited relief being proposed will apply only to contributions made this financial year. More than 15,000 assessments were issued on concessional contributions in 2008-09 and that was expected to rise in 2009-10 however, with the delay in processing, only 2579 had been issued at last count in May.

The relief will also allow only a one-off refund of excess contributions up to $10,000. If you exceed that $10,000, according to the consultation paper, you'll not only be denied the opportunity to get your excess money out but will be denied the relief in any future years if you overstep the limit.

Turn down the opportunity for a refund and you'll miss out in future years, even though you haven't taken advantage of the relief.

The refund relief will apply only to concessional contributions, not non-concessional.

Not surprisingly, an increasing number of fund members are winding back their contributions to ensure they stay under the limits, even if something unexpected happens. That's the antithesis of being encouraged to save for retirement - but it's not hard to see why.

Disclosure: Yes, the author has just received an excess contributions tax assessment.

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