The changes to excess contributions tax will offer minimal benefits, writes Max Newnham.
Last week, the Gillard government introduced into Parliament amendments to the superannuation laws stating that they would make superannuation simpler and fairer.
One of the amendments related to the 2011 budget measure that is meant to provide relief from excess concessional superannuation contributions tax.
Far from fixing this oppressive tax, the amendments are a great example of a government wanting to be seen to be doing something, when because of the way the legislation has been drafted the benefits for many taxpayers will be minor and almost non-existent.
The main reason for this is because of the complicated way the excess contribution tax relief measures will work.
When they were first 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 to fixing the problem. The reality is because of how the maximum $10,000 excess contribution limit is applied and how a person qualifies for the tax relief the actual benefit received could be very small.
We still have a penalty tax system applying that, in exceptional circumstances, can impose a penalty tax of 93 per cent on an excess super contribution.
The new legislation will only apply to individuals that have an excess superannuation contribution after July 1, 2011, 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 superannuation contribution in a year after July 1, 2012 and
" 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 the income tax commissioner allows.
Under the relief measure, an individual that qualifies will have the excess contribution refunded to them by their superannuation 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 the 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 with the excess contribution will have 28 days after the notice is issued to accept the refund offer. If the offer is not accepted within the 28 days, it will lapse.
The wording of this part of the legislation is where the potential benefit of the excess contributions relief measures is watered down to almost being non-existent.
If the offer is not accepted, then that person will not be entitled to receive another offer for any excess contributions in future years.
This means a person with an excess super contribution of $100 in this or a later financial year, that chooses to accept the refund and save 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 superannuation contributions.
If, on the other hand, the person decided to reject the refund offer and pay the excess superannuation 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 excess contributions legislation, far from being simpler, is in fact a sleight of hand that any accomplished magician would be proud of. Maximising tax collections has again triumphed over fairness and equity.
Max Newnhams book, Funding Your Retirement A Survival Guide, is available in bookstores and as an e-book.
Frequently Asked Questions about this Article…
What are the recent changes to excess superannuation contributions tax introduced by the Gillard government?
The Gillard government introduced amendments to superannuation law designed to make excess concessional contributions relief available. In short, the changes allow some individuals with an excess contribution after July 1, 2011 to have the excess refunded by their super fund and to be taxed on that refunded amount at their normal marginal tax rate rather than paying the previous 46.5% penalty tax—subject to a number of qualifying conditions.
Who qualifies for the new excess contributions tax relief and how do I know if I’m eligible?
To qualify the legislation requires that: the excess concessional contribution is $10,000 or less; the individual has not had a previous excess concessional superannuation contribution in a year after July 1, 2012; and the person has 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 the commissioner allows). The relief only applies to excess contributions made after July 1, 2011.
How does the $10,000 cap and refund process work for excess super contributions?
If you meet the conditions, the tax office will issue a notice offering a refund of the excess contribution. Your super fund will refund the excess to you and you will pay income tax on that refunded amount at your applicable marginal tax rate instead of the 46.5% penalty. The offer must be accepted within 28 days of the notice being issued or it will lapse.
What happens if I don’t accept the refund offer within the 28‑day window?
If you fail to accept the refund offer within the 28 days it lapses, and you will not be entitled to receive another offer for excess contributions in future years. The legislation’s wording means letting an offer lapse effectively removes eligibility for future relief.
If I accept the refund now, can I still get relief for a larger excess contribution in future years?
No. The law states that if you accept the refund offer you will not be entitled to receive another offer for any future excess contributions. Equally, if you reject the refund and pay the penalty tax now, you also forfeit eligibility for future relief. Either choice removes you from future relief offers.
How much tax could I save by using the relief compared with paying the penalty tax?
Under the relief you pay tax on the refunded amount at your marginal tax rate instead of the flat 46.5% penalty tax. The article gives a simple example: on a $100 excess, accepting the refund could avoid a $46.50 penalty but result in $31.15 of income tax instead. Note the article also warns the penalty regime can be harsher in exceptional circumstances, potentially imposing up to a 93% penalty.
Why do commentators say the changes offer only minimal benefit and lack fairness?
The critique in the article is that the relief is complicated and narrowly drafted, so many taxpayers will see only minor benefits or none at all. Conditions such as the $10,000 cap, the previous‑excess restriction, and the strict 28‑day acceptance rule mean the measure can amount to a ‘sleight of hand’—appearing to help while preserving the government’s ability to maximise tax collections over fairness and equity.
Who wrote the commentary on these superannuation changes and where can I read more?
The commentary was written by Max Newnham. The article also notes his book, 'Funding Your Retirement — A Survival Guide', is available in bookstores and as an e‑book for readers who want more detail on retirement funding and superannuation issues.
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