Tax minefield needs fixing once and for all

As this column has written before, so-called excess benefits tax is proving a nice little earner for the government. Last year it collected penalty taxes of more than $130 million from some 45,000 taxpayers who inadvertently put too much into super. And that number is likely to have grown as further assessments were issued.

Excess contributions arise when your deductible or "concessional" contributions to super exceed the mandated caps. These are $25,000 for under 50s and $50,000 for those aged 50 or older, though they will revert to $25,000 for everyone next year for at least two years.

Once you exceed the cap, your excess contributions are taxed at the top marginal rate and counted towards the non-concessional contributions cap of $150,000 a year. That's penalty enough, but those tax penalties can balloon if you're also trying to maximise your non-concessional contributions. The effective tax rate on excess contributions if you breach both caps is 93 per cent, and thanks to the complex workings of a rule that allows you to "bring forward" non-concessional contributions, there have been instances where an excess contribution of a few hundred dollars has resulted in a tax bill worth tens of thousands. Staying within the caps sounds simple enough, but in practice people have found themselves caught by things outside their control.

Their employer, for example, might be late in making a payment one financial year resulting in an extra "contribution" the following year. They might forget their employer subsidises some of the fund's costs and that this is counted as an employer contribution. Or they might get their sums wrong.

Despite limited measures to allow a one-off refund of excess contributions up to $10,000, excess contributions are causing problems for many people trying to maximise their retirement savings. This is only likely to get worse next year when the cap for over-50s is halved.

One of the absurdities of the super system is that we are not all treated the same way when it comes to contributing to super. If you're self-employed, you're allowed to make tax-deductible contributions personally - which is why you see all those shop-keepers running off to see their accountants at this time of the year. They need to work out how much income they're likely to earn and whether they can afford to contribute to super.

But if you're an employee, you're not allowed to make tax-deductible super contributions. You have to ask your employer to do it through a salary sacrifice arrangement where you forgo some of your pay in lieu of higher super contributions. Salary sacrifice agreements must be prospective, which means you can only sacrifice salary you haven't earned yet. So the ability of employees to ramp up their retirement savings and save tax in June is more limited.

But spare a thought for the army of people in the new work environment who don't fall into either neat category. They might earn part of their income from an employment arrangement and part from self-employment. Visiting medical officers are an oft-cited example.

Under the rules, you can only make personal deductible super contributions if less than 10 per cent of your income is from employment. This includes reportable fringe benefits. For those on the margins, June can be a "Will I or won't I" exercise of trying to work out whether they are eligible to make personal contributions and facing extra tax if they get it wrong.

Then there are contractors who fall into that grey area between being self-employed and employees. The Australian Tax Office takes a narrow view of who qualifies to be treated as a contractor and has "sham" contractor arrangements on its compliance hit list. But employers are increasingly demanding contractor arrangements for the added flexibility they provide - and also because it means they don't have to pay costs such as compulsory super.

In the worst case, these people can find themselves denied the ability to make personal deductible contributions by the ATO which regards them as employees, but told by their employer they are not eligible for compulsory super because they are independent contractors.

Yes, they can ask the ATO to pursue their "unpaid" employer contributions. And part of the ATO's crackdown is aimed at forcing employers to make these payments where the arrangement is a sham.

Then there's the issue of employers and salary sacrifice. While it has become more widely available, there is still no obligation for employers to offer salary sacrifice to all their employees. So some people are shut out of making deductible contributions altogether.

While thankfully becoming rarer, employers are also still allowed to use salary sacrifice contributions by employees to reduce their own compulsory super obligations. While most employers will pay compulsory super on your gross salary, there's nothing to stop them deciding that because you're sacrificing 10 per cent of your salary into super, 9 per cent of that can count as their compulsory super payment.

In effect, the employee is meeting their obligations for them. Another sneaky trick is for employers to calculate the 9 per cent compulsory super on your salary after your sacrificed contributions have been deducted - again reducing the amount the employer contributes.

Despite promises to crack down on such practices in its 2007 election campaign, the government neglected to include this in any of its extensive super reforms. It is becoming less common, but should not be allowed at all.

Twitter: @sampsonsmh