In March the Gillard government introduced legislation into Federal Parliament to make superannuation "simpler and fairer". This was to be achieved by allowing individuals to have an excess concessional contribution of up to $10,000 without being taxed at 46.5 per cent. The legislation is at best a token measure that will not fix an injustice in the tax system.
One of the reasons why the new legislation is not simpler or fairer is because the $10,000 limit applies once only. This means a person can have an excess contribution of $10 in one year, perhaps due to a mistake by their employer, and they will never be eligible for relief from the excess contributions tax again.
The excess concessional contributions problem will also become worse as a result of compulsory employer contributions increasing to 12 per cent, and because the Gillard government is not allowing the concessional contributions cap to increase. Even before the increase in the Superannuation Guarantee Charge there are many examples where taxpayers have paid the excess super contributions tax on compulsory super contributions because of circumstances beyond their control.
In one case a person had three employers in the same financial year. At all times during the year he had at least two employers. Because one of his employers paid a 2009 contribution in the 2010 year, and because of compulsory super contributions made by each of the employers during 2010 year, he ended up paying excess contributions tax.
In another case a small business owner mailed a $90,000 super contribution cheque to his superannuation fund on June 26, 2007, with the appropriately signed and dated application forms. The super fund did not receive the contribution until July 4, 2008, and classed it as a 2008 contribution.
Unaware this had happened the small business owner made a contribution for the 2008 year of $100,000. As a result the small business owner paid $41,950 in excess super contributions tax on the $90,000 contribution.
At the heart of the excess super contribution problem is the inflexible attitude taken by the ATO.
The commissioner of taxation has always had the ability to not charge the excess contributions tax. Instead of using his discretion, the commissioner has chosen to maximise tax revenue collection at the expense of fairness and equity.
An example is a woman whose husband was terminally ill with only months to live. In addition to looking after her ill husband she had to attend to their financial affairs. Unfortunately she made a mistake and transferred too much money to their super fund as a non-concessional contribution that resulted in excess contributions being made that year.
Despite the fact she was able to produce supporting documentation from doctors that showed her husband at the time was terminally ill, and she did not have full control of her faculties, the commissioner refused to exercise his discretion and not charge the excess contributions tax.
Adding insult to injury, the ATO in a letter confirming the tax would be payable stated they did not accept she would have had her mind off her financial affairs.
The relevant section of the legislation that provides the commissioner of taxation with the discretion not to impose the excess contributions tax, is broad enough to have allowed him to exercise his discretion in all of the examples above.
Until the ATO and both sides of government realise the taxation system must operate fairly, taxpayers can be forgiven for finding ways to minimise their tax.