Paid too much into your super?

The Tax Office has a few words of advice for SMSFs that want to undo what can become potentially expensive mistakes.

ONE GUARANTEE of a comfortable retirement is to save as much as you can along the way. You can’t save too much, however, because the Australian Taxation Office won’t let you – unless you don’t mind paying extra tax.

The annual limit for contributions from untaxed income, or concessional contributions, is $30,000 if you’re under 50 and $35,000 if you’re older than that.

For contributions from after-tax income, the annual limit is $180,000, or $540,000 in a three-year period.

Anyone who is a bit too eager to push a retirement savings limit higher has to live with paying extra tax. When the concessional cap is breached, excess contributions are taxed at the marginal tax rate plus a penalty known as the excess concessional contributions charge.

Key Points

  • Excess contributions to super are not that easy to rectify

  • Some tax has to be paid before it is refunded

  • The ATO says some SMSFs are making a bungle of it

That can be a nasty surprise for someone who didn’t realise a cap existed and hasn’t any spare funds lying around to pay a bigger tax bill.

The ATO’s solution is to refund the excess contribution, but there’s a bit of bother because 15% will have already been siphoned off as tax. So it will refund 85% of the excess and a tax offset for the 15% will be included in the super fund member’s next tax return.

Things are a bit more complicated for non-concessional contributions. If that cap is breached, the saver has two options:

  • Withdraw the entire contribution and 85% of the earnings (15% tax has already been paid). Earnings will be taxed at the marginal rate with a 15% tax offset, or…
  • If you choose to leave things be, the ATO will issue an excess non-concessional contributions tax assessment and the excess will be taxed at the top marginal rate.

But the bother of going backwards to settle overpayments is a bit too much hassle for some self-managed super fund trustees, as noted recently by the Tax Office.

“Some SMSFs are not meeting their obligations with the authority to release excess concessional contributions or non-concessional contributions,” is said in a release in November.

For the 2011-12 and 2012-13 tax years, the ATO will issue a refund release authority to SMSFs where one of the members has exceeded the concessional contributions cap for the first time by up to $10,000.

Some DIY fund trustees have struggled getting the paperwork right, and the Tax Office wants to set the rest of them straight.

“You need to pay particular attention to the direction provided in the ATO release authority letter to make sure you’re not incorrectly releasing excess contributions from member accounts directly to individuals,” it says.

“If you have made an incorrect payment you will be required to take recovery action to rectify the error.”

Recovery action sounds like a lot of hard work. The solution is to play by the rules, as is always the case when the Tax Office is involved. 

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