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Over the top: exceeding the concessional cap

Last year’s super reforms have certainly changed things if you want to make concessional contributions to super, with tax deductions being available to more people including employees.

The concessional contribution cap of $25,000 applies to any super contributions made for you, or that you claim as a tax deduction. It includes salary sacrifice, superannuation guarantee and any of your pre-tax salary package that is paid to super.

If you have just one source of income then the calculation should be relatively simple, but if you have several jobs or belong to more than one super fund, then monitoring your concessional contributions can be a little more tricky. And if you do go over the cap there are tax ramifications.

What is happening with Jane?

Jane earned a salary of $100,000 last financial year. Her employer paid 9.5% of her salary as compulsory super, totalling $9,500 for the year and remitted at the end of each month. Also, each year she salary sacrificed up to the $25,000 cap, or $15,480 paid as a monthly amount of $1,290 and at the same time her compulsory contributions were made.

During the year, Jane did some part-time work in a friend’s business, with $1,000 paid in superannuation. Jane’s total concessional contributions were $25,980, which exceeded the $25,000 cap.

She exceeded the cap, what happens next?

Once the ATO has all the information about Jane’s superannuation, it will send her a determination detailing the amount and the charge that applies for the excess. The charge is calculated from the beginning of the financial year in which the excess arose up to the time of her income tax assessment. The ATO will amend Jane’s tax assessment to include the excess, which is taxed at her personal rate less a 15% tax offset to take account of the tax already paid on the contribution by the super fund.

Once Jane receives the determination from the ATO she will have 60 days to make one of two choices:

  1. She can make an irrevocable election for one of her super funds to release 85% of the excess contributions to the ATO within 21 days of her election. This should provide enough to pay the amended income tax assessment. Anything left over will be applied against any of her other tax liabilities, then any remainder will be refunded to Jane.
  2. She can pay the penalty tax and leave the excess in super which will also be counted against her non-concessional contributions cap for the financial year in which the excess arose.

Government measures to help

The 2018 Federal Budget provided help for those at risk of breaching the cap but only where the person has a number of employers required to make superannuation guarantee contributions. Where compulsory contributions across all employers are expected to exceed the cap, an election can be made to absent one or more of those employers from paying super. This will help high income earners on more than $263,157 (and who have multiple employers).

However, individuals like Jane will be unlikely to access this measure, as part of her concessional contributions comprised salary sacrifice. But for an unexpected situation like Jane’s, the excess plus penalty charge will apply. She will need to decide whether to leave the excess in the fund and be counted against her non-concessional cap, or whether to withdraw it.

 

Graeme Colley is the Executive Manager, SMSF Technical and Private Wealth at SuperConcepts, a sponsor of Cuffelinks. This article is general information and does not consider any individual’s investment objectives.

For more articles and papers from SuperConcepts, please click here.

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