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Clearing the way for change
The proposed simplification of the superannuation rules and the various changes that have been made since the original announcements give the impression of being rather complicated. These complications involve those who may have made large contributions to superannuation just after the announcement in the hope that, at worst, they would receive a refund if amounts in excess of the contributions were made.
A recent publication by the Australian Taxation Office gives some indication how the rules for these excess contributions may work.
Under the rules that were announced on May 9, 2006, after tax contributions by an individual could be made to superannuation funds up to certain limits, with any excess being refunded to the individual. The original proposed cap was increased in September 2006 so that it was possible to make after tax contributions of up to $1 million from May 10, 2006, to June 30, 2007, without penalty. Any excess was also proposed to be refunded to the individual without penalty.
However, the proposals were further changed in December last year to permit only excess contributions to be refunded to the individual if they were made on or after May 10, 2006, and up to December 7, 2006, when the legislation was introduced into Parliament.
In addition, to prevent avoidance by high income earners, any excess tax deductible contributions made to the fund were then counted against the after tax contribution cap of $1 million.
The current stance is that any excess contributions made after December 6, 2007, is now retained in the fund and taxed at a penalty rate of 46.5 per cent in total. In special circumstances, some or all of the excess that arose after December 7, 2006, may not be penalised. However, it would appear from the Tax Commissioner’s publication that the penalty rate would not be imposed where the excess has arisen in circumstances beyond the control of the contributor.
Anyone who wishes to receive a refund of any excess that arose up until December 7, 2007, must apply to the Tax Commissioner by June 30, 2007. It would appear that late applications might not be considered.
For those that wish to get in early, it is possible to pre-register an application for a refund with the Commissioner before the new rules are made law.
Here is a case study of how the rules as currently included in the legislation would work:
Let’s consider Marvin, who is over 50 and has the following contributions made on his behalf to superannuation:
1. From May 10, 2006, to June 30, 2006, Marvin’s employer contributed $7,000 to superannuation.
2. From July 1, 2006, to December 6, 2006, employer and personal after tax contributions of $1.2 million were made. The taxable contribution from the employer was $200,000.
3. From December 7, 2006, to early February 2007, Marvin’s employer contributed $6,000 to superannuation.
4. It is expected that from February 1, 2007, to June 30, 2007, Marvin’s employer will contribute about $30,000 under his employment contract.
The questions to answer are:
* Which contributions fit within the cap?
* Which contributions can be refunded to Marvin?
* Which ones will be taxed at the penalty rate of 46.5 per cent in total?
In Marvin’s circumstances it would seem that the proposed rules would operate as follows:
The contribution of $7,000 that was made on or after May 10, 2006, up until June 30, 2006, will count against Marvin’s age based limit of $100,587 that applies for the 2005-06 financial year.
As no excess arises, the contribution of $7,000 will be taxed in the superannuation fund at the 15 per cent rate.
The taxable contribution of $200,000 will be first counted against Marvin’s age based limit of $105,113 for the 2006-07 financial year. Any excess would be counted against the after tax contribution cap of $1 million. Any excess over and above the after tax contribution cap could be refunded, as the contributions were made before December 7, 2006. The refund would occur only where an application for a refund was made to the Tax Commissioner by June 30, 2007.
The contribution of $6,000 made from December 7, 2006, to January 31, 2007, is in excess of the contributions cap and cannot be refunded, as it was made after December 6, 2006. The fund would be liable for the tax on the contribution of 15 per cent plus a penalty rate of 31.5 per cent for being in excess of the contributions cap.
The estimated contribution that is expected to be made from February 1, 2007, to June 30, 2007, is in excess of the age limit and in excess of the after tax contributions cap. Therefore, it will be taxed at the 15 per cent rate in the fund plus a penalty rate of 30.5 per cent, as it exceeds the threshold for the 2006-07 financial year
The manner in which the contribution is treated under the proposed rules is illustrated in Table A (see Super Review Magazine March 2007, page29).
The proposed rules may simplify some of the superannuation rules, but for those who exceed the contributions caps from May 10, 2006, the results could be a web of complexity and a degree of confusion.
Graeme Colley, technical manager, Super Concepts.
AUTHOR
Mike Taylor
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