Australia: Proposed changes to refund of excess non-concessional super contributions
As you may already be aware, eligible individuals can currently contribute up to $180,000 per annum to their super fund using after-tax monies (known as nonconcessional contributions). Eligible individuals under age 65 can also bring forward an additional two years’ worth of contributions as long as they don’t exceed a maximum of $540,000 worth of contributions over a three year period.
Under current rules, where contributions exceed these caps, individuals can be subject to a non-concessional contributions tax on the excess amount, which is subject to tax at the top individual marginal rate of tax. Given that this type of super contribution is sourced from after-tax monies, the tax on excess contributions was effectively a double taxation arrangement which was not deemed equitable.
As a result, it is being proposed that individuals who make after-tax (known as non-concessional) super contributions in excess of the above caps can elect to have these contributions refunded as well as the ‘associated’ earnings on those contributions (15% of the earnings will be withheld to reflect earnings tax).
The excess contributions will no longer be subject to tax at the top marginal rate, however the earnings on the contributions will be included in the individuals assessable income with a 15% tax offset to reflect the amount withheld inside super. The amount refunded from the super fund must come from the tax-free component of the member’s super interest, before reducing any taxable component.
The amount of the associated earnings included in assessable income is calculated from the first day of the financial year in which the contribution was made until the date of issue of the ATO’s excess non-concessional contributions determination. The actual amount of earnings generated by the fund on the excess amount is not used, rather the calculation will use an average of the General Interest Charge (GIC) rate for each of the quarters of the financial year in which the excess contributions were made and is compounded daily.
Example
James (Marginal Tax Rate of 47% includes Medicare levy) exceeded his Non-Concessional Contribution Cap by $200,000 on 1 July 2014. He is given an excess NCC determination on 1 July 2015.
James chooses to refund the whole amount of excess to him. If he didn’t, the full amount would be subject to a tax of 49% ($98,000). As he is withdrawing the amount, he must withdraw 85% of the associated earnings as well. Associated earnings can be calculated via the following:
(The weighted average of GIC over the period) 0.000263219% × $200,000 x 365 days (1 July 2014 to 1 July 2015) = $19,214.99.
James’ total available release amount is $216,332.74 ($200,000 plus 85% of $19,214.99)
James’ tax return will include extra assessable income of $19,214.99. James will pay $6,148.79 ($9,031.04 less $2,882.24 non-refundable tax off-set).
