The concessional tax treatment of superannuation is undoubtedly one of the key advantages and incentives to contributing to superannuation. That is why triggering excess contributions tax and quickly eroding the tax advantages is so distressing to many individuals and their employers.

Excess contributions tax results in a higher rate of tax on contributions that exceed the contribution caps in any one year. In this edition we take a look at the contribution caps for this year and how you can plan to avoid excess tax.

Contribution caps – knowing how much you can contribute

There are two main contribution caps. The first is the 'concessional contribution cap', which is a limit on the amount of tax deductible contributions which are concessionally taxed. The second is the 'non-concessional contribution cap', which is a limit on the amount of undeducated contributions which are concessional taxed.

The caps for this financial year, ending 30 June 2013 (regardless of age), are as follows:

Concessional contributions cap $25,000
Non-concessional contributions cap $150,000

For individuals under the age of 65, they may be able to 'bring forward' future contributions by using a 'bring forward mode'. The bring forward mode lifts the non-concessional contribution cap for a year to $450,000 (i.e. 3 x $150,000). Using the bring forward mode means the individual is not permitted to make any further undeducted contributions for the following two financial years.

Contributions that relate to the small business capital gains tax concessions or personal injury payments are excluded from the above caps, however they are subject to their own restrictions.

In addition to being mindful of the contribution caps, it is important to check with your advisor whether you are eligible to make contributions. Not all individuals are eligible to make different types of contributions.

Excess contributions tax

When the above contribution caps are exceeded, 'excess contributions tax' may be triggered. The broad result of excess contributions tax is that a total tax rate of 46.5% applies to the amount of the contribution that exceeds the cap. This total tax rate is considerably higher than the 15% that usually applies to concessional contributions and the zero rate that applies to non-concessional contributions.

Some common examples of exceeding the caps and how to avoid them

Employer contributions
Salary sacrifice agreements Often employees will wish to maximize their superannuation contributions by entering a salary sacrifice agreement that takes their contributions up to the concessional contribution cap.
The annual cap can be easily exceeded when the timing and amount of contributions are not planned.
Employees who are aged 50 or over may have entered an arrangement based on a higher contribution cap from an earlier year. Those arrangements should be reviewed urgently.

Suggested action:

  • Employees should check with their employer the timing of when contributions will be made. There may be a different number of pay periods in each financial year. Employers should try and stick to their standard timing and advise employees of any change.
  • Estimate the total concessional contributions that will be made in the year. This will include your usual employer contributions as well as any additional contributions made under the salary sacrifice arrangement.
  • Where you will exceed the total contribution cap for the year, look at altering the salary sacrifice agreement.
Personal contributions
Timing of contributions Contributions are generally counted towards the contribution cap in the year in which the contribution is received by the fund.
Contributions can often be made in the wrong year when the contributions are not received by the fund before year end. For example, if a cheque was placed in the mail before 30 June 2012 and received by the fund in July 2012, it will be counted against the cap for the 2013 year.

Suggested action:

  • Check with your fund the date when they need to receive a contribution for it to be included in the financial year.
  • Allow yourself some time buffer to ensure electronic transfers can be cleared on time or cheques sent by post will be received by the fund.
Triggering the 'bring forward' mode in the wrong year The 'bring forward' mode for non-concessional contributions is triggered whenever the $150,000 cap is exceeded (even by $1).
Individuals need to carefully monitor any year when the 'bring forward' mode is triggered as they will not be permitted to make further non-concessional contributions in the two following year.

Suggested action:

  • Before making a non-concessional contribution, check if you have exceeded the $150,000 in any of the two prior financial years.
  • Plan the years in which you wish to make larger contributions so that you trigger the 'bring forward' mode in the desired year.

What should you do if you accidently exceed a contribution cap?

Where you discover you have already exceeded a contribution cap, there are some steps that can be considered, including:

  • Refund of excess contributions

  • Individuals who exceed their concessional contribution cap by up to $10,000 may be able to have the excess contributions refunded and taxed at marginal tax rates. Whilst this may be a good solution in some cases, there are various conditions that apply.

  • Applying for discretion to disregard or reallocate contributions

  • The ATO has discretion in special circumstances to disregard or reallocate contributions, thereby reducing the amount of excess contributions subject to tax. This discretion can only apply to genuine inadvertent breaches of the caps.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.