In March 2011, some sobering information was released by the Australian Taxation Office (ATO) detailing the number of people exceeding their contribution caps – both concessional and non-concessional. Observations from this data include the following:

• The number of people expected to exceed the concessional contribution cap only for 2009/10 is 65,733 (a 132% increase on 2008/09);
• The number expected to exceed the non-concessional contribution cap only for 2009/10 is 4,339 (a 10% decrease from the prior year);
• The number of people expected to exceed both contribution caps for 2009/10 is 541 (a 37% decrease from the prior year); and
• Whilst the number of people exceeding the cap has substantially increased, the average amount by which the cap has been exceeded has almost halved from $13,096 in 2008/09 to $6,901 in 2009/10.

Common issues with the concessional contributions cap

When managing the level of concessional contributions, it is important to remember that it is not just voluntary contributions (such as salary sacrificed amounts) that count towards this cap, but also compulsory superannuation guarantee contributions from an employer or any other employer contributions.

Whilst most employers contribute the standard 9% super guarantee amount up to the legislated limit (currently based on a quarterly cap of $43,820), some employers may choose to contribute at a higher level (or may do so as a result of an award arrangement).

Example

Linda is employed on an annual salary of $200,000. Her employer’s standard practice is to contribute 12% of base salary to super for all employees. The amount her employer is required to contribute to super to satisfy its super guarantee obligations is $15,775.20 (ie 9% x $43,820 x 4).

However, the amount contributed by her employer is 12% of $200,000, resulting in a $24,000 contribution. If Linda is under age 50, then she only has $1,000 of her concessional contribution cap remaining before penalties may be imposed.

It is also important to consider how employers calculate their level of compulsory superannuation guarantee contributions, as this will have an impact on how much is actually contributed and assessed against the contributions cap. For example:

• Does the employer pay SG on the base salary amount, irrespective of how the employee chooses to package their salary?
• Does the employer only pay SG on the cash component of the salary after any packaging is taken into account? (note this is the legislative manner in which SG liability is calculated)
• Does the employer structure any SG contributions on a total remuneration basis? In the above example, if Linda was over the age of 50 and had chosen to sacrifice $16,000 to super, her employer does not legally need to contribute anything further. A salary sacrificed amount is deemed to be an employer contribution and will count towards meeting an employer’s SG obligations.

It is also important to take into account any changes in salary during the year, bonus payments, or if you have multiple jobs, and therefore multiple sources of SG contributions.

Example

Half way during the year, Linda receives a salary increase, lifting her base salary to $220,000. As a result of this, whilst the compulsory SG contribution amount has not changed from $15,775.20, the actual amount contributed by her employer is $25,200 (ie 12% x $200,000 x 0.5 for half of the year, plus 12% x $220,000 x 0.5 for the balance of the year).

Finally, does the employer fund insurance premiums through super for its employees on top of any SG? These amounts, even though effectively immediately on-paid to cover premium costs still count as concessional contributions.

Common issues with the non-concessional contributions cap

Any contributions for someone is not entitled to a tax deduction will usually count towards a client’s non-concessional contributions cap. There are however some important exceptions to this, including:

• Amounts where the client has qualified for small business CGT relief and transfers an amount into super under the small business CGT rules. To the extent the amount transferred does not exceed the lifetime CGT cap (currently $1,205,000) it will not count as a non-concessional contribution.
• Amounts contributed that relate to a structured settlements or orders for personal injuries
• Government co-contributions.

Example

In 2009/10 when aged 64, Sally made a non-concessional contribution of $150,000. In July 2010 whilst still aged 64 (she turned 65 in August), Sally made a $450,000 non concessional contribution to her super-fund utilising the 3 year averaging rule.

In March 2011, Sally received a notice from the ATO stating that the level of concessional contributions made to her fund for 2009/10 (as a result of employer and salary sacrificed contributions) was $51,000. This resulted in excess concessional contributions of $1,000 which resulted in a $315 tax liability for her. Sally was not too concerned about this.

However, the flow on impact for Sally is in relation to her non-concessional contributions. The $1,000 excess concessional contribution in 2009/10 will now count to her non-concessional contributions for that year, resulting in $151,000 of non-concessional contributions. This itself doesn’t create a liability, but it results in the 3 year averaging rule being invoked in 2009/10, limiting the amount of non-concessional contributions for 2010/11 and 2011/12 to $299,000.

However, Sally has already made $450,000 of non-concessional contributions in July 2010. As a result, she will have excess non-concessional contributions of $151,000, which at a penalty rate of 46.5% will result in an excess contributions tax assessment of $70,215.

The $1,000 excess concessional contribution has ultimately resulted in total excess tax bills of $70,530.

Issues created with personal deducted contributions

Where a person meets the relevant qualification criteria, they may be eligible to claim a deduction for personal contributions to super. These give rise to concessional contributions. In order to claim the deduction, they will need to complete the relevant “Section 290” notice requirements with their superannuation funds.

An incorrect understanding of the process around Section 290 notices can lead to situations where contribution caps may be exceeded. The following sets out a number of examples where this may arise.

• Section 290 notices are not completed within the required timeframe.

In order to be valid, a Section 290 notice needs to be completed by the earlier of the time the client lodges their tax return for the year in which they were looking to claim the deduction, or by 30 June of the following year. For example, if a person was looking to claim a deduction for a personal contribution made during the 2009/10 year, they need to complete the Section 290 notices by the time they lodge their 2009/10 tax return or by 30 June 2011, whichever is earlier.

Other events can bring forward the time for completion of these Section 290 notices. If the member has since rolled the contributions to another super fund, or has commenced a pension from their fund, the Section 290 notice needs to be completed before these events. If not, it will be invalid. Using the example above, if the member had contributed the money in 2009/10, but was looking to commence a pension in August 2010, they would need to complete the Section 290 notice requirements by that time.

If the Section 290 notice requirements are not appropriately completed, instead of being considered a concessional contribution, the contribution will be a non-concessional contribution. They will not be eligible for a personal tax deduction and the contribution will be assessed against their non-concessional cap, and may invoke the 3 year averaging rule (when not initially contemplated) or result in excess non-concessional contributions.

• A Section290 notice is completed, and the amount claimed is greater than the client is eligible to deduct.

The amount that a person can claim for a personal deduction is not limited by the concessional contribution cap; rather it is limited by their level of taxable income. For example, a person that is over the age of 50 could make concessional contributions of up to $50,000 without penalty, but if their taxable income (excluding the contribution is only $30,000), they are entitled to only claim a deduction for $30,000.

Often the Section 290 notices are completed and lodged prior to determining the level of taxable income. For example, the above person could have lodged a Section 290 notice in the belief that their taxable income would be $50,000, but ultimately only ends up being $30,000.

Up until the date of lodging the tax return or the following 30 June (whichever is earlier), a Section 290 notice can be varied. So in the situation described, the notice could be varied down to $30,000. In these situations, the 15% contributions tax would only be levied on the $30,000 and the remaining $20,000 would be regarded as non-concessional. Again, this could create issues around the management of the non-concessional cap.

Alternatively, they could choose not to vary the notice down (or be out of time to make a variation). Using the above example, the $50,000 contribution would remain subject to 15% tax in the fund, would count in full towards the concessional contribution cap, they would only be entitled to a tax deduction for $30,000. The $20,000 difference would be assessed as a non-concessional contribution.

• People try to “beat the system”

Knowing that concessional contributions suffer 15% tax, some people in the past have lodged a contribution as a non-concessional contribution, with the intent of later completing the Section 290 notices and delaying the imposition of the 15% tax.

However, if they forget to complete the notices in the required time, they will be denied the deduction and the contribution will be assessed against their non-concessional cap.

Importantly around the Section 290 notice process, the process technically starts with members notifying their funds of their intention to claim a deduction. Superannuation funds do not have to start the process by reminding clients of the need to complete the notices, although most will do so where they have been advised that the client has made concessional contributions throughout the year.

Getting the ATO to exercise their discretion

Under the legislation, the ATO has a very limited discretion as to when it can choose not to impose any excess contributions tax. The Commissioner has stated that the discretion will generally only be exercised where there are special circumstances. Factors that may be considered by the ATO include

• Whether the contribution made in one financial year should be more appropriately allocated towards a different financial year;
• Whether a genuine mistake was made in processing the contribution
• Whether it was reasonably foreseeable when the contribution was made that there would be excess contributions for the financial year; and
• The extent to which the person had control over making the contributions

Exercise of the discretion is rare. In a recent statement, the Commissioner noted that of all excess contribution notices issued to date, applications for exercise of the discretion have only been requested in about 8% of all cases, and the discretion actually granted on about 20% of those. Overall, this has resulted in approximately 98% of all excess contribution notices remaining in force.