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Superannuation contribution caps

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					Last updated: 24 August 2010

Superannuation contribution caps
From 1 July 2007, the Government introduced contribution caps to limit the amounts of concessionally
taxed superannuation contributions a person can make/receive. Understanding the caps is important as
exceeding them can result in significant tax penalties. In this TapIn Guide, we review the operation of the
caps and highlight some common tips and traps.


Table of contents
What is a contribution? ............................................................................................................. 2
   In-specie contributions.............................................................................................................................................2
   When is a contribution made? .................................................................................................................................2
   Contribution by way of asset transfers ....................................................................................................................2
Concessional Contributions Cap.............................................................................................. 3
   Amount of the concessional contributions cap ........................................................................................................3
   Exclusions from the concessional contributions cap ...............................................................................................4
   Available deduction amount is not limited by cap....................................................................................................4
   Keeping within the concessional contributions cap – tips and traps .......................................................................5
   Insurance premiums and the concessional contributions cap.................................................................................6
   Common mistakes leading to excess contributions ................................................................................................8
   Penalties on exceeding the concessional contributions cap ...................................................................................8
Non-Concessional Contributions Cap ..................................................................................... 8
   What is the non-concessional contributions cap? ...................................................................................................8
   Amount of the non-concessional contributions cap.................................................................................................8
   Bring forward rules for people turning age 65 .........................................................................................................9
   Exclusions from the non-concessional contributions cap......................................................................................10
   Common mistakes leading to excess contributions ..............................................................................................10
   Contributions in excess of both the concessional and non-concessional caps ....................................................11
Breaching the caps .................................................................................................................. 12
   Monitoring contributions against the caps .............................................................................................................12
   The ATO assessment process ..............................................................................................................................13
   How the contributions are reported to the ATO.....................................................................................................13
   Refunding of contributions.....................................................................................................................................14
   Earlier application of ATO’s discretion relating to excess contributions tax ..........................................................15
   Excess contributions tax assessments and applying for ATO’s discretion ...........................................................15




TapIn Guide                                                                                                    For planner use only
What is a contribution?
According to the ATO, a contribution is:

“anything of value that increases the capital of a superannuation fund provided by a contributor whose
purpose is to benefit one or more particular members of the fund or all of the members in general.”

Some transactions which in the past were not viewed as contributions are now treated as such. These
include:
-    Transfers from an overseas superannuation fund.
-    An employment termination payment directed (previously “rolled over”) to superannuation.
-    Amounts contributed (previously “rolled over”) by or on behalf of an individual to qualify for the small
     business retirement exemption.
To make these contributions, the person needs to be eligible to contribute to superannuation (eg under
age 65, or if aged 65-74 and meet the work test). In addition, part or all of the contribution will be
counted under the contribution caps


In-specie contributions
Contributions can be made in cash, or by in-specie by contributing an asset (where permitted by the
trustee of the superannuation fund). Where an in-specie contribution is made, it will also be counted
under the relevant contribution cap(s).


When is a contribution made?
The timing of the contribution is often important in determining what financial year a particular
contribution relates to.

As a general rule, a contribution is made when funds are received by a trustee of super fund.

Common forms of contribution and when a contribution is recognised

 Form of contribution                                    Is a contribution when:

 -    Cash                                               -    the cash is received by the trustee.

 -    Electronic Funds Transfer (EFT)                    -    the EFT an amount is credited to a bank account
                                                              of the trustee.
 -    Money order                                        -    the money order or cheque is received by the
                                                              trustee, unless it is subsequently dishonoured.
 -    Bank Cheque
                                                         -    Post-dated cheques cannot be presented (hence
 -    Personal Cheque
                                                              the contribution is not made) before the date
                                                              shown on the cheque.


Contribution by way of asset transfers
Where a contribution is made by way of a transfer of an asset, the contribution will be deemed to have
been made when the superannuation fund obtains ownership of the asset. A fund obtains ownership
when beneficial ownership of the asset is acquired by the fund. This can occur earlier than legal
ownership.



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For example, a fund may acquire beneficial ownership of listed shares effected through an off-market
share transfer when the trustee of the fund obtains the properly executed off-market share transfer in
registrable form.

In the case of property, a fund acquires beneficial ownership when its trustee obtains possession of a
properly executed transfer that is in registrable form, together with any title deeds or other documents
necessary to procure registration of the fund as the legal owner.

With respect to in-specie superannuation contributions:
- The amount of the contribution is the market value of the asset at the time the contribution is
   received by the trustee.
-   Where a person contributes an asset to a SMSF and the trustee provides a consideration for that
    asset, the contributed amount is the difference between the market value of the asset and the
    consideration paid by the SMSF trustee.



Concessional Contributions Cap
Concessional contributions are so named because they are broadly made from pre-tax income and are
taxed at a maximum rate of 15% (a concessional rate of tax) on entry to the superannuation fund. The
concessional contributions cap limits the amount of concessional contributions a person can
make/receive that will continue to attract this concessional tax treatment. Concessional contributions
made in excess of the cap are subject to penalty tax.
Concessional contributions are generally contributions that attract the 15% contributions tax and include:
-   Superannuation Guarantee contributions.
-   Salary sacrifice contributions.
-   Voluntary employer contributions.
-   Personal contributions for which a tax deduction has been allowed.
-   Any contribution made by an entity such as a trust or company (as an entity cannot make a non-
    concessional contribution).
-   Taxable component of directed employer termination payments made to superannuation in excess of
    the $1million cap.
-   Certain amounts allocated from fund reserves or surpluses.


Amount of the concessional contributions cap
From 1 July 2009, a concessional contributions cap of $25,000 per person, per financial year applies. A
transitional cap of $50,000 applies to a person who is age 50 or over on the last day of the relevant
financial year during the transitional period. The transitional period ends on 30 June 2012. Under the
current rules, once the transitional period ends, a cap of $25,000 will apply, regardless of the person’s
age.
The Labor Government proposed extending this transitional cap from 1 July 2012 for people age 50 or
over with total superannuation account balances less than $500,000. At the time of writing, legislation to
enact this proposal had not been introduced.
The concessional contributions cap of $25,000 pa is indexed to AWOTE, in increments of $5,000. The
transitional cap of $50,000 is not indexed.
For each of the financial years 2007/08 and 2008/09, the concessional cap was $50,000 while the
transitional cap was $100,000.



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Exclusions from the concessional contributions cap
Certain contributions are specifically excluded from the concessional contributions cap. These include:
-   Concessional contributions made to constitutionally protected superannuation funds.
-   Some concessional contributions made by, or on behalf of, certain members of defined benefit
    superannuation funds. Planners should check the amounts counted towards the concessional cap
    with the trustee or administrator of the fund to ensure the cap is not breached.
Note that concessional contributions split with a spouse are counted under the concessional contribution
cap of the original contributing member rather than under the receiving spouse’s cap.


Available deduction amount is not limited by cap
The deduction the employer can claim for an employer contribution is not limited by the concessional
contributions cap. Nor does the concessional contributions cap limit the tax deduction an eligible person
can claim for personal contributions. However, the amount of deduction claimed is limited by the
person’s taxable income.
Any concessional contributions made or received by a person in excess of the concessional cap will be
subject to a penalty tax of 31.5%. This tax will apply in addition to the 15% contributions tax already
levied. The excessive amount will also count towards the person’s non-concessional cap.


Example
Darren (age 38) is an employee. During the 2010/2011 financial year, he enters into an agreement with
his employer to salary sacrifice $25,000 into superannuation. This amount is in addition to
Superannuation Guarantee contributions of $5,000 Darren is already receiving. As Darren is under age
50, his concessional cap is $25,000 for the 2010/2011 financial year.
Darren’s employer can claim the full $30,000 (salary sacrifice and SG) contributions as a tax deduction.
However, the excess contribution of $5,000 over Darren’s concessional contributions cap will effectively
be taxed at 46.5% (15% contributions tax, plus 31.5% penalty tax).


Example
Josh (age 51) operates his graphic design business as a sole trader. In the 2010/2011 financial year, he
makes a personal deductible contribution into superannuation of $65,000. His taxable income for the
year is $100,000. Josh can claim a tax deduction for the entire contribution of $65,000, as this amount
does not exceed his taxable income. However, the $15,000 in excess of his concessional cap will
effectively be taxed at 46.5% and will also be counted towards his non-concessional contributions cap.




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Keeping within the concessional contributions cap – tips and traps
Before recommending that a client makes additional concessional contributions, planners should check
what concessional contributions have already been made in the current year and expected to be made in
the remainder of the financial year. It is the responsibility of the individual to monitor their concessional
contributions to ensure these do not exceed their cap.


Example
Claire (age 30) has a concessional contributions cap of $25,000 pa. As Claire has concessional
contributions from several different sources, she needs to monitor the cap to ensure her cap is not
breached.
Claire runs a business through her company of which she is an employee and director. For 2010/11,
Claire has decided she will sacrifice her entire salary and director’s fees from the company into
superannuation. In total the company will contribute $6,000, including SG contributions on her behalf.
Claire also works as an employee for a large listed company earning $100,000 pa plus an annual
performance bonus. The performance bonus is payable in March. In June 2010, Claire was preparing to
enter into a salary sacrifice agreement for the following financial year. Claire wants to work out the
amount she can salary sacrifice without breaching her concessional contributions cap.
To determine an appropriate amount to salary sacrifice, Claire needs to estimate her annual
performance bonus, as SG will also be paid on this amount. Based on previous years’ bonuses and a
recent promotion, she determines that the bonus will be approximately $10,000, which would mean total
employer SG contributions for the year will be approximately $9,900.
To work out how much Claire can salary sacrifice without the breaching the cap, all the concessional
contributions Claire is expecting to receive in 2010/11 must be taken into account.
Total concessional contributions for 2010/11 will be $15,900 = SG and salary sacrifice from the private
company ($6,000) + SG from the listed company ($9,000) + SG on expected performance bonus ($900)
= $15,900
As a result, just prior to 1 July 2010, Claire agrees with her employer to sacrifice $8,000 of her salary into
superannuation. This will bring Claire’s concessional contributions for the 2010/11 financial year to a
total of $23,900, which is within her concessional contributions cap of $25,000.
Should Claire’s bonus be more than anticipated, she should review her salary sacrifice arrangement for
the remainder of the financial year to ensure her total contributions remain within the concessional
contributions cap.


Superannuation Guarantee contributions
When calculating the SG a client expects to receive, it is important to remember that an employer is only
required to make SG contributions on an employee’s ordinary time earnings (OTE) up to a maximum
quarterly amount. An employer is not obliged to make SG contributions on OTE over and above this
figure. A person has a maximum quarterly contribution base for each employer they work for. The base
is indexed annually in line with AWOTE.
For the 2010/11 financial year, the maximum contribution base is $42,220 per quarter. This means that
the maximum amount of SG payable is 9% of the maximum contribution base for the relevant quarter.


Example:
John, aged 50, earns $200,000 per annum in salary. John’s quarterly income is $50,000, which is
greater than the maximum contribution base of $42,220. John’s employer is only required to provide SG
support of $3,800 per quarter, (i.e. 9% of $42,220).




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Personal deductible contributions
A personal contribution for which a tax deduction has been allowed is counted under the concessional
contributions cap. If the deduction cannot be claimed, or is denied by the ATO, the personal contribution
will be a non-concessional contribution. Planners need to be aware of these rules as they can affect
contribution planning for their clients. These situations are discussed below.


Notice of deductibility is invalid and rejected by the trustee
Where the notice of deductibility is rejected by the trustee of the superannuation fund because it is
invalid (e.g. part or all of the superannuation balance has been withdrawn in a lump sum or used to
commence a pension), the contribution will be a non-concessional contribution instead of a concessional
contribution.

ATO denies all or part of a deduction on a personal contribution
Where the ATO denies a deduction on part or all of a personal contribution, the amount which is
disallowed will be a non-concessional contribution.
One of the main reasons for denying a deduction for a contribution is that person cannot claim a tax
deduction for a personal contribution that is in excess of their taxable income for the financial year.
Another common reason is that the person is not eligible to claim a deduction under the “10% test”.


Example
Amanda, aged 35 operates a toy store as a sole trader. Her taxable income for the financial year is
$20,000. She makes a personal contribution to superannuation of $25,000 and intends to claim the
entire amount as a deduction.
The ATO only allows a deduction on the contribution to the level of her taxable income of $20,000. The
remaining $5,000 will be classed as a non-concessional contribution and will be included under the non-
concessional contribution cap.




Insurance premiums and the concessional contributions cap
It is common for people to hold their life, TPD and/or salary continuance insurance through their
superannuation fund. The premiums for the cover can be funded by concessional contributions such as
salary sacrifice or personal deductible contributions.
It is important to remember that these contributions will also be counted towards the person’s
concessional contribution cap. Any excess contributions i.e. amount above the person’s cap, will attract
the 31.5% penalty tax rate. Interestingly, where these contributions will be used to fund insurance
premiums, they will not attract the 15% contributions tax. So, despite the fact that excessive
concessional contributions will attract the 31.5% penalty tax rate, it can still be tax effective for certain
people to make contributions that exceed their concessional cap (provided that the excessive portion is
used to fund insurance premiums).




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Example
Andrew (age 40) is on the 46.5% marginal tax rate. He is already contributing up to his $25,000
concessional contribution cap. He currently holds a non-superannuation life insurance policy which has
an annual premium of $535. In order to make his $535 premium payment (after tax) he needs to earn
$1,000 of his gross salary (before tax).
Could Andrew gain any advantage by holding his life cover within his superannuation fund? Two options
Andrew can consider are:
        Salary sacrifice $535 into superannuation to pay for the life cover, receiving the balance of $465
         as salary, or
        Salary sacrifice the entire $1,000 into superannuation, of which $535 would be used to pay for
         the life cover.
Both options will provide him with advantages over his current situation. The results of each option are
outlined below:
 Current scenario: Cost of non-superannuation life cover
 Gross salary                                                                                                       $1,000
 Income tax @ 46.5%                                                                                                   $465
 Net cash (to pay premium)                                                                                            $535
 Balance                                                                                                                Nil
 Option 1: Salary sacrifice premium – receive balance as salary
 Salary sacrifice contribution                                                                                        $535
 Insurance Premium                                                                                                   ($535)
 Less: Contributions tax @ 15%                                                                                           Nil


 Remaining amount taken as cash salary                                                                                $465
 Less: Income tax @ 46.5%                                                                                             $216
 Less: Excess concessional contributions tax @ 31.5%                                                                  $169
 Advantage – Increased cash flow                                                                                       $80
 Option 2: Salary sacrifice $1,000 into superannuation
 Salary sacrifice contribution                                                                                      $1,000
 Insurance premium                                                                                                   ($535)
 Less: Contributions tax @15%*                                                                                         $70
 Less: Excess concessional tax @ 31.5%                                                                                $315
 Advantage – Increased net superannuation benefit                                                                      $80
* Only payable on $465. Note that $535 used to fund the premiums is deductible to the trustee and does not attract the 15% tax.




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Common mistakes leading to excess contributions
Since the concessional contributions cap was introduced on 1 July 2007, some common errors include:
-   Forgetting to check the concessional contributions already made in the financial year in all super
    funds the person has.
-   Forgetting that SG contributions are included in the cap.
-   Mistakenly assuming that SG contributions made in July for the previous quarter ending 30 June will
    be counted for the previous financial year. Contributions are generally counted in the financial year in
    which they are received.
-   Forgetting that employer contributions paid to a superannuation fund to fund insurance premiums or
    administration costs are also concessional contributions and included under the cap.
-   Making a personal deductible contribution and failing the eligibility requirements.


Penalties on exceeding the concessional contributions cap
Any concessional contributions made or received by a person in excess of the concessional
contributions cap will be subject to a penalty tax of 31.5%, in addition to the 15% contributions tax
already levied. This means the effective tax rate on the excess concessional contribution is 46.5%.
Furthermore, the excess contribution will be treated as a non-concessional contribution and measured
against the non-concessional contribution cap for the same financial year.
The process that ATO adopts in dealing with excess concessional contributions is outlined from page 12.


Non-Concessional Contributions Cap
Non-concessional contributions are generally after-tax contributions. Non-concessional contributions do
not attract any tax upon entry into the superannuation fund. Non-concessional contributions also count
towards the tax-free component in the fund.
Non-concessional contributions include:
-   Personal after tax contributions.
-   Spouse contributions received.
-   Personal contributions for which a tax deduction has been denied.
-   Concessional contributions in excess of the concessional contribution cap.
-   Any non-growth portion of a transfer from a foreign superannuation fund e.g. the portion which is
    non-assessable to the individual.


What is the non-concessional contributions cap?
The non-concessional contributions cap limits the amount of non-concessional contributions a person
can make without incurring penalty tax.


Amount of the non-concessional contributions cap
From 1 July 2007, the non-concessional contributions cap is $150,000 per person, per financial year.
Where a person is under age 65 at any time in the financial year, they are able to make a non-
concessional contribution of up to $450,000 under the bring forward provisions. Bring forward provisions
allow a non-concessional contribution of 3 times the annual non-concessional cap over the 3 financial
years. When the person is age 65 or over at the time the contribution is made, they need to ensure the
work test has already been met before the contribution is made.


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The non-concessional contributions cap is defined in legislation as 6 times the concessional
contributions cap. Therefore when the concessional contributions cap increases though indexation, the
non-concessional cap will increase also.
Where a person contributes more than the annual non-concessional cap amount (currently $150,000) in
any given year, they will automatically trigger the bring forward provisions. This means that the cap
applying for that financial year and the following two financial years will be $450,000. Once triggered, this
cap amount is not indexed.


Example
Rose, aged 48, makes $160,000 of non-concessional contributions on 1 August 2010. As her
contribution exceeds $150,000, she has automatically triggered the bring forward provisions. Rose has
another $290,000 that she can contribute during the remainder of the 2010/11 financial year and the next
two financial years.


Bring forward rules for people turning age 65
If a person is turning age 65 during the financial year, they are able to trigger the bring forward
provisions in that year.
A common misunderstanding is that a person in this situation does not need to meet the work test to
contribute after reaching age 65. Eligibility to contribute must be determined first, prior to considering the
available caps. A person aged 65 to 74 must meet the work test (having worked at least 40 hours in 30
consecutive days) to contribute to superannuation in a particular financial year.


Example
David will turn 65 on 1 June 2011. He works full-time and satisfies the work test. As he was aged 64 on 1
July 2010, i.e. the start of the 2010/2011 financial year, David is able to use the bring forward provisions
to make up to $450,000 of non-concessional contributions during this current financial year.




Example
Ann has not worked for many years and turned 65 on 1 August 2010. Whilst Ann would normally be
eligible to trigger the bring forward provisions (as she was aged 64 on 1 July 2010), she cannot make
superannuation contributions on or after her 65th birthday as she has not met the work test.




Example
Ross turns 65 on 20 January 2011. He is still working full time and plans to retire on 30 June 2012. Ross
has $150,000 that he wishes to contribute to superannuation as a non-concessional contribution.
Ross’ mother Beatrice is unwell. Ross expects to receive an inheritance of roughly $200,000 when she
passes away, which he would also like to contribute to his superannuation fund.
As per his planner’s recommendation, Ross makes a non-concessional contribution of $150,001 before
30 June 2011. Ross is able to make this contribution after his 65th birthday as he meets the work test.
As Ross’ contribution exceeds $150,000, he has automatically triggered the bring forward provisions.
Ross has another $299,999 that he can contribute over the next two financial years (assuming that he
continues to meet the work test).



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Beatrice passes away on 1 December 2011, and Ross receives the inheritance in May 2012. Ross is
able to contribute the full $200,000 into superannuation as a non-concessional contribution. He must
make this contribution by 30 June 2012 as he will not meet the work test in the following financial year.
As Ross is age 65 at the start of the 2011/2012 financial year, the trustee can only accept individual
contributions of up to $150,000. Therefore, Ross would need to make 2 separate contributions totalling
$200,000.



Exclusions from the non-concessional contributions cap
Certain contributions are specifically excluded from the non-concessional contributions cap. These
include:
-   The Government co-contribution.
-   Rollovers within the Australian superannuation environment e.g. from one super fund to another or
    from an allocated pension back to accumulation phase.
-   Qualifying amounts contributed under the small business CGT cap where the 15-year exemption or
    retirement exemption are met.
-   Qualifying amounts contributed as proceeds from structured settlements and personal injury
    payments.


Common mistakes leading to excess contributions
One of the most common errors with respect to the non-concessional contribution caps is forgetting to
check the history of both concessional and non-concessional contributions made to all super funds for
the person in the current financial year and the previous two financial years.
The reason for checking the contributions made in previous financial years is to determine whether the
bring forward provisions have been triggered in a previous year, either by accident or purposefully. If
this is the case, these amounts need to be taken into account to determine the remaining cap for the
current financial year.
Some other common errors with respect to the non-concessional contribution cap include:
-   Forgetting that excess concessional contributions are also counted as a non-concessional
    contribution.
-   Making contributions of up to $450,000 for an individual when they are ineligible to use the bring
    forward of future years’ contributions (e.g. are aged 65 or over throughout the whole financial year).
-   Forgetting that a non-concessional contribution made under a re-contribution strategy counts under
    the non-concessional contribution cap.
-   Forgetting that the non-growth portion of an overseas transfer counts for the non-concessional cap.
-   Having the notice of deductibility on a personal contribution rejected by the trustee of the
    superannuation fund because the notice is invalid. This contribution therefore counts as a non-
    concessional contribution.
-   Having part or all of a deduction for a personal contribution denied by the ATO and therefore having
    it counted as a non-concessional contribution under the cap.
-   Making non-concessional contributions under the small business CGT cap for amounts greater than
    the qualifying amount
-   Forgetting to lodge the appropriate approved form before making a contribution under the small
    business CGT cap.



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Example – triggering of bring forward provisions in a previous year
In the 2009/10 year, Jennifer (aged 61) withdrew $400,000 from her superannuation and re-contributed it
as a non-concessional contribution in the same year. By contributing an amount above the non-
concessional cap of $150,000, she automatically triggered the bring forward provisions in that year.
In the 2010/11 year, Jennifer receives an inheritance and makes a non-concessional contribution of
$150,000. Jennifer has breached the non-concessional contribution cap as the non-concessional
contributions made during the 3 financial year period (1 July 2009 – 30 June 2012) total $550,000.




Example – contributing greater than the amount permitted under the CGT cap
Jerry, aged 55, sold an active business asset (purchased in 1990) for $1.1 million due to his retirement.
The capital gain resulting from the disposal is $400,000.
His accountant confirms that Jerry meets the basic and specific conditions to be eligible for the small
business 15-year exemption. Consequently the capital gain of $400,000 on the sale of the asset is
exempt from CGT.
Jerry wishes to contribute the entire sale proceeds of $1.1million into superannuation under the CGT
cap, which is $1.155 million for the 2010/11 financial year. Jerry can do this, provided he lodges the
approved form with notifying the trustee that contribution should be counted towards CGT exempt cap.
The form must be provided to the trustee at the time or before the contribution is made. If the Capital
Gains tax election form (NAT 71161) is not given to the trustee within this time frame, the contribution
will count towards the non-concessional cap.
Elaine, aged 55 also sold an active business asset (purchased in 2000) for $1.1 million. The capital gain
resulting from the disposal is $400,000. Elaine has held the asset for more than 12 months, therefore the
general 50% CGT discount must be applied.
Her accountant confirms that in addition to the general 50% CGT discount, Elaine meets the basic
conditions for small business CGT concessions. Therefore, Elaine is eligible for the small business 50%
reduction. After applying both 50% discounts, Elaine chooses to exempt the remaining capital gain
amount of $100,000 under the small business retirement exemption. Elaine wishes to contribute the
entire sale proceeds of $1.1 million into superannuation under the CGT cap. However, only $100,000 of
the net gain amount can be made under the CGT cap. However Elaine can also contribute non-
concessional contributions under the general non-concessional cap of $150,000/$450,000.
To increase the amount that Elaine can contribute under the CGT cap, she can choose not to apply the
50% active asset reduction and go straight to the retirement exemption. In this case, $200,000 can then
be contributed under the CGT cap.


Contributions in excess of both the concessional and non-concessional caps
Where a person has exceeded their concessional contributions cap, the excessive amount counts
towards the non-concessional cap. If in that year, the person has already maximised their cap, this may
cause the person to exceed their non-concessional cap also.
Any excessive non-concessional contributions will be subject to a penalty tax of 46.5%.
Where a contribution has exceeded both caps, the total penalty tax is 93% (15% + 31.5% + 46.5%).




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Example
Luke (aged 67) is an employee earning $120,000 pa. A couple of years ago, Luke agreed with his
employer to salary sacrifice $40,000 into superannuation.
Early in the 2010/11 year, Luke makes a non-concessional contribution of $150,000 which is within his
non-concessional contributions cap.
During the year, Luke is eligible for a performance bonus of $15,000. Luke has a prior arrangement with
his employer to salary sacrifice the bonus amount into super. Consequently, in the 2010/11 year, his
employer makes total concessional contributions totalling $67,150 (SG and total salary sacrifice
contributions). As Luke is over age 50, his concessional contribution cap is $50,000 for the 2010/2011
financial year so the excessive concessional contributions for the year are $17,150.
The excess contribution of $17,150 over Luke’s concessional contributions cap will effectively be taxed
at 46.5% (15% contributions tax, plus 31.5% penalty tax) and will also be treated as a non-concessional
contribution for the 2010/11 financial year.
The total non-concessional contributions for Luke for the year will be $167,150. As a result, Luke will
exceed the non-concessional contribution cap by $17,150. This excess non-concessional contribution of
$17,150 will be taxed at an additional 46.5%. Luke will have to pay this excess (non-concessional cap)
tax from his superannuation benefits. Note that the contribution of $17,150 made in excess of both of the
caps is taxed at a total of 93% (46.5% + 46.5%).



Breaching the caps

Monitoring contributions against the caps
It is the responsibility of the individual to monitor the contributions made by them or on their behalf to
ensure these do not exceed the contributions cap(s). It is not the responsibility of either the employer or
the superannuation fund trustee to monitor the contributions of individual employees/members.
A superannuation fund trustee can only return part of the non concessional contributions (NCC) in very
limited circumstances.

A situation where the excessive contributions are returned applies to a single contribution made by a
member in a financial year, where that contribution exceeds the fund-capped contribution limit. The fund-
capped contribution limits are:


   Age at 1 July of financial year                        Fund-capped contribution limit
65 or over                             The non-concessional (NCC) cap - Currently $150,000 for the year

64 or less                                 Three times the NCC cap - Currently $450,000 for the year


A fund must return the amount by which the contribution exceeds the limit within 30 days and will not
report to the ATO the returned amount as a contribution. Excessive contributions tax does not apply on
the returned amounts.

Apart from the above, a fund cannot generally readily return contributions.




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Example – Fund capped NCC contributions to be returned
Betty was 65 years old on 1 July 2010, so her fund-capped limit for the 2010/11 financial year is
$150,000. She is gainfully employed on at least a part-time basis and makes a single NCC of $200,000
to her super fund in July 2010. Her fund must return $50,000 within 30 days and will report to the ATO
personal contributions of $150,000 in the member contributions statement for Betty for the 2010/11
financial year.


Example – Fund capped contributions cannot be returned
Richard was 54 years old on 1 July 2010, so his fund-capped contribution limit for 2010/11 financial year
is $450,000. He makes three separate NCC of $200,000, $150,000 and $150,000 in the 2010/11
financial year. Because none of the contributions individually exceed his fund-capped contributions limit,
his fund cannot return any part of the contributions and the fund will report his personal contributions for
the year as $500,000.



The ATO assessment process
Concessional contributions in excess of the concessional contributions cap will be subject to a penalty
tax of 31.5%, in addition to the 15% contributions tax already levied. Further, the excess contribution will
be treated as a non-concessional contribution and measured against the non-concessional contribution
cap for the same financial year.
Any non-concessional contributions which are in excess of the non-concessional contributions cap will
be subject to a penalty tax of 46.5%.
Where a contribution is in excess of both the concessional and non-concessional caps, the total taxes
levied will be 93% (i.e. 15% + 31.5% + 46.5%).


How the contributions are reported to the ATO
Each superannuation fund sends details of all contributions made by and on behalf of a member during
the year directly to the ATO. For retail public offer superannuation funds, this information is provided to
the ATO in a member contribution statement (MCS) by 31st October for the previous financial year. In
the MCS, the fund shows the types of contributions it has received for the member. That information is
then combined with any personal contributions the member has claimed in their individual tax return as a
tax deduction.
The MCS process of reporting personal contributions does not allow the superannuation fund to
separately identify the personal contributions the member has indicated will be claimed as a tax
deduction. That is, whether deductible or not, the fund simply records all these contributions as personal
contributions on the MCS.
The ATO then uses the details from the member’s individual income tax return to work out how much of
the personal contributions recorded in the MCS are to be counted against the member’s concessional
contribution cap because they have been claimed as a tax deduction in the member’s tax return.
For example, consider a member who has contributed $250,000 in personal contributions and then
indicates to AMP that they are going to claim a tax deduction for $50,000. In this instance, AMP must
report $250,000 of personal contributions to the ATO. The ATO will then compare the reporting from
AMP to the details submitted with the member’s individual income tax return to determine the actual
concessional and non-concessional contribution details.




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Refunding of contributions
As soon as a person makes a validly accepted contribution to a superannuation fund, the legislation is
quite clear that apart from fund capped contributions outlined on page 12, a trustee generally cannot
otherwise readily return contributions. For example, a fund cannot return all or part of a contribution only
because the member would otherwise have an excess contributions tax assessment.

Generally speaking, the circumstances where a superannuation fund can return part of the non
concessional contributions made by or for a member are limited to situations where the “fund capped
contributions rule” applies.
In Interpretative Decision ID 2010/104 the ATO examined a situation where an individual made a
number of voluntary non concessional contributions in the relevant period. As none of the single
contribution exceeded the fund-capped amount, the trustee was not required under superannuation law
to return any of the contributions. The member ended up contributing a significant amount in excess of
his NCC cap. Of interest in this case was the member’s ability to persuade the trustee to refund the
excess in purported restitution of a payment/contribution made by mistake.

The member told the trustee that he failed to realise that the earlier contributions made in the relevant
period would be counted towards the NCC cap. If he had realised this the trustee would not have
received the excess contributions, therefore, the contributions should be returned.

The trustee decided that the member had made a mistake and returned the excess contributions. The
fund also adjusted the member’s amount to reflect the return of the excess contributions and amended
the member contribution statement to the ATO to report only an amount up to the member’s NCC cap.

The ATO, despite the trustee returning the excess contributions to the member, still included all the
excessive contributions when calculating the member’s liability to excess contributions tax.

The ATO indicated that in this case the individual had actually formed an intention to make a contribution
of certain amounts and gave effect to that intention. The fund was the intended recipient of the amount.
The individual was not mistaken in the sense that he thought he was required to make a contribution. In
this case there was a contribution and it would not have been unjust for the trustee of the fund to retain
the contribution.

The interpretative decision contains some examples of where, in ATO’s view, contributions may be
appropriately returned based on the ground of restitution for mistake. This involves situations where it
would be unjust for the super fund to retain the contribution. Examples include:

-   Where a company made a contributions in the mistaken belief that it had a legal obligation to make
    SG contributions on behalf of individual independent contractors. These contractors were not
    employees under the extended SG definition and therefore, this obligation did not exist. The
    company had only made the contributions because it mistakenly believed it would be subject to the
    SG charge if it did make the contributions. The case for restitution of the contributions was
    established.

-   A case for returning a contribution was also established where a superannuation fund was not the
    intended recipient of the payment. The member had intended to pay $1,000 rent to his landlord’s real
    estate agent. Instead he mistakenly paid $1,000 to his SMSF. This was a payment made under a
    mistake of fact, the fact being the identity of the payee.

-   A case for refunding contributions could also be established where the trustee of a fund is the
    recipient of an amount greater than what was clearly intended, for example, because of a clerical,
    transcription or arithmetic error.




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Earlier application of ATO’s discretion relating to excess contributions tax
Legislation has been introduced that, if passed, will allow the ATO to make a determination to disregard
or reallocate contributions for the purposes of ECT without first issuing an ECT assessment.

This will permit a person to request the ATO to use its discretionary power at an earlier time. The ATO
will only be able to make a determination after it is satisfied that all contributions in the year that are to be
potentially disregarded or reallocated have been made. These changes will apply from date of Royal
Assent of the legislation.

Importantly there is no change to the criteria the ATO uses to determine whether it should make a
favourable determination.


Excess contributions tax assessments and applying for ATO’s discretion
If a person receives an excess contributions tax assessment in relation to non-concessional
contributions, they will need to present the assessment to the superannuation fund and request that the
trustee releases the monies to cover the taxation liability. The proceeds released by the superannuation
fund are then used by the member to pay the liability due to the ATO.
If a person receives an excess contributions tax assessment in relation to concessional contributions,
the person has the choice of either:
-   Requesting that the relevant superannuation fund release an amount to cover the liability, or
-   Use their own funds (outside of superannuation) to pay the tax liability to the ATO.
If the member has been issued with an excess contributions tax assessment, the ATO has discretion to
disregard or reallocate contributions in limited circumstances on formal application by the member.
Broadly, when assessing an application for discretion, the ATO may consider:
-   Whether a contribution made in one financial year would be more appropriately allocated to a
    different financial year.
-   Whether it was reasonably foreseeable when the contribution was made that there would be excess
    contributions for the financial year.
-   Where the contribution is made for the person by someone else, the terms of any agreement or
    arrangement covering the amount and timing of the contribution.
-   The extent to which the person had control over the making of the contributions.
The ATO is unlikely to exercise discretion in the following situations:
-   Where an individual is claiming financial hardship due to the imposition of the excess contributions
    tax assessment.
-   A breach occurring as a result of the individual being ignorant of the law.
-   A breach occurring due to incorrect professional advice.
-   Where an individual exceeds their non-concessional contributions cap and requests for the
    excessive contributions to be allocated to a previous financial year in which they did not exhaust their
    NCC cap.
An individual can only lodge an application for the Commissioner to exercise this discretion after they
have received an excess contributions tax assessment. This application must be made in an approved
form (“Application – excess contributions tax determination” form, NAT 71333 –10.2007) which is
available for download on the ATO website.
This application form needs to be lodged with the ATO within 60 days of receiving an excess
contributions tax assessment. However, if an application has not been made within 60 days, an
extension can be granted in certain circumstances.


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Disclaimer
The information provided in this TapIn Guide is believed to be accurate and reliable as at 24 August 2010 and is of a
general nature only. It is for professional planner use only - it is not to be distributed to clients. It is provided by AMP Life
Limited ABN 84 079 300 379. AMP Life is not responsible for any errors or omissions.


Produced by TapIn




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