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Contributions caps and taxation of contributions

Excess non-concessional contributions

Section: 5.20

Excess non-concessional contributions tax of 47% is imposed on excess

non-concessional contributions that remain in a superannuation interest. Clients may elect to release the excess non-concessional contributions, plus 85% of an associated earnings amount, from super to avoid paying 47% tax on the excess non-concessional contributions. If the excess amount is not released from a superannuation interest, the Commissioner will issue the individual an excess non-concessional contributions tax assessment (for 47% of the excess amount) and the tax liability will be due and payable in 21 days. An individual may be liable to pay a general interest charge where the excess non-concessional contributions tax liability is not paid by the due date.

Furthermore, the excess non-concessional contribution tax liability must be withdrawn from the client's superannuation interest. Where the excess non-concessional contribution (plus 85% of an associated earnings amount) is withdrawn from super, it is not subject to the 47% excess non-concessional contribution tax. However, 100% of the associated earnings amount is assessable income of the member personally and is taxed at their marginal tax rate (although a 15% non-refundable tax offset applies to recognise that tax would have been paid on the actual earnings made on the contribution while it was in the super fund). The withdrawal is non-assessable non-exempt income (although as mentioned above the associated earnings is assessable to the client).

The amount withdrawn is a superannuation benefit, however, the proportioning rules do not apply to the payment (i.e. the amount paid will not be split into tax-free and taxable components). This means the trustee is not required to deduct the amount withdrawn from the member's tax-free component where it was paid from a superannuation interest in the accumulation phase. As a result, such payments could effectively result in a reduction of the member's taxable, rather than tax-free, component.

Calculation of associated earnings amount

The associated earnings amount is calculated by multiplying the amount of the excess non-concessional contributions by the General Interest Charge (GIC) rate for each of the quarters of the financial year in which the excess contributions were made. The GIC rate is applied on a compounding daily basis (refer to the ATO website for current rates). As a guide, the average GIC rate for all quarters of the 2019-20 financial year was 8.54%. The calculation of the associated earnings amount is performed by the ATO.

It is also important to note that the period for which the deemed earnings amount is calculated starts on 1 July in the year the contributions are made and ends on the day the Commissioner issues the excess non-concessional contribution determination.

For example, a member made a non-concessional contribution that exceeded their non-concessional cap on 1 May 2019. The ATO then issued the excess non-concessional contributions determination for 2019-20 on 1 December 2018. In this case, the deemed earnings amount would be calculated based on the period from 1 July 2018 until 1 December 2019.

Example - Jack, excess non-concessional contributions

Jack made a non-concessional contribution which exceeded the non-concessional contributions cap by $100,000 on 30 June 2019.

If he chooses not to withdraw the excess amount, the excess contribution will be taxed at the top marginal tax rate, which must be released from the fund. Alternatively, he could choose to withdraw the excess contribution (plus 85% of associated earnings) once notified by the ATO. In this case:

  • associated earnings are calculated on the excess amount from the beginning of the financial year of the contribution to the date of the ATO determination
  • associated earnings are taxed at the client's marginal tax rate less a 15% tax offset.

Let's assume the ATO notifies Jack of the excess contribution on 31 December 2019. In this case, associated earnings will be applied over 18 months (1 July 2018 to 31 December 2019). Associated earnings are calculated by the ATO using the GIC (General Interest Charge).

For an estimate of the amount, the GIC for July to September 2019 as published on the ATO website is 8.54% pa.

Associated earnings ($100,000 x (1.0002339726^549)) -$100,000 = $13,705

Associated earnings are then taxed at Jack's marginal tax rate less a 15% tax offset. If we assume Jack is on the 39% marginal tax rate, he would incur tax of $3,289 (($13,705 x 39%) -($13,705 x 15%)).

Last modified: Sunday, July 21, 2019