New excess concessional contribution regime, increased concessional contribution caps and SuperStream
In our previous article on stronger super and SMSFs we looked at some of the stronger super and other Government changes that have affected self managed superannuation funds (SMSFs) in the last few years. In this, our final article on stronger super and SMSFs, we will focus on some of those changes that commenced in the 2013/14 financial year and also the changes legislated to commence in the 2014/15 financial year.
In addition, we look at the recent announcement by the new Government in relation to measures announced but not implemented by the previous Government. This includes measures that are to be implemented and measures that won’t be implemented.
New excess concessional contributions regime
The former Government’s first effort at alleviating the harsh operation of the excess concessional contributions (ECCs) regime was firstly introduced with effect from 1 July 2011 (and operated for the 2011/12 and 2012/13 years). Those rules operated so that on the first occurrence of an individual having ECCs, provided such ECCs were $10,000 or less, the individual had a one off choice of having up to 85% of their ECCs refunded where that amount refunded was subject to marginal tax rates (subject to satisfying certain criteria). Given the restrictive nature of this measure, it was roundly criticised as being inadequate.
Consequently, a new ECCs regime was introduced with effect from 1 July 2013. Under this measure, the excess concessional contributions tax regime has effectively been abolished. In its place, the Government introduced a regime where the amount of ECCs made on or after 1 July 2013 are automatically added to an individual’s assessable income and assessed at the individual’s marginal tax rates. In addition, individuals will also be required to pay an “excess concessional contribution charge” (ECC Charge) and shortfall interest charge (SIC) on the ECCs as outlined below.
Where an individual has ECCs, sometime after that individual has lodged their income tax return for the relevant year (i.e. the individual’s “normal tax return”), the Commissioner will issue an amended assessment calculated on any ECCs being added to the individual’s other assessable income and taxed at the individual’s marginal tax rates. This will give rise to a new tax liability that the individual will be required to pay within 21 days of the amended assessment being issued.
In that assessment, individuals will receive a 15% non-refundable tax offset calculated on the amount of the ECC to offset the 15% contributions tax paid by the super fund. This means that the effective tax rate will depend on the individual’s marginal tax rate. So for example, if the individual had an effective marginal tax rate of 30%, they would have an effective tax rate on their ECCs of 30% (being 15% tax in the fund plus 15% tax in the individual’s name). This compares favourably with the previous system that effectively taxed all ECCs at the rate of 45% and therefore strongly penalised low income earners while individuals on the highest marginal tax rate were only marginally affected.
Calculation of ECC Charge and SIC
The ECC Charge will be calculated at the 90 day bank bill rate plus 3% (this being the same rate as SIC). The ECC Charge applies to the amount of the tax attributable to the ECCs (in accordance with the individual’s marginal tax rate) and is calculated from the start of the income year in which the breach occurred (i.e. 1 July) to the due date for the payment of the individual’s first notice of assessment (i.e. the individual’s “normal tax return”). The Australian Taxation Office (ATO) has no power to remit the ECC Charge. The ECC Charge is also non-deductible to the individual.
From the time of the due date for the payment of the individual’s first notice of assessment to the due date for the amended assessment relating to the ECCs and the ECC Charge, the amount of the tax attributable to the ECCs together with the ECC Charge is subject to SIC. The key differences between the ECC Charge and the SIC are that the ATO has the power to remit the SIC and the SIC is deductible. If the individual fails to pay the combined amount of the tax attributable to the ECCs, the ECC Charge and the SIC by the due date of the individual’s amended assessment, then any amounts outstanding are subject to (the higher rate of) the general interest charge.
Release of excess contributions
Upon receipt of an ECC determination from the ATO, an individual can elect to release up to 85% of the ECCs from their fund (i.e. less the 15% contributions tax payable by the super fund).
The process for releasing ECCs is as follows:
- An individual must, within 21 days of receiving the ECC determination, complete and send to the ATO an election to release the ECCs;
- The election must be in the approved form;
- Once submitted, the election cannot be varied or revoked;
- After receipt, the ATO will provide a release authority to the nominated super fund(s);
- The super fund must pay the release amount to the ATO within 7 days;
- The ATO will then credit the amount released to the individual’s “ATO account” and apply it to any outstanding tax liabilities;
- Any amounts left over are paid to the individual.
Interaction with the non-concessional contributions cap
Any ECC amounts elected to be released from a fund (plus the 15% contributions tax retained by the fund) will not count towards the non-concessional contributions cap. However, where an individual does not elect to have an ECC amount released, the amount retained by the fund will count towards the non-concessional contributions cap.
The non-concessional contributions cap regime is unaffected by the changes to the ECCs regime and therefore any excess non-concessional contributions will continue to be taxed at 45% plus the Medicare levy and can generally not be released from the fund.
Planning considerations for ECCs
One planning consideration for ECCs is whether the ECCs should be released. Where the ECCs will cause the individual to exceed their non-concessional contributions cap or cause the individual to trigger the “bring forward rule” (of 3 times the non-concessional contributions cap over 3 years), then in most situations, the individual will be best off electing to release their ECCs.
Where this does not occur, it may be better to leave the ECCs in the concessionally taxed super fund environment or to limit the amount of the release to the amended assessment (i.e. the tax on the ECCs, the ECC Charge and the SIC).
Another related consideration is whether the individual should pay the amended assessment themselves or elect to release an equivalent amount from their super fund. This will largely depend on whether the individual has the resources to pay the amended assessment and the extent that the individual receives a tax advantage for retaining the ECCs in their super fund.
A further consideration is whether an individual should deliberately make ECCs. This would involve an analysis of whether having the amounts in the concessionally taxed super regime (potentially for many years) outweighs the additional cost of paying the ECC Charge and the SIC (which will generally be calculated on a period of about a year and a half). Of course, the effect such ECCs have on the individual’s non-concessional contributions cap must also be considered.
Concessional contributions cap increases for older members
From 1 July 2013, an increased concessional contributions cap of $35,000 (rather than the current $25,000 cap) will be available for older members, with the increased cap to apply in 2 phases.
The first phase, to apply from 1 July 2013, will apply to members who were aged 59 or more on 30 June 2013.
The second phase, to apply from 1 July 2014, will apply to members who were aged 49 or more on the last day of the preceding financial year (e.g. for the 2014/15 year, the date for determining the member’s age is 30 June 2014).
Unlike the “standard” concessional contributions cap, this cap for older members will not be indexed. Therefore, it is expected that from 1 July 2018, the standard concessional contributions cap will have reached $35,000, therefore making this cap redundant.
These changes to the concessional contributions cap do not affect the amount of the non-concessional contributions cap for individuals (regardless of their age).
SuperStream measures that affect SMSFs
The stronger super measures known as “SuperStream” have been designed to enhance the back office of the super system with the increased use of technology and uniform data standards by moving from cheque/paper based contributions to electronic payment/messaging systems.
The SuperStream measures have been largely seen as a “large super fund” issue but they also will have a significant impact on employers of all sizes, and many SMSFs, as they require employers to make, and super funds (including SMSFs) to receive, employer contributions electronically.
In addition to making contribution payments electronically, employers and receiving funds must use prescribed data and e-commerce standards that include electronic messages.
As of 1 July 2014, the SuperStream measures will apply to SMSFs that receive contributions from medium to large employers (20 or more employees). From 1 July 2015, the measures will extend to contributions from small employers (less than 20 employees).
It is expected that electronic standards will be extended to cover rollovers to SMSFs in the future, therefore capturing a wider net of SMSFs.
It is important to note that the SuperStream measures do not apply to contributions to SMSFs from related party employers or members. Such contributions can continue to be paid, and received, by non-electronic means.
How will SMSFs comply with their SuperStream obligations?
Employers, and affected SMSFs, will need to establish systems for electronic payments and messages. This could potentially include the use of:
- Financial accounting and payroll software
- Message delivery services
- A clearing house such as the Government’s Small Business Superannuation Clearing House or a clearing house operated by a super fund or commercial operator
“Stop the press” – new Government announces that it will proceed with some of the previous Government’s measures and not proceed with others
In the last few days, the new Government has released a press release about certain tax and superannuation measures announced but not implemented by the previous Government. This includes measures that are to be implemented and measures that won’t be implemented.
The measures to be implemented include:
- That holding/bare trusts established for limited recourse borrowing arrangements will have a “look through” treatment for tax purposes. This is expected to mean that the income and deductions relating to the asset held by such trusts will be taxed at the super fund level rather than the trust level. Hopefully, this measure will also provide that ABN and GST registrations only need to be done at the super fund level. This measure will apply retrospectively to 1 July 2007.
- Penalties for promoters of illegal early access schemes. This measure will apply from Royal Assent.
- The introduction of a new penalties and administrative directions regime to give the ATO greater flexibility and options in relation to SMSFs trustees that breach the law. This measure will apply from 1 July 2014.
The measures that will not be implemented include:
- The proposed new rules regulating the acquisitions and disposals of assets between SMSFs and related parties. This was to include the requirement that listed shares be acquired “on the market” and that the price of unlisted assets be determined by formal valuations.
- Creating a verification system for SMSF members and SMSF bank accounts before rollovers can be made to an SMSF.
- Subjecting SMSFs to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 requirements before they can receive rollovers.
- Taxing unlawful payments from super funds at 45% plus the Medicare levy. It is not clear why this measure is not proceeding, given that the other similar measures, noted above, will be implemented.
- The introduction of a measure that would make inoperative an SMSF trust deed clause which prevents excess contributions being treated as a contribution (and therefore avoiding the excess contribution caps).
Download a PDF version of this article: Stronger Super and SMSFs - Issue 4
03 9611 0163
03 9611 0161