Could you pay 78% tax on super contributions?

Why it’s important to understand contributions caps

For most, a penalty of up to 78% on their super contributions would be the subject of nightmares. For one unfortunate woman, however, this was just the beginning.

The controversial case (Verschuer v Commissioner of Taxation), highlighted in a recent article in the Australian Financial Review (22 January 2013), illustrates the dangers of exceeding your contributions cap.

How did this happen?

The individual was the subject of a series of unfortunate events.  Firstly, there was a delay in contributions from her employer being allocated to her from a clearing account to her superannuation fund member account.  This led to a breach of her concessional contributions cap (attracting a 31.5% penalty).  Because of other contributions, this breach resulted in her also exceeding her non-concessional contributions cap (attracting a further 46.5% penalty).  The full penalty imposed amounted to 78%.

Combined with the 15% tax already paid on the concessional contributions received by the fund, her effective tax rate is actually 93%!

Understanding Contributions caps

An individual’s annual superannuation contributions caps are:

  • Concessional contributions – $25,000*
  • Non-concessional contributions – $150,000*

*subject to various conditions, such as the individual’s age and hours worked.

Any amount exceeding the concessional contributions cap counts towards the non-concessional contributions cap.  If you breach both caps in any given financial year, you may be liable for a 78% (effectively 93%) tax bill.

The Government introduced legislation to allow a once-off refund for first time excess concessional contributions of up to $10,000 from 1 July 2011.

The application of these rules is, however, limited.  It’s a “use it or lose it” option.  The refund is only available if you haven’t breached your concessional contributions cap from 1 July 2011.  Additionally, the administration to apply for the refund is arduous.

Red Flags

  • Watch out for superfunds (particularly larger industry funds) which use clearing accounts.  Contributions deposited into a clearing account may have a delay before they are allocated to the member’s superannuation fund account.  This was the problem in this AAT case.
  • Contributions made via electronic funds transfer (EFT) may not necessarily be received by the superfund on the same business day.  EFT transactions take one business day to process which may push contributions to the next financial year.
  • Consider the timing of employer contributions made by your employer before making additional contributions (such as salary sacrifice) to superannuation.
  • Where the superannuation fund pays expenses on your behalf, such as insurance premiums, these may be treated as contributions and may impact on your caps for the year.

Superannuation can be a very effective strategy that ultimately benefits your retirement.  However, the recent AAT case is a timely reminder of the penalties of getting it wrong.

If you require further information or assistance with this matter, please contact your local William Buck advisor.