The Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 was passed on 3rd March 2015 to allow refund of excess non-concessional contributions.
Summary of the new rule
In the 2014-2015 Budget, the Government announced that it would allow individuals the option of withdrawing excess non-concessional contributions made from 1 July 2013 and associated earnings.
The new legislation now allows the release of excess non-concessional contribution plus 85% of associated earnings. The full earnings amount is included in the individual’s assessable income and taxed at the individual’s marginal tax rate. The individual is entitled to a non-refundable 15% tax-offset.
The old rule
Under the old regime, an individual is liable for excess non-concessional contributions tax which is imposed at the top marginal tax rate.
The existing treatment of excess non-concessional contributions may be regarded as punitive as the tax is applied to the excess contribution rather than the tax benefit received on the excess contribution, and the same treatment applies to both intentional and inadvertent breaches of the cap. This treatment can also be seen as double-taxation, because the contributions have generally been made out of the after-tax income of the contributor.
Detailed explanation of the new rule
For the 2013-2014 and later financial years, an individual can choose to have an amount equal to the excess non-concessional contributions plus 85% of the associated earnings amount released from their super in accordance with a release authority issued by the Commissioner.
The Commissioner must make a written determination for individuals who have made excess non-concessional contributions for the financial year. The determination states the amount of the excess contributions, the amount of the associated earnings for those contributions, and the total release amount .
Individuals will have 60 days to elect:
- to release the total release amount stated in the determination, that is, the amount of the excess contributions plus 85% of the associated earnings amount;
- not to release any amount from superannuation because the value of all their superannuation interests is nil; or
- not to release any amount from superannuation for another reason
Individuals cannot elect to release only a part of the total release amount stated in the determination. Individuals whose total superannuation interests are valued at less than the total release amount stated in the determination must still elect to release the total release amount to avoid excess non-concessional contributions tax.
Where the amount of the excess contributions is released from superannuation OR the commissioner determines that the value of the individual’s superannuation interest is nil, the associated earnings amount is included in the individual’s assessable income.
The associated earnings amount is calculated using an average o the GIC rate for each of the quarters of the financial year in which the excess contributions were made an compounds on a daily basis. For the 2013-14 financial year the average GIC rate for the four quarters of the financial year is 9.66%.
The period the associated earnings amount is calculated for commences on 1 July of the financial year in which the excess contributions occurred and ends on the day that the Commissioner makes the first determination.
The amount paid to the individual by the superannuation provider in accordance with a release authority is a superannuation lump sum benefit of the individual, but the amount itself does not have income tax consequences for the individual as it is non-assessable non-exempt income. However an associated earnings amount is still included in the individual’s assessable income.
The proportioning rule (which requires superannuation benefits to be treated as made from particular components of a superannuation interest in proportion to the overall composition of the interest) does not apply to release amounts.
Example: Full release
In the 2014-2015 financial year, Reginald makes non-concessional contributions that result in him exceeding his non-concessional contributions cap by $100,000. The Commissioner determines that the associated earnings amount is $19,000. The Commissioner gives hims a notice of excess non-concessional contributions determination stating his excess contributions amount of $100,000, an associated earnings amount of $19,000 and a total release amount of $116, 150 ($100,000 plus 85% of the associated earnings amount of $19,000)
Reginald makes a valid election to release the total amount of $116,150 from his superannuation interests by notifying the Commissioner and specifying a superannuation provider that holds an interest for him.
The Commissioner issues Reginald’s superannuation provider with a release authority requiring the provider to make a payment to Reginald of $116,150 from his superannuation interest.
The amount is paid to Reginald by his superannuation provider in compliance with the release authority. The amount is non-assessable non-exempt income in his hands.
The superannuation provider notifies the Commissioner and Reginald of the payment of $116,150 made in accordance with the release authority.
As a result of the release of the amount from his superannuation interest, Reginald no longer has excess non-concessional contributions, and so is not liable for excess non-concessional contributions tax. The associated earnings amount of $19,000 is included in his assessable income for the 2014-2015 income year and taxed at his marginal tax rate. Reginald is also entitled to a non-refundable tax-offset of $2,850 being 15% of $19,000.