As we enter a new financial year, people may find that they have inadvertently exceeded their concessional super contribution limits. We discuss what to consider if you find yourself in this situation.
Excess concessional contributions occur when an individual exceeds their contributions cap for the year. The Australian Taxation Office (ATO) assesses two key sources of information to determine if this limit has been surpassed: super contributions reported by your super fund and deduction for personal contributions stated in your tax return.
Should you exceed your concessional contributions cap, the ATO will issue an excess concessional contributions determination, providing you with two options to handle the excess. Let’s take a closer look at these options and their implications.
Option 1: Leave the Excess in Your Super Fund
By choosing this option, you allow the excess concessional contributions to remain in your super fund. However, it’s important to note that these excess contributions will count towards your non-concessional contributions cap.
Option 2: Release Up to 85% of the Excess from Your Super Fund
Alternatively, you can elect to release up to 85% of the excess concessional contributions from your nominated super fund(s). The released amount, already subject to a 15% tax by the super fund, will not count towards your non-concessional contributions cap.
Now that we’ve explored the options, let’s delve into the tax and super implications of each choice, helping you determine the more beneficial option for your circumstances.
Understanding Excess Concessional Contributions (CCs)
In a financial year, your concessional contributions cap consists of the standard cap (currently $27,500) and any unused cap amounts from the previous five years, provided your total super balance before the financial year starts is under $500,000.
When your total concessional contributions exceed your cap, the ATO issues an excess CCs determination, detailing your CCs cap and the excess amount. Additionally, the determination outlines the tax consequences of including the excess in your assessable income.
Choosing the Right Option and Checking Information
After receiving an excess CCs determination, it’s crucial to ensure its accuracy. If the super fund reported incorrect contributions, you can request the fund to re-report the correct information, but only if a mistake was made. It’s important to remember that re-reporting contributions solely to avoid excess contributions is not permitted.
In case you believe the ATO has misapplied the law, you have the option to object to the excess CCs determination following the standard ATO objection process. Additionally, if you exceeded your CCs cap due to special circumstances beyond your control, you can apply to the ATO for a determination to disregard or reallocate part or all of the excess CCs.
Comparing the Options
When deciding between the two options, it’s crucial to consider the impact on your tax and super positions. Importantly, both options have the same tax consequences for exceeding your CCs cap:
- The excess CCs amount is added to your assessable income and taxed at your marginal tax rate for the year.
- A non-refundable 15% tax offset is available to reduce your income tax liabilities, compensating for the tax paid by the super fund on the excess CCs.
These tax consequences are applied when the ATO issues the tax notice of assessment upon lodging your individual tax return. Furthermore, it’s worth noting that the excess CCs charge, previously applicable for extra tax liabilities resulting from the inclusion of excess CCs, has been abolished from the 2021/22 financial year onwards.
Impact on Non-Concessional Contributions (NCCs) Cap
The chosen option will affect your NCCs cap differently:
Option 1: If you choose to leave the excess in your super fund, the excess CCs amount will count towards your NCCs cap. However, this amount will not appear as an after-tax contribution in your super account, often leading to unintentional breaches of the NCCs cap or the triggering of the bring-forward NCCs rule.
Option 2: Opting to release up to 85% of the excess CCs from your super can help manage your NCCs cap. The released amount, already subject to the 15% tax paid by the super fund, will not count towards your NCCs cap.
How to Make an Election to Release Excess CCs
If you choose option 2, you have two methods to make the election:
- Using myGov Linked to ATO Online Services: Simply log in to your myGov account and complete the Excess Concessional Contributions Election Form. This form will be available for 120 days from the determination issue date. If you are not yet registered, you can sign up for the ATO’s online services to complete the form digitally.
- Downloading the Form: Alternatively, you can download the election form from the ATO website, complete it, and mail it to the address provided.
Remember, the election to release must be made within 60 days from the determination issue date. You can choose to release the amount from one or more funds, but the total withdrawal cannot exceed 85% of the excess concessional contributions stated in the determination.
Once you make your election, the ATO will send the release authority to the selected super fund(s). The fund (excluding defined benefit schemes) must release the specified amount to the ATO if the member benefit balance is sufficient. The ATO will then offset the released amount against any outstanding tax or other Australian Government debts, paying the remaining balance to you.
It’s crucial to carefully assess your situation and consult with a financial advisor or tax professional to make informed decisions.
This is intended to be general advice only. Goldsborough Financial Services has not taken into account the objectives, financial circumstances or investment needs of any particular person. For specific advice on your situation please contact your Goldsborough Financial Planner.