Removal of excess concessional contributions charge

By Julie Steed, Senior Technical Services Manager

New legislation contained in the enacted Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 removes the excess concessional contributions charge from 1 July 2021. However, clients who had exceeded their concessional contribution cap in the 2020/21 financial year and earlier years may still be subject to an excess concessional contributions charge.

The removal of the excess concessional contributions charge from 1 July 2021 may encourage clients with higher marginal tax rates who may otherwise exceed their concessional contribution cap to take no action in preventing an excess.

Taxation of excess concessional contributions

Since 1 July 2013, 100% of excess concessional contributions are included in a client’s assessable income and taxed at their marginal tax rate. A 15% non-refundable tax offset is applied.

Clients may elect to release up to 85% of excess concessional contributions to pay the tax liability. Any amount released does not count towards the non-concessional contributions cap, however, any excess amount not released does count.

Excess concessional contributions charge

Where excess concessional contributions were made prior to 1 July 2021, clients are liable for an excess concessional contributions charge (ECCC). This charge is calculated on the amount of additional personal tax payable on the excess concessional contributions and is to recognise that the tax is collected later than if the income was originally included in the client’s personal tax return.

This process was designed to return the ATO, the individual and the super fund to the financial position they all would have been in if the tax had been collected as part of salary and wages at the time it was paid.

The charge applies from 1 July of the financial year in which the contributions were made up to the day before the first personal tax payment was due.

The interest rate varies each quarter based on the 90-day bank bill rate plus three percentage points the shortfall interest charge (SIC), which is currently 3.04%. The average of the quarterly annualised rates is then expressed as a daily rate.

Fortunately, the ATO calculates this charge and there is no ability for the Commissioner to waive this charge.

Case study –  Kevin

Kevin exceeds his concessional contribution cap by $5,000 in June 2021. The $5,000 excess concessional contributions amount is added to Kevin’s assessable income and he receives a tax credit of $750 ($5,000 x 15%).

In addition, the ATO calculates an excess concessional contributions charge which is also payable.

The amount of additional tax and the excess concessional contributions charge depends on Kevin’s marginal tax rate, which is shown in the table below:

Tax rate Additional tax Less tax credit Amount of tax payable Approximate ECC charge
47.0% $2,350 $750 $1,600 $73
39.0% $1,950 $750 $1,200 $55
34.5% $1,725 $750 $975 $45
21.0% $1,050 $750 $300 $14

* Assumes SIC is 3.04% and ECC accrues for 18 months

If Kevin exceeds his concessional contribution cap after 1 July 2021, he will not be subject to the above excess concessional contributions charge.

Administration of excess concessional contributions

The ATO determines that excess concessional contributions are based on the information contained in the client’s personal tax return and the information provided by super funds.

ATO election form

The client has 60 days to complete the election form and return it to the ATO (not their super fund).

The client can elect the release amount, which can be any amount up to 85% of the excess concessional contributions.

Release amount with the ATO

The ATO receives the released amount from the super fund and then credits the amount to the client’s tax account. The ATO uses the tax credit (15% of the excess contributions) to offset the additional tax payable.

In addition to any tax debts owed, the ATO can withhold any amount owed to a Commonwealth agency, the most common being outstanding child support payments. The ATO pays any remaining balance to the client.

No election made

If no election is made, the client is liable to pay additional tax from their personal resources and must ensure that they pay by the due date, otherwise late payment penalties can apply. In addition, excess concessional contributions that are not released count towards the non-concessional contributions cap.

Payment type

A release amount is a special type of benefit payment which is treated as a non-assessable, non-exempt benefit payment to the client. The proportioning rule does not apply to released amounts.

Where the release amount is paid from an accumulation account, the released amount reduces the taxable component only. Where the release amount is paid from a pension account there is no adjustment to the tax-free and taxable percentages calculated on commencement of the pension.

The ordinary cashing order applies whereby a release amount will be taken in order from:

  • unrestricted non-preserved benefits
  • restricted non-preserved benefits
  • preserved benefits.

If the released amount is paid from an account-based pension it will count towards the minimum annual pension. If it is made from a transition to retirement pension then it will also count towards the maximum annual pension.

Case study – Kerry

Kerry has excess concessional contributions of $5,000 in 2021/22. The ATO issue an excess determination which will allow Kerry to have up to $4,250 of the excess concessional contributions released ($5,000 * 85%).

If Kerry has $4,250 released, the amount of concessional contributions counted towards non-concessional contributions is reduced by the amount released * 100/85.

$4,250 * 100/85 = $5,000, therefore, the amount counted towards the non-concessional contributions cap is nil.

If Kerry does not elect to have any concessional contributions released, the amount of the excess concessional contributions counted towards the non-concessional contributions cap is $5,000.

To release or not to release

Whether a client chooses to make the election to have excess concessional contributions released or not does not change the way that additional tax is calculated.

The excess concessional contributions are still subject to tax at a client’s marginal tax rate (less the 15% tax offset) and the excess concessional contributions charge applies for excesses incurred prior to 1 July 2021.

Some clients may have sufficient funds outside of super and are therefore willing to pay the tax bill from personal resources. This leaves the maximum amount invested in super. Not releasing excess concessional contributions may also be appealing for clients who do not want to reduce an existing unrestricted non-preserved benefit.

However, it is essential that clients understand that excess concessional contributions that are not released count towards the non-concessional contributions cap.


More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.