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By Janet Manzanero-Caruana, Senior Technical Manager
High income employees who exceed their concessional contributions cap due to obligatory superannuation guarantee (SG) contributions from multiple employers may now apply to the Australian Taxation Office (ATO) to exempt one or more of their employers from their SG contributions for a certain quarter or quarters.
These employees can instead negotiate with their employer to receive amounts, not contributed because of the exemption, as additional cash or as non-cash remuneration.
This measure was contained in Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 which lapsed in 2018 and was re-introduced this year. It passed the Senate on 19 September 2019 and received Royal Assent on 2 October 2019, becoming effective on 3 October 2019.
An employer is required under the Superannuation Guarantee (Administration) Act 1992 (SGAA) to make SG contributions calculated as 9.5% of ordinary time earnings for an employee, up to the maximum contributions base (MCB). The MCB is $55,270 per quarter in 2019/20. When SG contributions are made up to the MCB for the whole income year ($21,003 per year - calculated as 9.5% x $221,080), an employee will not exceed the concessional contribution cap ($25,000 in 2019/20). However, when the employee has more than one employer making SG contributions, that cap may be exceeded. When the cap is exceeded the employee pays tax at their marginal tax rate on excess concessional contributions, less a 15% tax offset to compensate for the contributions tax paid by the super fund plus a charge for late payment of tax. The employee may either have the excess contribution refunded (less any outstanding tax or Government debts) or leave the amount in their super to count against their non-concessional contributions cap. When the excess amount is left in super it is retained as a taxable component, rather than a tax free component, if it was originally a non-concessional contribution.
Employees can now apply to the Commissioner of the ATO for an employer shortfall exemption certificate (ESEC) in relation to a current employer (or employers as it can be more than one if the employee has three or more employers) to exempt that employer from SG obligations for one or more quarters. The ESEC may be issued if the Commissioner is satisfied that all the following conditions are met:
In making the decision the Commissioner may rely on data from past tax returns, single touch payroll reporting and information provided by the employee. Whether the employee has contrived to artificially enable themselves to apply for the ESEC may also be considered.
Employees can download the approved form from ato.gov.au and apply for an ESEC to cover one or more employers. The application must be received by the ATO at least 60 days before the start of the quarter to which the ESEC will apply.
The Commissioner must give written notice of the ESEC to the employee and the employer covered by the ESEC. The ESEC must state:
If the application is denied the Commissioner will only notify the employee. An application will be taken to be denied if an employee does not receive any notice from the Commissioner within 60 days of their application.
For only the January to March 2020 quarter, the ATO will accept applications until 18 November 2019.
A highly paid employee who works for more than one employer and exceeds the concessional limit may benefit from applying for an ESEC for an employer. However, the employee must ensure that at least one employer makes SG contributions on their behalf.
The employee can negotiate with their employer to receive the amount that would have been contributed as SG as additional income or as non-cash benefits. The employee can receive the amounts as additional salary, allowances or bonuses and may use it for:
Non-cash benefits may include:
An employer granted an ESEC is not obliged to cease paying SG, neither is the employer required to pay the employee amounts saved because of the ESEC in another form. This means the employer may retain these amounts. However, the employer is likely to agree to pay the difference in some form for a highly valued employee.
While additional tax may be paid on these benefits, the employee may consider the saving on charges for late payment of tax and the administrative burden of dealing with excess contributions if the ESEC did not apply.
Where possible the employee should fully utilise their concessional cap using SG contributions from the employer which are not covered by an ESEC and/or top up personal contributions.
Highly paid employees are likely to have higher total super balances which may preclude them from making ‘catch-up’ concessional contributions, meaning unused concessional caps are lost. ‘Catch-up’ concessional contributions allow unused concessional contributions caps (from 2018/19) to be carried forward and used in the next five income years subject to the member’s total super balance being less than $500,000 as at 30 June prior to the year of the ‘catch-up’ contribution.
Andre is a chief executive for Gold Dust Company and earns $250,000 per year. He also works as a consultant for Gem Stone Company earning $250,000 per year. Both companies must each make SG contributions of $5,250.65 each quarter in 2019/20. In total Andre’s concessional contributions in 2019/20 will total $42,006 per year ($21,003 per year x 2) and he will exceed the $25,000 cap. After he files his 2019/20 tax return, excess concessional contributions of $17,006 ($42,006 - $25,000) will be added to his assessable income and taxed at his marginal tax rate less a tax offset equal to 15% of his excess concessional contributions. He also pays a charge for the late payment of tax. Andre may apply for a refund of the excess contribution or leave the amount in his super to count against his non-concessional contributions cap.
Alternatively, he may apply for an ESEC for either Gold Dust Company or Gem Stone Company (but not both, as an employee must have at least one of their employers paying an SG contribution). He applies to the Commissioner for an ESEC to exempt Gold Dust Company from SG obligations for the 2019/20 income year (four quarters).
As only Gem Stone Company now makes SG contributions for Andre, he does not exceed his concessional cap. Andre requests Gem Stone Company to implement salary sacrifice of $3,997 ($25,000 - $21,003) to use 100% of his concessional contributions cap in 2019/20.
Andre and Gold Dust Company agree that the value of $21,003 will be provided to Andre either as additional salary or an equivalent amount in the form of other benefits such as a novated car lease or other effective fringe benefits.
Applying for an ESEC may avoid an excess concessional contributions determination and its related penalties and administrative burden. In some instances, where excess concessional contributions are not refunded, it may result in excess non-concessional contributions for those with total super balances of $1.6 million or more.
Applying for an ESEC requires advisers and clients to be proactive about dealing with potential excess concessional contributions. It’s worth considering how these funds can be used to provide clients with tax effective present day benefits.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
Disclaimer Issued by IOOF Investment Management Limited (IIML), ABN 53 006 695 021, AFSL 230524. IIML is a company within the IOOF Group of companies, consisting of IOOF Holdings Limited ABN 49 100 103 722 and its related bodies corporate.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser.