There is no restriction on the amount of money that can be contributed into a self managed superannuation fund (SMSF).  However, superannuation contributions above certain contributions caps do not receive concessional tax treatment.  The two main types of contributions caps are the concessional contributions cap and the non-concessional contributions cap.

Concessional contributions cap

From 1 July 2017, the concessional contributions cap is $25,000 per annum regardless of age.  Concessional contributions received in an SMSF of up to $25,000 per annum are taxed at the concessional tax rate of 15%.

Catch up concessional contributions cap:  Also, from 1 July 2018, members with total superannuation balances of less than $500,000 at 30 June of the previous financial year are able to carry forward any unused concessional contributions caps on a rolling basis for five consecutive years.  Any unused amounts carried forward but not used after five years will expire.  The first financial year in which members can access unused concessional contributions is the 2019/2020 financial year.

Excess concessional contributions above $25,000 per annum are liable for additional tax. The liability for the excess concessional contributions tax is imposed on the member and not the member’s SMSF.  The member will receive an excess concessional contributions determination from the Australian Taxation Office (ATO).  The determination informs the member of their excess concessional contributions amount included in their assessable income in their income tax return and taxed at their marginal tax rate.

An SMSF member with excess concessional contributions is given the opportunity to withdraw up to 85% of the excess concessional contributions amount from their SMSF.  The amount is capped at 85% as the remaining 15% represents the tax liability paid by their SMSF on the excess concessional contributions.

If the member chooses to withdraw the excess amount from their SMSF, the full excess amount will be taxed at the member’s marginal tax rate with a 15% tax offset to compensate for the tax already paid by their SMSF.

An Excess Concessional Contribution (ECC) Charge (i.e. interest) is applied on the excess amount. The intent of the ECC charge is to acknowledge that the tax is collected later than normal income tax. The ECC charge period is calculated from the start of the financial year in which the excess concessional contributions were made, and ends the day before the tax is due to be paid in the member’s first tax assessment for the relevant financial year.

The formula for calculating the ECC charge uses a base interest rate plus an uplift factor of 3%.  The base interest rate is the monthly average yield of 90 day Bank Accepted Bills published by the Reserve Bank of Australia.  The compounding interest formula is applied against the base amount for each day of the ECC charge period.

Importantly, if the member chooses to withdraw the excess concessional contributions from their SMSF, the excess amount does not count towards the non-concessional contributions cap.

If the member chooses to retain the excess concessional contributions in their SMSF, the excess amount will be subject to an additional 32% tax and count towards the member’s non-concessional contributions cap.  This means, any excess concessional contributions remaining in the member’s SMSF will be subject to 47% tax in total (i.e. 15% contributions tax + 32% excess contributions tax).

Non-concessional contributions cap

From 1 July 2017, the non-concessional contributions cap is $100,000 per annum.  SMSF members under the age of 65 have the option to contribute up to $300,000 in one year (using the three year bring forward rule), depending on their total superannuation balance.

Non-concessional contributions also include excess concessional contributions not withdrawn from the member’s SMSF.

If an SMSF member exceeds their non-concessional contributions cap, then the ATO will issue the member with an excess non-concessional contributions determination and provide the member with the option to withdraw all their excess non-concessional contributions plus 85% of the associated earnings from their SMSF.  The full associated earnings amount stated in the member’s determination will be included in the member’s assessable income and taxed at their marginal rate of tax.  A non-refundable tax offset of 15% is applied to recognise the tax paid by their SMSF on the associated earnings.

The associated earnings amount is calculated to approximate the amount earned from the investment of the excess non-concessional contributions while it was held in the member’s SMSF.  The rate used to calculate the associated earnings is the average of the general interest charge rates for the four quarters of the relevant financial year the excess non-concessional contributions were made.  The period used to calculate the associated earnings is from 1 July of the financial year (irrespective of the date on which the contributions were actually made) until the date the ATO issues its determination.  The associated earnings rate is applied on a daily compounding basis to the excess non-concessional amount for the length of the associated earnings period.

If the member chooses to withdraw all of their excess non-concessional contributions and 85% of the associated earnings from their SMSF, the member must inform the ATO of the details of their superannuation fund(s) to release the amount from.  Upon receiving the member’s election form, the ATO will issue a release authority to the member’s nominated superannuation fund(s). The fund(s) must respond generally within 20 working days and release the available funds to the ATO.  The ATO will then use the money to offset against any outstanding tax liability or Commonwealth debts belonging to the member, with any remaining balance refunded to the member.

If the member chooses to retain their excess non-concessional contributions in their SMSF, they will receive an excess non-concessional contributions tax assessment.  The excess non-concessional contributions will be taxed at 47%.  The member will receive a compulsory release authority with their assessment which they must give to their SMSF to pay the amount of the assessment.

If the member decides not to do anything once they have received the excess non-concessional contribution determination from the ATO, then the ATO will issue a release authority to the member’s SMSF. The member’s SMSF must release the amount from the member’s superannuation account to the ATO in accordance with the instructions on the release authority.  The ATO will then release any balance of the released amount to the member after it has offset the amount against any ATO or Commonwealth debts belonging to the member.  The ATO will also amend the member’s income tax assessment to include the full amount of the associated earnings which will be taxed at the member’s marginal tax rate.  A non-refundable tax offset of 15% will be applied to the associated earnings to recognise tax paid by the member’s SMSF.

Reference

  • Section 291-15 of the ITAA 1997 (excess concessional contributions cap)
  • Section 95-10 of the TAA 1953 (excess concessional contributions charge)
  • Section 292-80 of the ITAA 1997 (excess non-concessional contributions cap)
  • Subsection 97-25(1) of the TAA 1953 (excess non-concessional contributions cap)
  • Section 97-30 of the TAA 1953 (associated earnings)
  • Section 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2007
  • Section 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2007
  • Division 131, Schedule 1 of the TAA 1953 (Release authority)

Below is a flowchart on how excess contributions are taxed:

Excess Superannuation Contributions


RELIANCE AUDITING SERVICES

Reliance Auditing Services is a specialist independent auditing services firm providing quality audits to SMSFs, companies, not-for-profits and AFS licensees all over Australia. Reliance Auditing places a huge emphasis on educating our clients to ensure they fulfil their reporting obligations. We value and build long-term transparent relationships.

Call: 1300 291 060 or email info@relianceauditing.com.au.

This information is an interpretation of rules, regulations and standards. It should not be considered as general or specific advice and neither purports, nor is intended to be advice on any particular matter. No responsibility can be accepted for those who act on the contents of this publication without first obtaining specific advice. Liability limited by a scheme approved under Professional Standards Legislation.