The recent Federal Budget announcement that excess non-concessional contributions will be abolished is great news.
However, there is a trap that means advisers still can’t afford to let their guard down when it comes to contributions and careful monitoring is still required.
The Federal Budget contained the following announcement, which was ‘music to the ears’ to presumably all SMSF advisers:
This measure delivers on the Government’s election commitment to develop an appropriate process that addresses all inadvertent breaches of the contribution caps where the error would result in a disproportionate penalty.
This measure is estimated to have a cost to revenue of $40.1 million over the forward estimates period.
Naturally, this is not law yet but only an announcement.
However, assuming it will be passed, there is the distinct possibility that a trap will exist.
The trap is best illustrated by way of case study.
What a client might intend to do … the trap is set!
Consider Larry. Larry wishes to make the maximum non-concessional contributions allowable.
Larry is under 65. Accordingly he contributes $150,000 in the 2014 financial year and uses the bring forward provisions in the 2015 financial year.
Because the concessional contributions cap is increasing from $25,000 to $30,000 in the 2015 financial year, the non-concessional contributions cap is increasing as well (ie, from $150,000 to $180,000). Therefore, under the three year bring forward provisions, in the 2015 financial year he contributes $540,000 (ie, 3 x $180,000).
Accordingly, what he intends to do can be summarised as follows:
|Three year bring forward provisions triggered?||No||Yes|
|Non-concessional contribution cap||$150,000||$540,000|
|Amount of cap to be carried forward to next year||N/A||–|
What actually occurs … the trap is sprung!
However, Larry has a very small amount of non-concessional contributions in the 2014 financial year that he forgot about. Such contributions can arise in many ways. For example, perhaps:
- He personally paid an amount in respect of his SMSF and that amount is journalised as a contribution.
- An insurance policy that he’s being paying for years and years is actually held via super and each time he paid premiums he’s actually making a non-concessional contribution.
- He is a member of a defined benefit fund and his employer is making non-concessional contributions.
Regardless of how, assume that an additional $1,000 non-concessional contributions are also made in the 2014 financial year even though Larry doesn’t realise this until after he’s contributed the $540,000.
Accordingly, what actually occurs is as follows:
|Three year bring forward provisions triggered?||Yes||Triggered last year|
|Non-concessional contribution cap||$450,000||–|
|Amount of cap to be carried forward to next year||$299,000||–|
There are several important points to note.
First, although the non-concessional contributions cap is increasing in the 2015 financial year, this won’t help Larry. Pursuant to s 292-85(4) of the Income Tax Assessment Act 1997 (Cth), by triggering the bring forward provisions in the 2014 financial year, only a total of $450,000 of non-concessional contributions can be made in the 2014, 2015 and 2016 financial years before excess concerns start.
Secondly, on the face of current legislation, the above gives rise to excess non-concessional contributions tax of $241,000 x 47%, that is, $113,270. (Note that without much fanfare last year the Superannuation (Excess Non-concessional Contributions Tax) Amendment (DisabilityCare Australia) Act 2013 (Cth) increased the rate of excess non-concessional contributions tax from 46.5% to 47% for the 2015 financial year.) Naturally though under the current legislation, based on the ATO’s de minimis approach, the Commissioner might ignore the $1,000 and thus no excess non-concessional contributions tax would have to be paid. However, when/if the announced change is legislated, it could well be that the ATO ceases this practice.
Accordingly, based on the Federal Budget announcement it appears that in order to not pay the $113,270 liability, $241,000 must be withdrawn from super.
Why this could spell disaster
On its face, having to withdraw the $241,000 does not seem like such a bad outcome. Certainly, it is better than paying a $113,270 tax liability.
However, consider why Larry might have been wanting to contribute the money to super in the first place.
He might be just about to turn 65 and no longer working. Accordingly, this contribution could have been his ‘last great hooray’ for superannuation.
Although the simple answer is that he should just wait until the three year period is over (ie, 1 July 2016), by then Larry might have attained 65 and no longer be able to contribute. This would be particularly disastrous if these facts arose as part of a withdrawal and re-contribution strategy.
Alternatively, he might have been contributing the money as part of a limited recourse borrowing arrangement and might have needed the money in his SMSF very shortly to have enough in the SMSF so as to satisfy a bank’s loan to value requirements.
Take away point: the price of a properly executed superannuation strategy is eternal vigilance!
Even though the announcement in the Federal Budget was great news, advisers can’t get complacent. As the above case study illustrates, there are still critical reasons to carefully monitor all contributions.
An important disclaimer
There is a fair amount of supposition in this article as to how the new rules will work exactly. Naturally, the specifics aren’t known yet. Hopefully the detailed laws will ultimately address situations like this with fairness and practicality. However, unless and until that happens, again, advisers can’t get complacent and must carefully monitor all contributions.
* * *
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.