MAX NEWNHAM March 09, 2012
The changes to excess contributions tax will offer minimal benefits, writes Max Newnham.
Last week, the Gillard government introduced into Parliament amendments to the superannuation laws stating that they would make superannuation simpler and fairer.
One of the amendments related to the 2011 budget measure that is meant to provide relief from excess concessional superannuation contributions tax.
Far from fixing this oppressive tax, the amendments are a great example of a government wanting to be seen to be doing something, when - because of the way the legislation has been drafted - the benefits for many taxpayers will be minor and almost non-existent.
The main reason for this is because of the complicated way the excess contribution tax relief measures will work.
When they were first announced, having a one-off excess contribution of up to $10,000 not being subject to the 46.5 per cent penalty tax appeared to go some way to fixing the problem. The reality is - because of how the maximum $10,000 excess contribution limit is applied and how a person qualifies for the tax relief - the actual benefit received could be very small.
We still have a penalty tax system applying that, in exceptional circumstances, can impose a penalty tax of 93 per cent on an excess super contribution.
The new legislation will only apply to individuals that have an excess superannuation contribution after July 1, 2011, if the following conditions are met:
• the amount of the excess contributions must be $10,000 or less;
• they have not had a previous excess concessional superannuation contribution in a year after July 1, 2012; and
• they have lodged a tax return for the year the contribution relates to within 12 months of the end of that year, or within a longer period the income tax commissioner allows.
Under the relief measure, an individual that qualifies will have the excess contribution refunded to them by their superannuation fund and, instead of paying 46.5 per cent penalty tax, will pay tax on the excess at their applicable marginal tax rate.
Once the tax office becomes aware of the excess contribution and the qualifying conditions have been met, a notice of offer to accept the refund of the excess contributions will be issued.
The person with the excess contribution will have 28 days after the notice is issued to accept the refund offer. If the offer is not accepted within the 28 days, it will lapse.
The wording of this part of the legislation is where the potential benefit of the excess contributions relief measures is watered down to almost being non-existent.
If the offer is not accepted, then that person will not be entitled to receive another offer for any excess contributions in future years.
This means a person with an excess super contribution of $100 in this or a later financial year, that chooses to accept the refund and save penalty tax of $46.50 at the expense of paying $31.15 income tax, will not be entitled to receive tax relief from any future excess superannuation contributions.
If, on the other hand, the person decided to reject the refund offer and pay the excess superannuation contributions tax of $46.50, doing so in the belief that it would be better to have the relief apply to a greater excess contribution in the future, by having rejected the refund offer they will also not be eligible for the relief on any future excess contributions.
The new excess contributions legislation, far from being simpler, is in fact a sleight of hand that any accomplished magician would be proud of. Maximising tax collections has again triumphed over fairness and equity.
Max Newnham's book, Funding Your Retirement - A Survival Guide, is available in bookstores and as an e-book.