NEED TO KNOW
On 19 June 2013, the Government introduced into Parliament the Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Bill 2013 (Tax Laws Amendment Bill) and the Superannuation (Excess Concessional Contributions Charge) Bill 2013 (Super Bill).
The Bills are designed to introduce what the Government describes as a fairer system for the taxation of excess concessional superannuation contributions.
The Government estimates that the proposed regime will affect approximately 100,000 people in 2013-2014 and 40,000 people will have a lower tax liability as a result of the regime.
The concessional contributions cap is $25,000 for the 2013-14 year and this cap will be set at:
- $35,000 for those individuals 60 years and over from 1 July 2013; and
- $35,000 for those individuals 50 years and over from 1 July 2014.
Currently, individuals pay excess concessional contributions tax at 31.5% on any excess concessional contributions to their superannuation fund and the fund also taxes the contribution at the concessional rate of 15%. This effectively means that concessional contributions exceeding the annual cap are taxed at the top marginal tax rate of 46.5%. If an individual has exceeded the cap, they may seek a determination from the Commissioner of Taxation to disregard the excess contributions or allocate the excess to another year. However, the Commissioner’s discretion is limited, and a determination can only be made in special circumstances.
This has been a major issue for the superannuation industry as potential effects of the current provisions include:
- individuals below the top marginal rate receiving a large penalty by being taxed at the top marginal tax rate despite exceeding the cap by a small amount (and often inadvertently); and
- individuals already on the top marginal rate not receiving any penalty for exceeding the cap and possibly benefiting from being able to defer the timing of their taxation as excess concessional contributions are taxed after the relevant financial year while salary is generally taxed in the income year earned.
The amendments in the Tax Laws Amendment Bill, together with the introduction of a charge on excess concessional contributions in the Super Bill, are designed to:
- make superannuation taxation fairer for low and middle income earners who inadvertently breach the concessional contributions cap by taxing these individuals at their marginal tax rate; and
- ensure that individuals are taxed on excess concessional contributions in the same way as if they had received that money as salary or wages and had chosen to make a non-concessional contribution.
SUMMARY OF PROPOSED REGIME
The Tax Laws Amendment Bill amends the Income Tax Assessment Act 1997 and the Tax Administration Act 1953 to:
- repeal the excess contributions tax in relation to excess concessional contributions;
- provide for excess concessional contributions to be included in the individual’s assessable income and taxed at their marginal tax rate and subject to a charge (to be imposed by the Super Bill) to account for the deferral of tax;
- allow individuals access to a non-refundable offset equal to 15% of their excess concessional contributions, which will reduce the individual’s tax liabilities to account for the tax payable on the contributions by the superannuation provider; and
- allow individuals to make an election in the approved form to release any amount up to 85% of their excess concessional contributions from their superannuation account. In turn, this proportionately reduces the individual’s non-concessional contributions.
If an individual chooses to release the full 85% of their excess concessional contributions for a financial year, their excess concessional contributions will have no impact on their non-concessional contributions.
The Super Bill imposes an excess concessional contributions charge on those individuals who have concessional contributions in excess of their annual cap. The charge is:
- payable on the amount of an individual’s income tax liability for the relevant income year that is attributable to the individual having excess concessional contributions;
- payable at the same rate as the shortfall interest charge, which is based on the 90-day bank accepted bill rate plus a 3% uplift and will be calculated and compounded daily; and
- subject to a shortfall interest charge and general interest charge where applicable.
TIMING OF NEW REGIME
The amendments are proposed to apply to the 2013-14 income year and subsequent income years. This means the amendments will apply with respect to contributions made on or after 1 July 2013.