What are non-consessional contributions and how will they effect me....
Non-concessional contributions are personal contributions made to a superannuation fund where a tax deduction is not being claimed for the contribution. Contributions made on behalf of a spouse are also treated as non-concessional contributions. Non-concessional contributions are subject to an annual cap or limit that is currently six times the concessional contributions cap of $25,000. That is, the annual non-concessional contributions cap is $150,000.
A person aged 64 or younger on the 1 July of the financial year in which they intend to make a non-concessional contribution may bring forward up to three years contributions and contribute up to $450,000. This "bring forward" provisions is triggered when a non-concessional contribution of more than $150,000 is made in a particular financial year. When the bring forward is triggered, the maximum non-concessional contributions that can be made in that and the following two financial years is $450,000.
By way of example, if a non-concessional contribution of $151,000 was made in the 2008/09 financial year, the maximum that may be contributed during the course of the next two financial years is $299,000.
Keeping accurate records of contributions made in previous financial years is of critical importance. One area where we have noticed problems with excess contributions arising is where life insurance held through superannuation. The premiums paid for life insurance are in essence superannuation fund contributions that could result in an unintentional excess contribution arising.
The following example may appear extreme but we are aware of a number of situations where excess contributions have arisen in very similar circumstances.
Let's consider a case where a person is looking to maximise non-concessional contributions in the lead up to retirement. They make non-concessional contributions of $150,000 in the 2009/10 financial year with the intention of contributing $450,000 in the 2010/11 financial year. In addition to the $150,000 non-concessional contribution made in 2009/10, they also paid a life insurance premium of $200 for insurance held through a superannuation master trust.
In this case, the actual non-concessional contributions made in the 2009/10 financial year amounted to $150,200, thereby triggering the bring forward provision. As a result, the maximum that can then be contributed over the course of the next two financial years is $299,800. If $450,000 was contributed in either of the following two financial years, an excess contribution of $150,200 will arise. The excess contributions tax amounts to $69,843!
Whilst this scenario might sound extreme, there are reported cases of significant excess contributions arising in very similar circumstances.
To avoid an excess contribution tax assessment arising from excessive non-concessional contributions the following steps should be taken:
- Keep very accurate records of all contributions made to all superannuation funds
- Excess concessional contributions also count against the member's non-concessional contribution cap;
- Remember to take into account life insurance premiums where the life insurance is held through superannuation;
- Don't forget to take account the value of any in-specie contributions that may have been made; and
- Watch the timing of contributions as contributions made close to the end of a financial year may not be recorded by the super fund until the following financial year
For financial planners and accountants, both in respect of existing clients and when taking on new clients, an exhaustive examination of past the contribution history should be undertaken before making any future contribution recommendations. Those taking advantage of the higher caps that apply to the small business CGT concessions (up to $1,155,000), or making contributions with the proceeds of a personal injury settlement (no cap applies provided certain conditions are met), prescribed election forms must be lodged with the superannuation fund before or at the time the contribution is made. Failure to provide the appropriate election form/s may result in a contribution being misreported by the superannuation fund.
Excess non-concessional contributions can be avoided. As the Commissioner of Taxation appears to be reluctant to exercise discretion when it comes to excess contributions (only around 2% of excess contributions assessments succeed in having the excess contribution ignored or being allocated to another year), asking for forgiveness does not appear to be a viable option.
The above Information kindly provided by Professional Investment Services Pty Ltd