Newsletter No. 8, August 2012

Refund of Excess Concessional Contributions

The new law “Refund of Excess Concessional Contributions (RECC)” received Royal Assent on 27 June 2012.

The new law allows members of SMSFs to pay tax at their marginal tax rate instead of the current excess contributions tax rate of 46.5% on their excess concessional contributions.

The concessional contributions caps

Financial   Year

Under   aged 50

Aged   50 or over

1 July 2011 to 30 June 2012

$25,000

$50,000

1 July 2012 to 30 June 2013

$25,000

$25,000

Why has the Government introduced this new law?

The Government understands that people make mistakes and should not be penalised for the first time they make a mistake and that people should not be punished for unintentional insignificant breaches of the contribution caps.

Here is how the RECC law works:

1. When the Australian Taxation Office (ATO) realises that you have made concessional contributions into your SMSF in excess of the concessional contributions cap (e.g. $25,000 or $50,000 for 2011/2012), you will receive a refund offer from the ATO, provided the excess amount is no more than $10,000.  If you have exceeded the cap by more than $10,000, you will not receive the refund offer.

2. The  refund option is a once only offer and is only made to you the first time you exceed the concessional contributions cap by no more than $10,000 any time after 1 July 2011.  This also means if you have exceeded the concessional contributions cap prior to 1 July 2011, the refund option is not available to those excess contributions.  You can take up the refund option on your first excess concessional contributions which occurred after 1 July 2011, just not on the ones that occurred prior to 1 July 2011.

3. If  you do receive a refund offer, you can either choose to take up the offer or not. But, you need to keep in mind that the option will not be offered to you again in the future. Therefore, you cannot choose to save the offer for another financial year when you exceed the concessional contributions again. The offer is only available on your first excess concessional contribution that occurred after 1 July 2011. What this means is if someone has not exceeded the cap by very much this time around, but believes that they may exceed the cap by a larger amount in the future, they cannot save the refund option for another time. It will only be offered to them the first time they exceeded the cap, any time after 1 July 2011. If they were to decline the offer, it would not be available for any subsequent year.

4. If you decide to take up the offer, you have 28 days to accept the offer by letting the ATO know in an “approved” form.  It has to be in a proper ATO form and not just by writing a letter to the ATO. If you decide not to take up the offer, then you do not need to do anything.  The ATO will treat the non-receipt of the approved form as your decision to decline the offer.

5. By accepting the refund offer, your excess concessional contributions will be treated as your assessable income and taxed at your marginal tax rate, instead of the flat 46.5% tax rate. Your personal income tax assessment will be amended to include the excess concessional contributions as part of your assessable income in the year in which the excess concessional contribution was made to your      superannuation fund.

6. The 15% tax that your superannuation fund already paid on your excess concessional contributions will provide you with a tax offset of 15% on your amended assessment.

7. The liability resulting from the amended assessment will be paid by your superannuation fund. If there is not enough money in your superannuation fund to pay the tax liability, then you will have to pay the tax liability from your own sources.

8. By accepting the refund offer, the excess concessional contributions will not count towards the non-concessional contributions cap.  Whereas, by not accepting the refund option your excess concessional contributions will count towards the non-concessional contributions cap.

9. An accepted refund offer will increase your assessable income and hence taxable income, which may have flow-on effects to other government benefits or payments such as child support, super co-contributions, low income tax rebates and other means tested benefits.

10. The refund will not be used to reassess whether you are entitled to deducted personal superannuation contributions. Nor will the refund be used to reassess whether you have satisfied the 10% income for Government co-contribution for low income earners.  However, the test is one of several used to determine whether you are eligible to be paid a co-contribution and low income superannuation contributions.

 

Example 1: The choice not to accept a refund offer means you are not entitled to a future refund offer

The Commissioner of ATO determines that you have excess concessional contributions of $5,000 for the 2011-2012 financial year and determines that you are eligible for a refund offer.  You choose not to accept the offer and therefore is assessed for excess contributions tax (i.e. $5,000 x 46.5% = $2,325 tax liability).

Later, the Commissioner determines you have excess concessional contributions for $6,000 for the 2012-2013 financial year.  You are not eligible for a refund offer because you had $5,000 excess concessional contributions in the 2011-2012 financial year and the offer of a refund is a once-only offer the first time you exceed the cap.

 

Example 2: Excess concessional contributions of $10,000 or less change to more than $10,000 after the payment is received

The Commissioner determined you have excess concessional contributions for a financial year of $5,000 and you are eligible for a refund offer.  You accepted the offer to make a determination to disregard the excess contributions.  Your superannuation fund paid $4,250 to the Commissioner under a release authority (i.e. $5,000 – 15% tax already paid = $4,250).

The Commissioner amended your income tax assessment to include $5,000 in assessable income and allow an offset of $750 (i.e. 15% tax already paid by the fund).  The Commissioner also applied a credit of $4,250 to your tax liability.

The Commissioner receives new information about your concessional contributions and is satisfied that you have $13,000 excess concessional contributions for the financial year (including the $5,000 disregarded in the determination).

The Commissioner cannot revoke or vary the determination.  Instead, the Commissioner must assess you for excess contributions tax on $8,000 ($8,000 x 46.5% = $3,750).

Monica Rule is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Fund”.  Her advice is general in nature and readers should seek their own professional advice before making any financial decisions.

Monica Rule