What to do when you make an excess contribution to super?

What are concessional Contributions?

Concessional contributions to Superannuation are contributions made to Super that are made from Pre-tax monies and include contributions such as Superannuation Guarantee (S.G), Salary Sacrifice contributions and any other pre-tax contributions.

The main benefit of Concessional contributions is the tax saving that is generated when an individual’s Marginal tax rate is higher than the Super Concessional tax rate of 15%. This is because concessional contributions, rather than being taxed at an individual’s Marginal tax rate which could be up to 49% (including medicare Levy), the funds are taxed in the super environment as they enter at a concessional rate of 15%, saving money that would otherwise be paid in tax personally.

Typically, an individual is capped at $25,000 of Concessional contributions in any given financial year, this is what is known as the Concessional cap. However, from the 1st July 2018 onwards, an individual can utilise what is known as the catch-up rule, which if eligible, can give them the opportunity to contribute over the concessional cap during a single financial year.

The catch-up rule allows an individual to accrue unused concessional contributions from past periods and use them in subsequent financial years. To be eligible to make catch-up concessional contributions you must have a total super balance of less than $500,000 on the previous 30th June and have made concessional contributions less than the Concessional cap in previous financial years.

It’s important to remember that the ability to accrue unused concessional contributions only applies from the financial year ending 2019 onwards and does not apply to financial years preceding it. Also, unused cap amounts can only be carried forward up to five years.

What if I exceed the concessional Cap?

If you happen to exceed your concessional contribution cap throughout the financial year, when it comes time to prepare your tax return the ATO will issue you with what is known as Excess Concessional Contributions (ECC) determination.

What will happen is the contributions in excess of the concessional cap will be included on your assessable income for the tax year and taxed at your marginal tax rate (less a 15% tax offset). 60 days from the day of receiving the ECC determination you have the opportunity to withdraw 85% of your excess contributions from Super to assist in paying the tax owed.

In addition to the point above you will also be charged an ECC charge, which is approximately 4.54% for the July to September 2019 quarter. This charge is to consider the deferred payment of tax.

What are Non-concessional contributions?

Another type of contribution one can make to Super is known as a Non-concessional contribution, which are contributions that are made to super which come from Post Tax income. Similar to concessional contributions, Non-concessional contributions have a financial year cap of $100,000.

An individual can contribute over the $100,000 Cap by utilising the Bring-forward rule, which allows an individual who is under 65, to make non-concessional contributions over the Cap up to $300,000 by bringing forward two future periods contributions. Its important to understand that by bringing forward two future periods contributions you will be ineligible to contribute non-concessionally for the preceding three financial years from when the contribution is made.

What if I exceed my Non-concessional Contribution Cap?

If you happen to exceed your Non-concessional cap for a given financial year, it will result in paying more tax, unless you withdraw these funds from your Super Account.

Exceeding your non-concessional cap will lead the ATO to issue you with an Excess Non-concessional Contribution (ENCC) determination which outlines the options available to you and ask you to make a choice.

These options are:

1.       Withdraw the excess non-concessional Contributions and 85% of the associated investment earnings on the additional contributions within 60 days of the issue date of the determination. (The excess earnings will be included in your Assessable income for the financial year, however you will receive a 15% tax offset to reflect the tax already paid within super).

2.       Leave the excess contributions and associated earnings inside of Super, however choosing this option will result in paying the Highest marginal tax rate, even if your Marginal tax rate is lower with this tax being due within 21 days of electing this option. (Its important to remember that Non-concessional contributions come from Post tax funds, which have already paid tax, so electing this option would result in being taxed twice).

3.       The final option is the default decision if you fail to respond to the ENCC determination, and it automatically elects option 1.

 

Written by James McFall

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About the Author

Founding Director and principal adviser of Yield Financial Planning, I founded Yield in 2006 with a vision of enabling Australians to live the life they love now and retire securely.  Advising on Share and Property markets for more than 20 years, I understand that to provide the best advice, our team must have a deep connection with what is important to our clients and it is in our company DNA to constantly challenge ourselves to evolve and innovate ways we can deliver a consistently exceptional client experience.  I have been privileged to be recognised by the Financial Planning industry as the Certified Financial Planner (CFP) of the year, national finalist for 2018 and more recently by the IFA, as ‘Goals Based Adviser’ of the year finalist in 2019. This honour is alongside our company being named a finalist for the IFA Client Servicing Company of the year.