Rules changed for excess contributions tax

Treasurer Swan also announced that the Government will provide a once-off opportunity to withdraw excess concessional super contributions made during 2011-12 or later years up to a maximum of $10,000.

This is designed to soften the tax penalties on people who unintentionally exceed their contributions cap. Instead of effectively being taxed at 46.5% on the whole amount, the refunded contribution will be assessable to the contributor at their marginal tax rate.

For minor breaches of the contributions cap, it will therefore provide an opportunity to rectify the over-payment and only incur a modest penalty.

While this sounds sensible, the reality is that breaches of the cap can happen quite easily and quite often. In many cases, the excess contribution arises from an event or action that has nothing to do with the fund member. For example:

• sometimes there are 27 pay-periods in the financial year rather than 26;
• an employee might receive contributions from two employers;
• a contribution from a previous year might be counted by the fund in the current year; or
• the person might receive a pay rise which results in higher contributions being made by their employer.

There are also several unanswered questions regarding the operation of the new rules. In particular -

• how the excess contributions cap will interact with the non-concessional cap;
• what happens when someone breaches the cap by more than $10,000; and
• what the tax treatment of the refunded amount will be from the fund's perspective.

Is self-managed super right for you?

Self-managed super funds offer their members a range of important benefits.

1. Control over your investments

Research suggests that this is the number one attraction of SMSFs for most trustees/members. They like to have responsibility for their own financial affairs and would rather do their own investing, even if they made mistakes, rather than paying a professional do the work.

2. Greater flexibility

SMSFs certainly give members greater flexibility in managing their super. This applies at all stages in the management process, not just investing. There are also estate planning, investment and tax strategies that are either much easier or are only possible with a self-managed fund.

3. Possible cost savings

The poor performance and high fees charged by many managed superannuation products is another motivating force. With most retail funds charging around 2% per annum in management fees, it does not require a very high balance before the numbers start to favour the SMSF option.

4. Tax effectiveness

While this is seen as a bonus rather than a major motivation for most SMSF investors, it can still be very important when disposing of assets or planning the payment of member benefits.

But their are also some responsibilities and challenges which need to be considered.