SMSF Technical Education & Strategies

Excess contributions tax - avoid 93% double taxation

Since the 2006 Federal Budget, there has been a limit on how much you can contribute to your SMSF. Quite simply, if you go over those limits you get taxed at a penalty rate. However, did you know that if you really muck it up there is the possibility to pay up to 93% tax on the excessive portion of a contribution ?

Firstly, lets review the limits. Click Here to open up our table which shows the contribution limits and the tax rates that apply to excessive amounts.

The key point in all of it is this : if you exceed your concessional contribution limit, the gross excessive amount is then treated as a non-concessional contribution and is added to that limit also. If you have already made contributions that take you up to your non-concessional contribution limit (including any bring forward provisions) then this excessive concessional contribution will push you over BOTH limits, and will mean you will pay penalty tax rates twice on the excessive amount. This is what is meant by "double taxation", with the aggregate amount payable on the excess portion being 93%. Lets look at an example to show how it all works:

Example:

Bob is 55 years old and earns a salary income of $120,000 a year. Given his age, his concessional contributions cap will be $50,000 and his non-concessional contributions cap will be $150,000 for the 2010/11 financial year, although he may also use the 3yr bring forward provisions such that if he exceeds his non concessional contributions cap this year he will trigger the bring forward period and will be able to contribute up to $450,000 in any amounts over the 3 year period.

Now lets say that Bob salary sacrifices $50,000 of his salary into his SMSF, thinking that he is maximising his concessional contribution limit. But he has forgoten about his employer also contributing the required 9% of his salary or $10,800. Therefore his total concessional contributions are actually $60,800, meaning he has an excess amount of $10,800. Lets also assume that Bob has made a non-concessional contribution of $450,000 with the proceeds of a property sale, again thinking that he has maximised his non-concessional contributions limit.

This is how it all breaks down:

Firtsly, all the concessional (employer) contributions that the fund receives will form part of the assesable income of the fund, and be subject to 15% tax (lets assume there are no deductons, rebates, imputation credits etc to reduce this amount). Bob will then have to pay excess concessional contributions tax on his excess concessional contributions of $10,800 at a tax rate of 31.5%.

However, as this amount is also counted as a non-concessional contirbution, and he has already used up his NCC limit, he will also have to pay excess non-concessional contributions tax of 46.5% on this $10,800 amount (note the amount is not reduced by the tax paid either by the fund or the excess concessional contributions tax).

So the tax on the contributions will be :

$50,000 (his concessional contributions limit amount) will be taxed at 15% in the fund
$10,800 (his excess concessional contribution amount) will be taxed at 15% in the fund + 31.5% excess contributions tax. (Bob will have to pay this second amount himself.

$10,800 (his deemed excess non-concessional contribution amount) will be also be taxed at 46.5%

So as you can see above, Bob's $10,800 excess contribution is taxed overall at 15% + 31.5% + 46.5% = an overall rate of 93%.

Do your absoute best to avoid this situation by monitoring your contributions over each financial year, and be aware of your conribution caps. And don't forget about your employer contributions. As you have seen above, these can be the ones that tip you over the limits and virtually get entirely thrown away in taxation.