This change was announced alongside the 2014 federal budget. Currently there is an option to have excess concessional contributions refunded, but not excess non-concessional contributions.
Under the new rules super fund members will have the option of having excess non-concessional contributions refunded, along with ‘associated earnings’.
The refunded excess non-concessional contribution will be non-assessable non-exempt income, so it won’t be taxed. According to the draft explanatory memorandum (EM) “regulations will be made to ensure that the release authority for this measure satisfies a condition of release.”
The associated earnings will be calculated by the ATO based on deemed rate of interest and included in the assessable income of he member, to be taxed at individual marginal tax rate.
The option to have excess non-concessional contributions refunded will only apply for contribution made in the 2013/14, or later, later financial years.
How will excess non-concessional contributions be refunded?
Under the new system the ATO Commissioner will issue a written determination to the fund member, stating that they have excess non-concessional contributions. The member can elect to have the full amount of the excess and associated earnings refunded, or to not have any amount refunded.
If they choose to have the excess non-concessional contribution refunded, they can select which of their super funds will make the refund. Multiple super fund may be selected, with the amount to be refunded from each fund to be nominated by the member.
If the superannuation balance is nil they do not have to have an amount refunded in order to not pay excess contributions tax. They will still have to include the associated income in their tax returns.
The draft rules don’t change if the member has commenced a pension. The EM notes that this includes if the pension cannot be commuted, or if “this measure proves problematic or otherwise undesirable for the individual or the superannuation provider. ”
The amount refunded must first come from the tax-free component of the superannuation interest held by the super fund, before reducing any taxable component. According to the EM this “reduces the possibility of individuals obtaining a taxation advantage from the release process by using the release authority to alter the tax treatment of future payments from their superannuation interests. ”
An election must be made within 60 days of the notice being issued, otherwise the amount cannot be refunded. However another election can be made if the first release is unsuccessful. Once the election is made the ATO commissioner will issue a release authority to the super fund, which must pay the amount within 7 days.
The ATO commissioner will still have the power to disregard excess non-concessional contributions.
Associated earnings for refunding excess non-concessional contributions
Refunding excess non-concessional contributions includes both the excess of the contribution along with the associated earnings. These deemed earnings are included in the taxpayers assessable income, to be taxed at marginal rates.
The amount of the associated earnings is calculated from the first day of the financial year in which the contribution was made until the ATO commissioner issues the first excess non-concessional contributions determination. It appears that calculating from the start of the year, instead of when the contribution is actually made, is because the ATO does not know on what date contributions are made.
If legislated as drafted the associated earnings will be calculated according to this formula:
Proxy rate x (Excess x Sum of earlier daily proxy amounts)
The proxy rate is set at the lower of the General Interest Charge (GIC) or a rate set out in a legislative instrument by the minister.
The draft EM uses the example of a super fund member who exceeds their non-concessional contributions cap for the 2013/14 financial year by $100,000. The ATO Commissioner issues the notice on 1 November 2014, so the associated earnings is calculated from 1 July 2013 to 1 November 2014, resulting in $13,814 of additional assessable income.
The GIC annual rate for the October to December quarter 2014 is 9.63%. However the associated earnings are calculated on a daily basis, compounding, using the GIC daily rate.
The exposure draft consultation is called Reforming the Superannuation Excess Non-Concessional Contributions Tax, with consultations closing on Friday the 24th of October.
After this date there are only 12 sitting days of Parliament scheduled before the end of the calendar year.
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