Expert SMSF insights
Oh no, why did I get this super tax bill?
By Graeme Colley
The first Luke knew that he had a superannuation tax bill was when he received an excess non-concessional contribution assessment from the ATO. “How did that happen? But I’ve done everything right”, he thought. So, he set about retracing his steps.
As Luke went through his tax and super information, he saw that for the 2017/18 tax year he had contributed non-concessional contributions of $300k which was okay under the rules so he’d thought. From what he understood it was possible to access the three years bring forward rule as he was the right age – under 65 at the beginning of the year.
Then he went to the 2016/17 tax year and saw he had contributed $180k. This was within the non-concessional contribution limit for that year and by itself wouldn’t trigger the bring forward provision.
Damn – those insurance premiums!
The ATO’s excess contribution assessment of $104,000 didn’t make sense – until he remembered that every year $2,000 was automatically deducted from his bank account to pay the premium for a superannuation insurance policy.
The law regards premium payments as super contributions. The effect of a premium payment in the 2016/17 tax year – the year that he also made a $180k contribution – was to trigger the bring forward rule.
Add to that the ensuing contributions for FY 2017/18 – $300k plus a $2,000 premium – and he’s left with an excess of $104k.
It is possible in some situations that excess non-concessional contributions can be allocated to another tax year. However, for Luke that would be unlikely unless he was able to show that there was a ‘perfect storm’ which lead him down the wrong path resulting in the excess. In this situation he should have been aware of all the amounts that were being paid to superannuation, even the premium for his superannuation insurance policy.
Luke has two possible options available to him for the excess non-concessional contribution and has 60 days to decide which option he will take.
The first is to withdraw the excess contributions from the fund as well as 85% of the penalty earnings which was included in the ATO assessment. The refund of the contributions will be tax-free, but any penalty earnings will be included in Luke’s taxable income and he will end up paying tax of 15% on it. The ATO automatically amends Luke’s tax return and makes the adjustment to include the penalty earnings.
Luke’s second option is to not withdraw any excess contribution from the fund and pay tax equal to 47% of the excess. This is a high penalty considering non-concessional contributions are already after-tax amounts made to the super fund. The ATO will automatically amend Luke’s tax return and make the adjustment to include the excess which will be taxed.
Making non-concessional contributions to superannuation has become a much more precise science since the 1 July 2017 changes, which have reduced the amount you can make to super based on your age and the balance you have in super as at the end of the previous financial year. Next time Luke makes a non-concessional contribution to super he’ll need to look again to make sure he doesn’t go over his cap.