Blogs

By Mark Ellem

Previously we looked at the draft legislation to allow the refund of excess non-concessional contributions. Just before Christmas the draft legislation for these new rules were revised, with some welcome and interesting changes.

This legislation, once passed (in its current form), will apply to any excess non-concessional contributions (NCCs) from 1 July 2013 and provides a similar solution to that of excess concessional contributions. The main features of the draft legislation, noting the changes from the original draft, are as follows:

• A member who has excess NCCs will be notified by the ATO of the amount of excess NCCs, plus ‘associated earnings’. The member will then have the opportunity to elect to refund the entire amount of excess NCCs plus 85% of the ‘associated earnings’. In the original draft legislation the option was to refund 100% of the ‘associated earnings’, however, this has been reduced to 85% to recognise fund 15% earnings tax; 

• ‘Associated earnings’ are calculated using an average of the GIC rate for each quarter of the financial year in which the excess NCCs are made. Further, regardless of when the excess NCCs were actually made, the calculation is to be performed with effect from 1 July of the financial year in which the excess NCCs were made. For the 2013/14 income year the rate used to calculate “associated earnings” is 9.66% pa or 0.02646575% daily; 

• Where the member has elected to refund the excess NCCs, no excess NCCs tax will apply, however, 100% of the ATO advised ‘associated earnings’ will be included in their personal tax return to be taxed at their marginal tax rate (MTR). They will also be entitled to a 15% tax offset. The original draft legislation did not allow for the 15% tax offset, which was a point highlighted in our previous newsletter article as effectively double taxation; 

• Where an individual chooses not to refund the excess NCCs, or the fund is unable to refund the amount, for example the member’s interest is a defined benefit interest, excess NCCs tax will still apply; 

• Where an individual has a ‘nil’ superannuation interest, excess NCCs tax will not apply. However, 100% of the calculated ‘associated earnings’ will still be required to be included in the individual’s personal tax return, with a 15% tax offset applying. A member that has a superannuation interest that has commenced a pension is not a superannuation interest with a value of ‘nil’. Consequently, if the amount of excess NCCs and ‘associated earnings’ is not refunded, then excess NCCs tax will be imposed, at the top MTR, currently 47%. This could be a problem for non SMSFs as they may not allow a refund/release out of the pension interest; 

• The amount released, being the excess NCCs and ‘associated earnings’ is not subject to the proportioning rule. Only when an end superannuation benefit is paid is the proportioning rule applied. Similar to other release authority payments, effectively this means that the amount released will come from the taxable component of an accumulation interest and for a pension interest, it will be applied across the relevant tax components that were established when the pension was commenced.
  
  The original draft legislation included a specific provision that required the amount paid, to first come from any tax free component held in the fund. This specific provision does not appear in the revised draft legislation. Whilst it is not a requirement that the refunded amount come from the same fund that received the excess NCC, this change now potentially opens up some interesting planning strategies for deliberately exceeding a person’s NCC cap to effectively “wash” taxable component to tax free component.

• Once a superannuation fund receives a release authority it has 21 days to comply with it. The original draft legislation required the release authority to be complied with in 7 days. This is a welcomed change.Whilst a number of the issues highlighted in my previous article on this topic have been addressed, the revised draft still does not solve the inadvertent triggering of the bring forward rule (outlined in my previous article on this topic).

Whilst a number of the issues highlighted in my previous article on this topic have been addressed, the revised draft still does not solve the inadvertent triggering of the bring forward rule (outlined in my previous article on this topic).

Even though this new law, to allow the refund of excess NCCs, is to apply from 1 July 2013, no actual refunds should be processed until a valid release authority has been received from the ATO. Before this can happen, the draft legislation must be passed by the Parliament and the Bill enacted into law. Parliament does not sit until February 9, 2015, so there could still be some time before any practical application of this new rule.