It’s no secret that superannuation is a key part of Australia’s retirement landscape. And for those lucky enough to amass a sizable super balance, there are opportunities to make the most of it via excess concessional contributions.
But it’s important to stay within the contribution limits to avoid negatively affecting your overall tax position.
This guide will explain what excess concessional contributions are and how they’re taxed. It’ll also provide tips on how to avoid exceeding the contribution caps.
What Is an Excess Concessional Contribution?
As the name suggests, a contribution occurs when money is deposited into a member account within an SMSF. Generally, these concessional contributions are made so that the contributor can claim a tax deduction. In other words, these are contributions made before tax and are instead taxed at the super tax rate of 15%.
However, the Australian Taxation Office provides strict guidelines as to who can make a concessional contribution and how much that contribution can be.
For example, the SMSF trustee can accept concessional contributions from a member, employer, spouse, or relative. In addition, if you transfer money into your super fund from personal funds, you can claim a tax deduction when you submit your annual tax return.
As for the concessional contribution cap, you can only contribute a certain amount to each financial here. As of July 2021, the cap is $27,500, which has increased since the previous limit of $25,000. If you make contributions higher than the ATO’s set limit, the contribution will be considered an excess concessional contribution.
You may be able to make an excess concessional contribution if you carry forward unused contributions from previous years. However, your total super balance must be less than $500,000. For example, suppose you contributed $15,000 in 2020. You could add the $10,000 that wasn’t used to your contribution in 2021. So your limit will increase from $27,500 to $37,500.
While it is good to put as much extra money as you can towards your retirement, the ATO has set these limits for a reason, and there are tax implications for overstepping them.
How are Excess Concessional Contributions Taxed?
If you opt to make use of previously unused portions of the concessional contribution cap, the excess contribution will be added to your assessable income and taxed at your marginal tax rate (less the tax offset of 15% already paid).
However, there are a few extra charges you need to consider in addition to being taxed at your marginal rate. These extra charges include the following:
- excess concessional contributions charge,
- shortfall interest charge, and
- general interest charge.
The Excess Concessional Contribution Charge
The excess concessional contributions charge applies because the tax on the excess concessional contributions is collected after normal income tax is collected – which means that you would have paid a higher rate at the time if you had not claimed the tax deduction.
The charge is calculated for the period starting at the beginning of the financial year in which the excess concessional contributions were made and ending the day before the due date for your first income tax assessment for that year.
However, there is some good news – the charge only applies for people who made contributions from the 2013–14 income year until the 2020-21 income year. So those who make contributions on or after 1 July 2021 that exceed their cap will no longer be liable to pay the charge.
The Shortfall Interest Charge
Once you have received an amended notice of assessment to account for the excess concessional contributions charge, you have 21 days to make payment. The shortfall interest charge covers the 21 days between receiving the amended notice, and the due date for the excess concessional contributions charge payment.
The General Interest Charge
If you miss the cut-off dates for the excess concessional contributions charge or the shortfall interest charge, you will be liable to pay an additional general interest charge (GIC).
It’s worth noting that this is a broad explanation of what these charges entail, and the exact amounts will be dependent on your specific circumstances. You will need to get advice from a tax expert to ensure that you are paying the applicable charges on the relevant dates.
Managing Your Excess Contributions
Once the ATO has issued an excess concessional contribution, you have 60 days discretion to decide what to do if you exceed your contribution caps:
- Leave the excess contribution in the fund: you can decide to leave the contribution as is in the SMSF and simply pay the marginal tax and penalties from your own funds. In this case, your excess concessional contribution will be added to your non-concessional contribution (However, be careful not to exceed the non-concessional contribution caps).
- Release the excess contribution from the fund: you can withdraw up to 85% of the original amount. If you only withdraw the amount needed to help you pay for the additional tax, the remainder of the funds will be added to your non-concessional amount. The withdrawal amount will be added to your assessable income and taxed at your marginal tax rate.
Once you have decided what to do, you must notify the ATO, who will issue a release authority to your SMSF to pay the amount over to them – your SMSF trust deed should make provisions to accommodate these kinds of payments.
The best way to avoid affecting your tax position is to keep track of your concessional contributions each year. Timing is also everything. For example, if you make an extra contribution in August instead of June, your contribution will count for the following financial year.
You should also make sure to stay on top of what is considered a concessional contribution and rather stop the extra contributions if it pushes beyond the ATO’s limits.
Beyond that, engaging an SMSF expert to help manage your records and tax implications is advisable – especially since navigating the complexities of the legal sphere in which SMSFs operate can get tricky.