New rules for excess concessional contributions - what do they really mean?

The concessional contributions cap increases from $25,000 to $27,500 from 1 July 2021 – a good thing for anyone wanting to add to their super. But there’s another change just passed by Parliament that relates to the consequences of exceeding this cap.

Historically, there were three consequences when the concessional contributions cap was breached:

1. The excess was retrospectively added to the individual’s personal taxable income for the year in which the contribution was made and taxed like other income, less a special tax offset of 15% (to reflect the tax already paid by the super fund). This usually resulted in an extra tax bill being issued to the individual,
2. There was a special additional amount to pay called the “excess concessional contributions charge”. Conceptually this was like interest on the extra tax bill, and
3. Unless the excess (less 15% contributions tax) was taken out of superannuation, it would count towards the individual’s other contribution cap – the limit on non-concessional contributions. If this in turn caused the individual to exceed their non-concessional cap, refunding that excess was generally the only financially sensible option.

Conceptually the three make sense together. Someone going over the concessional contributions cap is effectively getting too much into super on a very tax preferred basis. So Step 1 was designed to reverse this and make sure the money is taxed just like it would have been if received directly by the individual. Step 2 was to provide a bit of extra incentive not to exceed the cap – by charging interest on the “underpaid tax” (and the interest is calculated in a fairly harsh way). And finally Step 3 was designed to ensure that excess concessional contributions didn’t provide a roundabout path to getting more into super than the law allowed. One way or another it would be limited by a cap.

The change from 1 July 2021 will be to remove (2) – there will no longer be an excess concessional contributions charge. Note that this only applies for contributions during 2021/22 and beyond – it’s entirely possible that individuals will continue to receive assessments for excess concessional contributions that include the charge well into 2021/22 and even 2022/23.  These will be for contributions made before 1 July 2021.

To be honest, the change doesn’t suddenly make it enormously attractive to exceed the concessional contributions cap.  There is certainly no real tax incentive to do so (Step 1 takes care of that). And it won’t allow a whole lot more money into super that wouldn’t otherwise be possible (Step 3 takes care of that).  It just removes an extra sting in the tail for people who have an excess by accident.

Technically there’s an opportunity to use excess concessional contributions as a mechanism to delay paying tax but I suspect this is more theoretical than practical. 

For example, Geoff is normally on the highest personal tax rate (45% + Medicare levy of 2%). He asks his employer to salary sacrifice $50,000 extra (over and above their concessional contributions cap) into super. That means he initially avoids the personal income tax on this amount ($23,500) and his super fund only pays tax at 15% ($7,500) – an apparent saving of $16,000. After a while (but possibly not for a year or two after the contribution is made), Geoff will receive their extra tax bill (Step 1) for $16,000. The fact that he won’t also be charged interest on this $16,000 means he’s had had a benefit of sorts – he has managed to hold on to an extra $16,000 until the ATO caught up with him. But it’s unlikely to be enormous.

As is the case now, anyone who has an excess can choose to have the money refunded or leave it in super. In the example above, the individual would be invited to have up to $42,500 refunded (the $50,000 excess contribution less the 15% tax that will have already been paid by the super fund). This amount would be paid to the ATO, they will deduct the extra tax owing ($16,000) and pay whatever is left to Geoff (say $26,500).

It is almost always beneficial to take the refund option.

Geoff might need it to pay the extra tax bill (otherwise, he will have to find the $16,000 from his personal savings)!

But even if this isn’t the case, there are downsides to just leaving the money in super.  In this example, it would mean that the whole $50,000 would count towards Geoff’s $110,000 non-concessional contributions cap. This is despite the fact that only $42,500 of it is left in the fund (after the 15% tax paid by the super fund) and even more tax will have been paid by Geoff personally. The whole $42,500 (plus earnings) will also be part of the taxable component of his super. 

In contrast, refunding the $42,500 out of super and then putting whatever Geoff ends up with (say $26,500 as above) back in again as a non-concessional contribution gets a completely different result. Geoff would only use up $26,500 of his cap and it would be part of the tax free component of his super.

There is also a timing difference that may be valuable or detrimental.

If Geoff leaves the excess in super, $50,000 will count towards his non-concessional cap when he made the excess concessional contribution (let’s say that is 2021/22). If he ends up refunding the maximum amount and re-contributing what’s leftover after all taxes have been deducted to super, that may not occur until 2023/24 or even later. The contribution will count towards his non-concessional cap at the time it’s made. If Geoff’s super balance is worth more than $1.7m by then, he will have a non-concessional contributions cap of $nil. That might be one scenario where Geoff is better off leaving the excess concessional contribution in super to begin with.

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