Excess Contributions Tax Or Charge
What is excess contribution tax?
Excess contributions tax is additional tax which applies when super contributions are made which are more than the limits set by the tax rules. The limits are in place because superannuation which is within the rules and limits is taxed at lower rates.
How much tax is payable on excess super contributions?
Excesses of concessional and non-concessional contributions have differing tax treatments.
Excess Concessional Contributions
The excess tax on concessional super contributions is contained in a notice of assessment sent to you from the Tax Office.
Concessional contributions are those which are tax deductible, and are taxed at a rate of 15% in the super fund. They will include super guarantee, salary sacrifice and personal deductible contributions,
The Tax Office calculates the tax assessment by comparing the data in your tax return with that of the super fund.
The notice of assessment will include the excess contributions as income, so the “extra” tax will be tax at your marginal tax rate (potentially up to 47% including medicare).
The assessment will also include:
- time-based charges to compensate the Tax Office for the delay in tax collected on the excess contributions; less
- a tax offset at the rate of 15% of the excess contributions which recognises the 15% tax paid by the super fund; and
- an option to withdraw 85% of the excess contributions. There is a 60-day time limit, and an election is non-revocable.
Withdrawal of the excess contributions provides funds to pay the additional tax assessment should that be required.
Importantly, however, unless the excess concessional contributions are withdrawn, the full amount of the excess will be counted as non-concessional contributions.
Depending on your position, this could result in additional tax of 47% including medicare if non-concessional contributions are pushed over the non-concessional cap limits.
See in detail: If you exceed your concessional contributions cap
See also: Concessional contributions
Excess Non-Concessional Contributions
Non-concessional contributions are those for which a tax deduction is not claimable.
When excess contributions are detected, the Tax Office sends a determination which sets out two options, exercisable within 60 days and are non-revocable.
Option 1 is applied by default, and enables the withdrawal of the excess contributions plus 85% of associated earnings from the super fund. The associated earnings are added to your other income to be taxed at the applicable marginal rate, less a 15% tax offset which recognises the tax paid in the super fund. Defined Benefit funds do not have Option 1.
Option two allows the excess contributions and associated earnings to remain in the super fund. The excess contributions are taxed at the highest marginal tax rate, currently 45% plus medicare at 2%. The ATO provides authorisation to release sufficient funds from the super fund in order to pay the tax.
If the fund has insufficient funds to pay the tax the obligation to pay falls on the individual.
See in detail: If you exceed your non-concessional contributions cap
See also: Non-concessional contributions
How To Avoid Excess Contributions Tax
Tax on excess contributions is avoided by keeping contributions within the caps, or obtaining the Tax Commissioner’s exercise of discretion in limited circumstances.
Such circumstances may include a cap breach resulting from an event outside an individual’s control, such as the super fund receiving compensation from a financial services provider; or a contribution allocated by the Fund’s administration to a tax year earlier or later than intended.
The bases on which the Commissioner’s discretion is exercised are reviewed in Super contribution caps and further in Law Administration Practice Statement PS LA 2008/1.
Timing Of Contributions is Crucial
Contributions are regarded by the Tax Office as being paid at the time they are received by the fund, and the timing of contributions is a critical factor in determining the relevant year for caps calculations.
Employer contributions will most often be received by the fund after a period end. This means that if the period end also happens to be the end of the financial year, the contributions will form part of the later year’s contribution caps calculations.
The Tax Office recognises ‘contribution reserving’ as a valid strategy (see TR 2013/22). See more about this here and commentary here. Form NAT 74851 can be used to notify the Tax Office where concessional contributions in one financial year were not allocated until the following financial year by the Super Fund. This form cannot be used non-concessional contributions.
This page was last modified on 2021-08-13