Excess concessional contributions tax

Excess concessional contributions tax

As you may or may not be aware, the government has abolished the excess concessional contributions tax. The excess concessional contributions tax is an additional tax you have to pay if you exceed the concessional contribution limit for the year.

From 1 July 2013, any individual who exceeds the concessional contribution cap will not have to pay 46.5% tax in total. Instead, excess concessional contributions will be included in the individual’s assessable income and the amount will be taxed only at their marginal tax rate.

Why?

In response to criticism that the current tax treatment of excess concessional contributions is unfair as the excess concessional contributions tax  is the same (46.5%) regardless whether you are a high or low income earner. Under the new rule, high income earners will be paying more tax on excess concessional contribution while low income earners pay less tax. This is fairer and a more equitable system for everybody.

What are concessional contributions?

Concessional contributions are employer contributions paid to a super fund on your behalf before any tax has been deducted from it. This includes superannuation guarantee (SG), salary sacrifice, employer voluntary contributions and personal contributions by a self-employed person for which a tax deduction has been claimed.

A non-concessional contribution is an after-tax contribution you voluntarily put in superannuation from your own money. It is called an after-tax contribution because you have already paid an income tax on it by your employer before paying you as a salary.

There is no change to the excess non-concessional contribution rule.

What is a contribution cap?

As superannuation is a tax-incentive savings for retirement and concessionally taxed, the government places a limit on the amount of money you can put in superannuation each financial year. This limit is called “contribution cap”. Contribution caps prevent wealthy people taking advantage of the concessional tax by pouring the money into the superannuation system.

So how much money can you put into superannuation each year? The answer depends on your age. The current contribution cap for a concessional contribution is $25,000pa. From 1 July 2013, this cap increases to $35,000 for people aged 60 and over and from 1 July 2014, for people aged 50 and over. It is anticipated that everyone will be able to contribute this amount by 1 July 2018 regardless of age.

How do you usually exceed the contribution cap?

Both SG and salary sacrifice contributions form part of the concessional contribution cap. People usually exceed their cap because they inadvertently salary sacrifice too much to super. For example, if you’re on the $25,000 cap, your SG for the year is $15,000 and you also salary sacrifice $1,000 per month ($12,000pa) to your super fund, the total concessional contribution your employer paid to your super fund would be $27,000. In this scenario, you exceed the cap by $2,000 and this amount will be included in your assessable income for the year.

There are also many other ways you can exceed this contribution cap.

Tax treatment of excess concessional contributions under the old rule

Prior to 1 July 2013, excess contributions are taxed at a further 31.5% by the Australian Taxation Office (ATO) in addition to the 15% contributions tax already deducted and paid to the ATO by the super fund. So under the old rule, everyone gets taxed at the same rate regardless whether you’re a low or high income earner.

How does it work under the new rule?

All concessional contributions are taxed at 15% by your super fund for the ATO when they are allocated to your account. For example, if your employer pays $1,000 to your super fund, $850 will go to your account and $150 will go to the ATO. If you exceed the cap for the year, the ATO will include the excess amount in your assessable income and this amount is taxed at your marginal tax rate. For example, let’s say your concessional contribution cap is $25,000 and your employer makes $30,000 concessional contribution to super on your behalf, you exceed the cap by $5,000. In this scenario, the $25,000 will be taxed at 15% by your super fund for the ATO and the $5,000 will be included in your assessable income for the year and be taxed at whatever your marginal tax rate is. This can be 19%, 32.5%, 37% or 45%, plus medicare. So if you’re a high income earner, your excess contribution may be taxed at 45% plus medicare which is no different to the old rule. However, the different is for low income earners, where any excess contributions will be taxed less.

Electing to have the excess concessional contribution released from your super fund

When you exceed the concessional contribution cap, the ATO will issue a Notice of concessional contributions determination to you. You can make an election to have up to 85% of excess amount released from your super fund and pay it to the ATO. The amount released is capped at 85% as the remaining 15% represents the contributions tax which has already been paid to the ATO by your super fund for which you’ll receive a tax offset. If the amount released exceeds your tax new liability, the ATO will pay you the excess amount as an income.

As you may or may not be aware, the government has abolished the excess contributions tax (ECT) for concessional contributions. The ECT is an additional tax you have to pay if you exceed the concessional contribution limit for the year.

From 1 July 2013, any individual who exceeds the concessional contribution cap will not have to pay 46.5% tax in total. Instead, excess concessional contributions will be included in the individual’s assessable income and the amount will be taxed only at their marginal tax rate.

Why?

In response to criticism that the current tax treatment of excess concessional contributions is unfair as the ECT is the same (46.5%) regardless whether you are a high or low income earner. Under the new rule, high income earners will be paying more tax on excess concessional contribution while low income earners pay less tax. This is fairer and a more equitable system for everybody.

What are concessional contributions?

Concessional contributions are employer contributions paid to a super fund on your behalf before any tax has been deducted from it. This includes superannuation guarantee (SG), salary sacrifice, employer voluntary contributions and personal contributions by a self-employed person for which a tax deduction has been claimed.

A non-concessional contribution is an after-tax contribution you voluntarily put in superannuation from your own money. It is called an after-tax contribution because you have already paid an income tax on it by your employer before paying you as a salary.

There is no change to the excess non-concessional contribution rule.

What is a contribution cap?

As superannuation is a tax-incentive savings for retirement and concessionally taxed, the government places a limit on the amount of money you can put in superannuation each financial year. This limit is called “contribution cap”. Contribution caps prevent wealthy people taking advantage of the concessional tax by pouring the money into the superannuation system.

So how much money can you put into superannuation each year? The answer depends on your age. The current contribution cap for a concessional contribution is $25,000pa. From 1 July 2013, this cap increases to $35,000 for people aged 60 and over and from 1 July 2014, for people aged 50 and over. It is anticipated that everyone will be able to contribute this amount by 1 July 2018 regardless of age.

How do you usually exceed the contribution cap?

Both SG and salary sacrifice contributions form part of the concessional contribution cap. People usually exceed their cap because they inadvertently salary sacrifice too much to super. For example, if you’re on the $25,000 cap, your SG for the year is $15,000 and you also salary sacrifice $1,000 per month ($12,000pa) to your super fund, the total concessional contribution your employer paid to your super fund would be $27,000. In this scenario, you exceed the cap by $2,000 and this amount will be included in your assessable income for the year.

There are also many other ways you can exceed this contribution cap.

Tax treatment of excess concessional contributions under the old rule

Prior to 1 July 2013, excess contributions are taxed at a further 31.5% by the Australian Taxation Office (ATO) in addition to the 15% contributions tax already deducted and paid to the ATO by the super fund. So under the old rule, everyone gets taxed at the same rate regardless whether you’re a low or high income earner.

How does it work under the new rule?

All concessional contributions are taxed at 15% by your super fund for the ATO when they are allocated to your account. For example, if your employer pays $1,000 to your super fund, $850 will go to your account and $150 will go to the ATO. If you exceed the cap for the year, the ATO will include the excess amount in your assessable income and this amount is taxed at your marginal tax rate. For example, let’s say your concessional contribution cap is $25,000 and your employer makes $30,000 concessional contribution to super on your behalf, you exceed the cap by $5,000. In this scenario, the $25,000 will be taxed at 15% by your super fund for the ATO and the $5,000 will be included in your assessable income for the year and be taxed at whatever your marginal tax rate is. This can be 19%, 32.5%, 37% or 45%, plus medicare. So if you’re a high income earner, your excess contribution may be taxed at 45% plus medicare which is no different to the old rule. However, the different is for low income earners, where any excess contributions will be taxed less.

Electing to have the excess concessional contribution released from your super fund

When you exceed the concessional contribution cap, the ATO will issue a Notice of concessional contributions determination to you. You can make an election to have up to 85% of excess amount released from your super fund and pay it to the ATO. The amount released is capped at 85% as the remaining 15% represents the contributions tax which has already been paid to the ATO by your super fund for which you’ll receive a tax offset. If the amount released exceeds your tax new liability, the ATO will pay you the excess amount as an income.

As you may or may not be aware, the government has abolished the excess contributions tax (ECT) for concessional contributions. The ECT is an additional tax you have to pay if you exceed the concessional contribution limit for the year.

From 1 July 2013, any individual who exceeds the concessional contribution cap will not have to pay 46.5% tax in total. Instead, excess concessional contributions will be included in the individual’s assessable income and the amount will be taxed only at their marginal tax rate.

Why?

In response to criticism that the current tax treatment of excess concessional contributions is unfair as the ECT is the same (46.5%) regardless whether you are a high or low income earner. Under the new rule, high income earners will be paying more tax on excess concessional contribution while low income earners pay less tax. This is fairer and a more equitable system for everybody.

What are concessional contributions?

Concessional contributions are employer contributions paid to a super fund on your behalf before any tax has been deducted from it. This includes superannuation guarantee (SG), salary sacrifice, employer voluntary contributions and personal contributions by a self-employed person for which a tax deduction has been claimed.

A non-concessional contribution is an after-tax contribution you voluntarily put in superannuation from your own money. It is called an after-tax contribution because you have already paid an income tax on it by your employer before paying you as a salary.

There is no change to the excess non-concessional contribution rule.

What is a contribution cap?

As superannuation is a tax-incentive savings for retirement and concessionally taxed, the government places a limit on the amount of money you can put in superannuation each financial year. This limit is called “contribution cap”. Contribution caps prevent wealthy people taking advantage of the concessional tax by pouring the money into the superannuation system.

So how much money can you put into superannuation each year? The answer depends on your age. The current contribution cap for a concessional contribution is $25,000pa. From 1 July 2013, this cap increases to $35,000 for people aged 60 and over and from 1 July 2014, for people aged 50 and over. It is anticipated that everyone will be able to contribute this amount by 1 July 2018 regardless of age.

How do you usually exceed the contribution cap?

Both SG and salary sacrifice contributions form part of the concessional contribution cap. People usually exceed their cap because they inadvertently salary sacrifice too much to super. For example, if you’re on the $25,000 cap, your SG for the year is $15,000 and you also salary sacrifice $1,000 per month ($12,000pa) to your super fund, the total concessional contribution your employer paid to your super fund would be $27,000. In this scenario, you exceed the cap by $2,000 and this amount will be included in your assessable income for the year.

There are also many other ways you can exceed this contribution cap.

Tax treatment of excess concessional contributions under the old rule

Prior to 1 July 2013, excess contributions are taxed at a further 31.5% by the Australian Taxation Office (ATO) in addition to the 15% contributions tax already deducted and paid to the ATO by the super fund. So under the old rule, everyone gets taxed at the same rate regardless whether you’re a low or high income earner.

How does it work under the new rule?

All concessional contributions are taxed at 15% by your super fund for the ATO when they are allocated to your account. For example, if your employer pays $1,000 to your super fund, $850 will go to your account and $150 will go to the ATO. If you exceed the cap for the year, the ATO will include the excess amount in your assessable income and this amount is taxed at your marginal tax rate. For example, let’s say your concessional contribution cap is $25,000 and your employer makes $30,000 concessional contribution to super on your behalf, you exceed the cap by $5,000. In this scenario, the $25,000 will be taxed at 15% by your super fund for the ATO and the $5,000 will be included in your assessable income for the year and be taxed at whatever your marginal tax rate is. This can be 19%, 32.5%, 37% or 45%, plus medicare. So if you’re a high income earner, your excess contribution may be taxed at 45% plus medicare which is no different to the old rule. However, the different is for low income earners, where any excess contributions will be taxed less.

Electing to have the excess concessional contribution released from your super fund

When you exceed the concessional contribution cap, the ATO will issue a Notice of concessional contributions determination to you. You can make an election to have up to 85% of excess amount released from your super fund and pay it to the ATO. The amount released is capped at 85% as the remaining 15% represents the contributions tax which has already been paid to the ATO by your super fund for which you’ll receive a tax offset. If the amount released exceeds your tax new liability, the ATO will pay you the excess amount as an income.

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Filed under: Basic Tax

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