Over and over again we have warned you not to make the mistake, coming up to the end of June, to exceed your contribution limit. (What happens if I exceed contribution Caps).We have reminded you that you are only entitled to make a $25,000 total concessional contribution if you are under the age of 50 years ($50,000 if over 50) this year to 30 June 2012.
If excess concessional contributions are made to the SMSF, then an additional 31.5% tax will be levied on these excess amounts. Effectively, it is being assumed that you are on the top marginal tax rate of 46.5% by adding this additional tax to the usual tax rate for concessional contributions of 15%. So after all of this, you may be happy to hear that Treasury has on Tuesday this week published the draft amendment regulations. They are looking for public submissions and commentary by 29 June and basically they are proposing to allow a refund of an excess contribution in certain circumstances. (Treasury submission page)
Essentially the Government announced the refund of excess concessional contributions measure in the 2011-12 Budget. This measure is designed to give eligible individuals the option to have excess concessional contributions of $10,000 or less effectively refunded to them. The excess concessional contributions will be assessed as income at their marginal tax rate, rather than incurring excess contributions tax.
The draft regulations propose that if all of the following conditions are met, the Commissioner may issue an individual with the notice of offer for a refund:
- the Commissioner is satisfied that the individual has excess concessional contributions for a financial year commencing on or after 1 July 2011;
- the amount of those excess concessional contributions is $10,000 or less;
- the individual does not have excess concessional contributions for an earlier financial year starting from 1 July 2011 (disregarding any previous application of this measure); and
- the individual has lodged an income tax return for the income year that corresponds to the financial year within 12 months of the end of that year, or within such longer period as the Commissioner allows.
If the individual accepts the refund offer, the Commissioner will make a written determination that the individual's excess concessional contributions for the financial year are to be disregarded (for the purposes of the provisions in the income tax law dealing with excess contributions tax). The amount of the excess will be included in the individual's assessable income for the corresponding income year.
Why would you do this? Well, if you are earning around $85,000 pa and you make concessional contributions in excess of $25,000, lets say you contribute$32,000 this year. Why would you want to pay excess contributions tax at the rate of 46.5% because your marginal tax rate would only be 37%.
If these regulations become law it would make more sense to apply for a once off refund via the Commissioner to ask for the excess (in this case $7,000) to be refunded to you and rather taxed at your marginal rate ie 37%.
Clearly this is not the ideal solutions as it is only allowed as a once off correction, so don't make the mistake twice! Also it is really not encouraging us to save more for our retirement. The real issue is the level of the contribution cap surely, but that is another political argument we just cannot win right now!