What happens if I exceed the Contributions Caps

There are various consequences if these limits are exceeded and none of them are good for the member, and some of them are downright catastrophic. So it is very important that you stay on top of the contributions you are making to the fund throughout the year.

As in many situations within the SMSF world, you are forced to wear two hats, that of the member and that of the trustee. What is applicable to you as a member in terms of what you may like to do, what sort of contributions are advantageous to you and which ones are not, is largely irrelevant to you when you wear your trustee hat.

This can be a very important distinction if, as a member, you make a mistake in the type of contribution you make. As trustee, you can't necessarily just reverse that mistake. There will be times when you are forced to live with it due to the administrative requirements and restrictions placed on you by your trust deed and/or the various pieces of legislation that govern what you can legally do.

• Prior to 2012 a member under the age of 50 can contribute $25,000 per annum without breaching the concessional cap. A member over 50 years of age can contribute $50,000 per annum.
• We cannot stress enough that there are no age differences in the non-concessional cap, with this being set at 6 times the standard concessional cap. So this makes it $150,000 at present.
• The legislation does allow for a bring forward provision that allows a member to contribute not only the current year's allowance, but also the following 2 years limit as well. Once this bring forward provision is activated it cannot be undone, and any amount over the $450,000 if contributed in the relevant 3 years will be excessive.

It is also important to note that the bring forward provision can only be taken advantage of if it is activated prior to the member turning 65 years of age.

• Much of the complexity surrounding contributions comes from the introduction of contribution caps. These caps effectively limit the amount the member can put into Superannuation in any given year. However, an important distinction between member and trustee responsibilities needs to be made. It is the member's responsibility to ensure that they don't exceed their contribution caps, not the fund's. From a practical perspective this basically means that the transaction will still stand, even if an error has been made and the ramifications of this can be disastrous.
• 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%.
• In addition to the extra tax, the excessive amount will also count toward your Non-concessional cap. This seems a little unfair given that the contribution is still added to the taxable component of the super fund rather than the tax free component, but this is the rule, and its important to be aware of.
• If contributions are made in excess of the non-concessional cap, these contributions are taxed at the rate of 46.5%. Given that the member has already paid marginal rates of tax on their income prior to making the contribution, the punitive nature of the excess tax is clear.
• In limited circumstances it is possible for the trustee to return non-concessional contributions that are in excess of the cap. However this only deals with payments in excess of $150,000. For example if $165,000 was placed in the fund, the trust could return the excess $15,000 within 20 days of the contribution being made. However, if the whole $165,000 was excessive, the trustee can still only return $15,000 with the remaining $150,000 subject to the excess tax.

The upshot of these penalty taxes is that it is possible for a person, through a simple mistake in how much contributions they made to pay up to 93% tax on those contributions.

• In this example consider a 48 year old member in year 1, thinking that they should really give their superannuation a bit of a kick along decided to place $300,000 into their SMSF as a non-concessional contribution. By contributing more than $150,000 in any given year, they have now triggered the bring forward rules and are limited to a total of $450,000 in the current and following 2 years.
• In year 2 their income picks up and they decide to reduce tax by salary sacrificing up to the concessional limit for a member under age 50. They also find themselves in a position to contribute a further $100,000 as non-concessional contributions. There are still no problems with what has occurred so far as their total contribution across 3 years is still less than $450,000.
• In year 3, the member picks up another consulting role with an unrelated 3rd party employer. They continue with their salary sacrifice they set up the year previous, but forget that the new employer is also going to make mandated SGC contributions. As a result, they exceed their concessional cap by $10,000. They also add a further $150,000 non-concessional contribution, only thinking about the yearly limit and forgetting that they had triggered the bring forward provisions 2 years ago.
• Now if there were no contribution limit issues, the tax on this member's contributions in year 3 would only be 15% of the $35,000 or $5,250. However, the member has breached the cap rates in two ways. First, the $35,000 concessional contribution is above his cap rate by $10,000. This excess amount is thus taxed at an additional rate of 31.5% or $3,150. The excess amount is also then counted against his non-concessional cap. His second breach of the cap is that the $150,000 contributed non-concessionally (when you add back the last 2 years contributions) brings total non-concessional contributions to $550,000. This is $100,000 more than allowed and because no single contribution was above $150,000 the trustee is not permitted to return any of the excessive amounts. This excessive amount is taxed at 46.5% or $46,500. Worse still the $10,000 from breaching the concessional cap is also added to this and taxed at 46.5% or $4,650. So total tax for the year is a staggering $59,550.
• This means that on the $10,000 they were in excess of their concessional cap, they have paid tax of $9,300 or 93%. So it is easy to see that a member needs to be very careful when making contributions.

Now in the May budget this year some "relief" was announced whereby up to $10,000 could potentially be refunded as a once off where made in error. It has to be an error of less than $10,000 though and only once! So make sure if you make a mistake, it is a small one...and make the mistake only once!