Superannuation

Compulsory superannuation places an obligation on employers to provide at least 9 per cent of an employee’s remuneration as a tax concessional super contribution.

Since rules allowing many employees to choose their own funds were introduced in 2005, the chosen fund can be a do-it-yourself fund. As long as an employer is provided with evidence the DIY fund complies with the rules, tax concessional compulsory contributions as well as tax concessional salary sacrifice contributions can be accepted by the fund.

But, as with other categories of super funds, some DIY funds that accept tax concessional contributions have been adversely affected by the reduction in annual contribution caps.

The rules and penalties

The caps on concessional contributions are $25,000 for people under age 50 and $50,000 for those over 50. From July 2012, the cap for the older group will be $25,000 for a member who has super in excess of $500,000.

If a concessional contribution cap is exceeded, any excess amount is taxed at 31.5 per cent in addition to the 15 per cent contributions tax levied in the fund. The excessive 31.5 per cent tax is required to be paid by the member, who can be reimbursed from the fund.

The total 46.5 per cent tax treatment is equivalent to the top marginal tax rate levied on people with a taxable income above $180,000.

A tale of two dilemmas

Two readers face different dilemmas.

One reader has two employers who are required by law to make compulsory super contributions into his fund, which will take him above the $25,000 limit. Given this is unavoidable, he asks whether he can withdraw any surplus and pay ordinary tax on it rather than being slugged with a penalty tax on the excess.

The other reader is over 50 but has more than $500,000 in saved super. His compulsory employer super contribution is $35,000 a year, which is a generous 20 per cent of his remuneration, a proportion well in excess of the compulsory 9 per cent.It’s OK this year and next, while he is entitled to contribute $50,000. However, from July 1, 2012 (when his limit becomes $25,000) he is concerned he will have an excess contribution because his employer appears reluctant to alter its payments.

It’s not unusual ...

Colonial First State technical manager Deborah Wixted says it is not unusual for an employer to pay more than the 9 per cent compulsory super to a valued employee, with 12 and 15 per cent quite common amounts. (An employer may also pay for an employee’s death and disability insurance held in super, a payment that must be treated as a tax concessional contribution.)

Also under the super rules, employers don’t have to pay the 9 per cent on annual remuneration of approximately $168,880.

Wixted says 9 per cent of the annual number works out to be about $15,200, which is well within the $25,000 tax concessional contribution cap.

Between a rock and a hard place

But if employees earn significantly more than this, say another $120,000, or if there is more than one employer paying compulsory super or extensive insurance support is provided through super, there is a chance of exceeding the $25,000 cap.

An employee in this position, says Wixted, may discover there is not a lot they can do without adversely affecting their own position.

The 2011 federal budget included the announcement of a once-only opportunity to withdraw excess concessional contributions of up to $10,000 made after July 1 this year. Such amounts can be withdrawn and, instead of being taxed at the total 46.5 per cent, can be added to ordinary income and taxed at a member’s personal tax rate.

Time to talk turkey

For repeat excess contributions the only real option, says Wixted, is to renegotiate a remuneration package with employers.

This may not be as simple as it appears, especially if remuneration is set by an agreement with which an employer is required to comply. You could think about asking for remuneration to be paid in an alternative manner, she suggests, an obvious one being salary instead of super. Another option could be extra fringe benefits.

But paying an excess contributions penalty may not be as severe as it seems for those on high incomes. Because money earned by a taxpayer on amounts above $180,000 is taxed at 46.5 per cent, the penalty amount for excess super is identical to ordinary tax.

The important consideration is that the excess concessional contribution does not clash with a maximum non-concessional contribution.

Those who suffer most

Fund members who seek to maximise their non-concessional contributions at the same time as making an excess concessional contribution suffer the worst outcome.

In this case another 46.5 per cent penalty tax is added on the original excessive tax concessional amount. This introduces a scary 93 per cent total tax.

Wixted says the excess contribution regime means those making non-concessional contributions should be most aware of the excess penalty rules.

While part of the aim of the caps is to keep concessional super contributions within a framework where the worst case scenario is paying tax at the same level as if you were on the highest personal tax rate, the extra impost that comes from mixing tax concessional and non concessional contributions is the real issue to be vigilant about.