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Sunday, 23 November 2014

Excess Superannuation Contributions Tax - Timing is everything

Back in May 2010 I had put in place arrangements to 'salary sacrifice' as much as possible into my superannuation, without exceeding the current concessionally taxed contributions (which is the sum of both the mandatory employer superannuation guarantee levy (SGL) plus any additional employer contributions arranged via salary sacrifice). All should have been well, as the annual total of SGL and SS I had agreed with my employer was several hundred dollars below the 'cap' on such concessionally taxed contributions, just in case there was an extra fortnightly 'pay' processed during the financial year...

However, one of the more 'interesting' inconsistencies of Australian superannuation legislation is that while employees need to have made such 'salary sacrifice' arrangements prior to the start of the financial year, and fortnightly payslips report the amount of employer superannuation contributions (SGL and SS) that have notionally been 'paid' on each pay date, the actual timing of employer contributions is much more uncertain. By law, employees are only required to pay superannuation contributions quarterly, and then they have until the end of the calendar month immediately AFTER the end of each quarter to actually make the superannuation payments.

In my case, my employer was in the habit of paying the three monthly contribution payments at the start of the month immediately following the end of each quarter. Which meant that payments for the months of April, May and June were normally processed by the payroll office at the end of June and the funds were then processed by their superannuation administrator and were deposited into our self-managed superannuation fund in the first or second week of July.

However, in 2010 the payroll officer (who was a bit unreliable, and has since been 'let go' for finally making one mistake too many) suddenly decided to process the superannuation payments a few days earlier than usual in June, so that two of the quarter's monthly payments actually got deposited into our SMSF bank account during June. This resulted in my 'concessionally taxed' superannuation contributions for the 2009-10 financial year being a total of 14 months' worth of employer contributions, and therefore exceeded the 'cap' by several thousand dollars...

As this had happened within a few days of the end of June it was way too late to take any remedial action, as any change to my salary sacrifice arrangements at that time would only have affected subsequent months, which would not be processed until the following financial year. So I phoned the ATO for advice at the time, only to be advised that nothing could be done pro-actively, and that I'd have to wait until an excess contributions advice eventuated after the 2010 SMSF tax return had been processed - at which time I could lodge an appeal outlining the 'special circumstances' which affected the timing of the employer contributions.

Nothing seemed to be happening - the 2010 SMSF tax return got processed without any excess contributions notification appearing, so I thought common sense may have prevailed (yes, that was hardly realistic when dealing with the tax office!). But then, just a few months ago, I suddenly received a notice of assessment for excess contributions tax for 2010 (quite a delay, given the 2011, 2012 and 2013 SMSF tax returns have all been processed years ago, and we are currently working with the administrator to finalise the 2014 tax return for our SMSF). The excess contriubtions tax assessment was due for payment within about 21 days, so I phoned the ATO again to check on the appeals process, I was advised that there would be penalties applied if the tax wasn't paid by the due date, and that even if I lodged an appeal immediately the amount due probably wouldn't be varied prior to the due date (as appeals have up to 28 days to be processed, counting from after receipt of all required documentation). So I went ahead and just paid the $1700 or so excess contribution tax, and downloaded the relevant appeal form....

It then took two weeks to get a letter from the company payroll office outlining the fact that they had caused the problem by making an unexpected and unannounced change to the timing of their contribution payments (and I had to provide the new payroll officer with details of the superannuation employer contributions arranged and processed for 2009/10!). I then sent this letter (plus a spreadsheet showing the fortnightly contribution amounts and dates, the totals due for each calendar month, and the expected payment timings vs. the actual dates deposits appeared in our SMSF bank account, plus copies of emails I'd sent payroll reminding them to ensure payments were processed on schedule, as I didn't want to exceed the contribution cap!) along to the ATO. The ATO officer in charge of this case then asked me to provide copied of all my 2009/10 payslips to verify the amounts I'd listed in the spreadsheet. Fortunately I still had all my old payslips sitting in an archive box in the garage...

Subsequently he has also asked for copies of the 2008. 2009. and 2010 financial statements from our SMSF, which I sent last week. It then transpired that what he actually wanted was a listing of the individual employer contributions paid into my SMSF account. I pointed out that I'd already sent him copies of the SMSF bank statements which showed all the deposits, and a spreadsheet showing how much of each deposit was attributed to my account (the employer contribution deposits are complicated by the fact the DW works for the same company as myself, an the employer SGL payments for DW and myself appear as a single deposit into our SMSF bank account, and similarly there is a single monthly payment for the total of salary sacrifice made by both DW and myself).

I'm now in the process of getting a listing of the amount of each deposit transaction attributed to each member (which is based on the information I, as SMSF trustee, provided to our SMSF administrator in order to prepare the financial statements and do the SMSF tax return!). Hopefully that will be last documentation required by the ATO to evaluate my appeal against the excess contribution tax, and they may then decide to 'reallocate' some of the excess contributions for 2010 to other tax years...

Overall, this highlights one of the hidden risks of using superannuation as a tax-effective investment vehicle. Not only do you 'lock in' your savings in superannuation until you reach retirement age (and are subject to legislative risk in the meantime), you don't save a lot of tax unless you are in the top marginal tax bracket (in my case I was only saving a modest amount of tax by 'salary sacrifice', paying 15% contributions tax rather than around 30% PAYG tax on salary). And if something goes wrong and you exceed the contributions 'cap' then the 'excess contributions' have tax levied at difference between the TOP marginal tax rate (around 50%) and the 15% superannuation contributions tax rate ... so my 'excess' contributions ended up being taxed at around 50% rather than my normal marginal tax rate of around 30%!

All in all, and especially in light of the tendency of government to chop and change the superannuation rules relating to the 'cap' on employer contributions, it seems best to stay well below the limits set for concessionally tax superannuation contributions. Especially if your employer has a badly run payroll office!

ps. There were also complications caused by the 'cap' being suddenly changed from year-to-year by the government. From $50,000 pa for over-50s, back to the standard $25,000 pa for everyone, then back up to $35,000 for those over 55 etc... no wonder many people tend to ignore superannuation as being 'too complicated' in Australia!

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1 comment:

mOOm said...

My employer contributions (public sector) are slightly above $25k and the fund won't let you lower them below the union agreed contract level and have the rest paid as a non-concessional contribution. I guess it is a good situation to be in, but seems silly. They send a letter saying that it is the responsibility of the employee to make sure they don't exceed the cap, but then there is nothing you can do about it. It's good that this year the cap is being raised.