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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Sunday 16 November 2014

Going on a cruise

We haven't been on a holiday for quite a while (I currently have about 40 days of 'long service leave' accumulated plus another 40 days of accumulated 'annual leave'), so early last week we decided to book a 'cheap' 14-day round-trip cruise to New Zealand during the January school holidays. The initial idea was to book a cheap 'quad share' interior room that would have cost a total of around $6,000, but it turned out that there were not any 'quad share' interior rooms available, and only one interior twin-share room. So we then tried to book one interior twin share room and one slightly more expensive 'ocean view' twin share room close by. However, during the booking stage it turned out that the 'quota' for 12-17 year old children on the cruise was full, so we couldn't book DS1 on. At that stage it was looking like we'd have to defer the trip, as the other available cruises to New Zealand were either one-way (and DW didn't want to have to fly back to Sydney), more expensive (over the Christmas/New Year period), or were travelling during Dec or Feb and would have meant that the boys would miss out on some of the school term.

Luckily DW decided to double-check on the same cruise again the next day, and either the quota had been increased or someone had cancelled, as we were then able to book everyone onto the January cruise we'd initially wanted. There were no longer any interior rooms available, so we ended up booking two adjacent 'ocean view' twin-share rooms for a slightly higher total cost of about $7,500. I'm guessing that the total vacation cost will end up somewhere over $10,000 for the two week trip! Aside from the cruise itself (basically transportation to New Zealand from Sydney, overnight accommodation between ports, main meals, and on-board entertainment), I've already paid another $136 for travel insurance, and we will be applying for new passports for DS1 and DS2 this week as their passports expired in 2013. Each 5-year children's passport will cost $122 (which is half the cost of a 10-year adult passport). Finally there will be extra costs for the various sight-seeing 'excursions' available at each port of call -  I'm estimating at least $100 per excursion per person for the ten days or so we are visiting various ports in New Zealand.

I'll post a break-down of the final costs (and some photos) when we get back.

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Tuesday 4 November 2014

Net worth: October 2014

The stock market rebounded, so pretty much the opposite happened compared with last month -- my superannuation account balance was up, my geared stock portfolio was up, and, uncorrelated but still welcome, the valuation for our house was up (along with the rest of Sydney real estate it seems). So, overall, my net worth was up by a fairly massive $57,607 (3.70%) during October.

Next month is likely to be much less impressive, even if the stock market continues to do well, as there aren't any more monthly employer superannuation contributions due until next January, and I will be paying the $32,000 tax bill due on the 21st. So I'll be pleasantly surprised if my NW manages to break through $1.65M by the end of 2014, and if things go really well I might become a 'multi-millionaire' (with the bare minimum $2M) sometime during 2017. Just goes to show how little a million dollars really is worth these days.

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Sunday 2 November 2014

Tax Sux

Having sold our investment rental property at the start of last financial year, my recent tax return ended up having a massive taxable income of over $190,000. Not only did that mean a large capital gains tax amount, but it also meant not getting any rebate for our net medical expenses this year (despite having net 'out of pocket' medical expenses of over $8,000), as DW also had a considerable 'taxable income' from her half of the capital gain from selling the investment property. The large taxable income also meant having to pay both the medicare levy and also a medicare levy surcharge (as we don't have private health insurance). All up, instead of the normal situation of getting a sizable tax refund of some of my PAYG tax (due to deductions for investment loan interest payments), this year I have an estimated tax bill of $32,370 that will be due in about three weeks. As she only works part-time, DW's tax bill will be slightly lower - just under $30,000.

Although we had used most of the net proceeds from selling our investment property to reduce our home loan, we each have around $100,000 invested in cash accounts and some share investments (so we would have funds available at short notice to pay our CGT bill). I liquidated the relevant share portfolio last week in order to have the cash ready to pay my tax bill (the $96,000 share portfolio I bought last year had lost around $6,000 - so I would have been better investing in an index fund, or else just investing in a term deposit), and once the official notice of assessment arrives in the next week or two I'll pay the amount owing and see how much cash DW and  I then have. The plan is for DW and me to each kick in equal amounts and pay off as much as possible of the remaining home loan balance (as the interest is not tax deductible). However, we don't plan to pay off the home loan entirely, as we still have an investment 'portfolio loan' account secured against our house equity.

Going forward, the reduced mortgage payments (once most of our remaining home loan has been paid off) will provide some additional cash flow, which I'll use to slowly pay down my margin loan balances as I get closer to retirement age. The big question mark hanging over my financial planning is whether I will remain in full-time employment until my expected retirement in about 15 years time...

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