Refunds of excess concessional contributions to superannuation fund members: Stronger Super continued

A proposed law would allow a member of a superannuation fund (including a Self-Managed Superannuation Fund) who has breached the concessional contributions cap by up to $10,000 to ask the trustees of their fund to refund the excess for their first breach.

The law is part of the federal government's ongoing Stronger Super reforms.

The ATO's recent Excess Contributions Tax Learner Guide may provide a useful refresher on understanding contribution caps.

Status of the proposed law

The proposed law[1] has not yet been finalised. Treasury has published 3 Exposure Drafts and Explanatory Memoranda – available here, here and here – and has sought comment from interested parties.

The proposed law is in the Superannuation Legislation Amendment (Stronger Super and Other Measures) Bill (the Bill).

What changes will the Bill make?

The Bill seeks to vary superannuation and income tax legislation to:

• allow fund members to apply for a refund of excess contributions – which is the topic of this article;
• require payslips to report details of superannuation payments;
• mandate data and e-commerce standards for processing rollovers and contributions;
• mandate annual consolidation of multiple accounts within a superannuation fund; and
• broaden the types of accounts displayed on the ATO's online search facility.

Refunds of excess concessional contributions

The Bill proposes to amend superannuation law so that a member of a superannuation fund who beaches the concessional contributions cap by up to $10,000 can, for their first breach, ask the trustees of their superannuation fund to refund the excess.

Currently, if a member breaches the concessional contributions cap, then:

• the member would automatically have to pay the 31.5% extra tax on the amount of the excess payment, in addition to the 15% tax payable when the contribution was made to the fund; and
• there is no opportunity to correct the excess payment.

What is the 'concessional contributions cap'?

A member's contributions to their super funds are subject to caps. If the amount the member contributes exceeds the relevant cap during a given financial year, then the extra amount is subject to extra tax. Caps apply to both 'concessional contributions' and 'non-concessional contributions'. 'Concessional contributions' include compulsory superannuation payments, salary sacrificed amounts and voluntary contributions by employers.

A summary of current contribution caps is available on the ATO website here.

How will the proposed refund mechanism work?

Treasury has not yet published any draft provisions about how the refund payments will work.

Why is the refund being proposed?

Parliament's objective in proposing these amendments is to:

• make the system fairer by allowing members to take excess concessional contributions out of their fund and have them assessed for tax at their marginal tax rate;
• reflect the fact that members should not be punished for inadvertent, insignificant breaches of contribution caps; and
• reduce the number of tax assessments required as a result of breaches of contribution caps.

What could this mean for trustees?

If the Bill becomes law, then members will be able to require their fund trustees to refund excess contributions of less than $10,000. How requests must be made – and what obligations trustees will face in complying with such requests – will become clear when the Bill is finalised (we hope).

Given these potential changes, trustees and their advisers will need to be aware of the following:

• contributions caps;
• that the refund is only for the first breach of the concessional contributions cap and only for excess contributions of less than $10,000;
• the relevant 'cap' (proposed to be initially $10,000) on the amount for which the member may seek the refund;
• the legislative framework of the refund process; and
• any penalties for failing to give the refund, or for giving an invalid refund.

Maddocks will monitor the Bill and update you through ClearLaw.

ATO Excess Contributions Tax Learner Guide

The ATO has published an Excess Contributions Tax Learner Guide to help financial planners understand contribution cap issues. However, the ATO states that the Guide must not be used as a legislative support tool in the workplace, but is a useful reminder of relevant issues.

More about Stronger Super

More information on Stronger Super is available here.

See also our previous articles on Stronger Super from March 2011, January 2011 and January 2012.

More Information from Maddocks

For questions or more information about the above article, please call Maddocks in Melbourne (03 9288 0555) and ask for a member of the Superannuation Team.

More Cleardocs information on superannuation and SMSFs

You can read other articles concerning superannuation and SMSFs here.

1. Order SMSF related document packages

• Set up an SMSF
• Update an SMSF deed
• Set up an SMSF pension
• Arrange SMSF borrowing lending docs:
  • for when the lender is a bank
  • for when the lender is a related party
• Set up an SMSF corporate trustee
• SMSF Death Benefit Nomination - binding or non binding
• SMSF Death Benefit Agreement - binding and permanent

2. Download

Download a checklist of the information you need to order a document package.

[1] Superannuation Legislation Amendment (Stronger Super and Other Measures) Bill.