The rate of Excess Contributions Tax that is payable on Excess Contributions is dependent on the type of contribution that was being made (i.e. Concessional Contribution or Non-Concessional Contributions). Your individual taxable income will also affect the level of Excess Contributions Tax payable.
The purpose of Excess Contributions Tax is not designed to penalise people for exceeding the relevant contribution caps, but rather to ensure that any excess contributions are taxed at the rate they would have otherwise been taxed had the excess contributions not been made.
In saying that, in some situations the Excess Contributions Tax on Non-Concessional Contributions can be taxed at a rate that is higher than an individual’s marginal tax rate.
Before we get into the Excess Contributions Tax Rates, here’s a quick overview of the difference between Concessional and Non-Concessional Contributions.
What Is A Concessional Contribution?
A Concessional Contribution is a contribution made or received into a superannuation fund (including SMSF)that the contributor claimed a tax deduction for. Types of Concessional Contributions include, but are not limited to, salary sacrifice contributions, mandatory employer SG contributions and self-employed contributions.
What is the Concessional Contribution Cap
The current Concessional Contribution cap is $35,000 p.a. (financial year) for people aged 49 years and over and $30,000 p.a. for people under age 49. However, as of 1 July 2017, new rules will see the Concessional Contribution cap reduce to a universal $25,000 p.a. for everyone. The new rules also allow individuals with superannuation balances to carry forward unused Concessional Contribution caps for up to 5 years from 1 July 2018, which can be utilised from 1 July 2019.
Keep in mind that people aged over 65 will need to meet the Superannuation Work Test to make or receive Concessional Contributions.
What is the standard Contributions Tax on Concessional Contributions?
The ordinary Contributions Tax payable on Concessional Contributions is 15% of the amount contributed. However, there is an additional 15% Contributions Tax payable by high income earners (read more here) and a Low Income Superannuation Contribution designed to offset the standard Contributions Tax (read more here).
What is a Non-Concessional Contribution?
A Non-Concessional Contribution is an after-tax contribution made into a superannuation account. Non-Concessional Contributions are generally made from an individual’s personal bank account into superannuation for the purpose of saving towards retirement in a more tax effective manner than had they saved the same amount in their personal name. Superannuation can be tax-effective because all earnings on investments within the superannuation environment are taxed at a maximum of 15%, as opposed to an individual’s Marginal Tax Rate.
Concessional Contributions (excluding Excess Concessional Contributions) are considered Low Tax Super Contributions.
What is the Non-Concessional Contribution Cap?
The current Non Concessional Contribution cap is $180,000 p.a. (financial year). However, as of 1 July 2017, the Non-Concessional Contribution cap will drastically reduce to $100,000 p.a. Further, an individual with a superannuation balance of $1.6 million or more will not be able to make any additional Non-Concessional Contributions.
There is also the ability to ‘bring forward’ up to 2 additional years of the Non-Concessional Cap for individuals under age 65. Transitional rules apply to the Non-Concessional Contribution ‘bring-forward’ rule in respect of the significant reduction in the cap from 1 July 2017. Click here to read more.
What is the standard Contributions Tax on Non-Concessional Contributions?
Non-Concessional Contributions do not incur Contributions Tax as they are after-tax contributions; therefore tax has already been paid on this amount prior to the contribution being made.
Excess Contributions Tax: Concessional Contributions
Exceeding the Concessional Contribution cap will result in the excess being treated as Excess Contributions. Excess Contributions are included in an individual’s assessable income and taxed at their personal marginal tax rate. An Excess Concessional Contributions Charge also applies.
As these excess contributions are taxed at an individual’s marginal tax rate, a 15% non-refundable tax offset is received in order to reimburse for the 15% Contributions Tax that was paid – to ensure that the individual is not over-taxed.
Up to 85% of the excess contributions are able to be released from superannuation to assist with the additional personal income tax payable. Any amount released is not counted towards a persons Non-Concessional Contribution cap. Excess Contributions that are not released will count towards an individual’s Non-Concessional Contribution cap. This could result in inadvertently exceeding the Non-Concessional Contribution cap.
Excess Contributions Tax: Non-Concessional Contributions
Exceeding the Non-Concessional Contribution cap will result in the excess being treated as Excess Contributions.
The excess Non-Concessional Contributions can be withdrawn from superannuation, plus 85% of any earnings on that amount. The earnings relevant to the excess contributions are included in an individual’s assessable income and taxed at their marginal tax rate, minus a 15% tax offset designed to rebate the tax on those earnings.
Excess Contributions that are not withdrawn from superannuation are taxed at the highest Marginal Tax Rate (MTR), plus Medicare (currently 45%, plus 2% Medicare Levy) within the super fund.