From 1 July 2022, individuals under age 75 do not need to meet a work test to be eligible to make a non-concessional contribution. In addition, clients who are 74 or under at 1 July 2022 may be eligible to access the bring forward rule and contribute up to $330,000 in 2022/23.
The rules for eligibility to contribute to super are relatively simple however there are additional conditions regarding the eligibility to access the bring forward that may result in unintended tax consequences. In this article we will look at the rules and review what happens when they are not fully met.
Eligibility to contribute
The superannuation law rules for eligibility to contribute to super are relatively simple – make the contribution before your 75th birthday. There is a small grace period where a fund may accept a contribution for a member up until 28 days after the end of the month in which the member turns 75.
Contribution limits
Individuals who are eligible to contribute to super pay no personal tax on contributions that are within the contribution caps contained in tax law.
For 2022-23 the general non-concessional contribution (NCC) cap is $110,000 and individuals who are eligible for the bring forward rule may contribute up to $330,000.
Being age 74 or under as at 1 July is only one of the conditions for being able to access the bring forward rule. Two other requirements are in respect of the individual’s total super balance at the previous 30 June and not currently being in a bring forward period.
The following table illustrates the relationship between the total super balance and the non-concessional contributions cap for 2022/23:
|
Cap
|
Total super balance at previous 30 June
|
Cap amount
|
|
Annual cap
|
< $1.7 million
|
$110,000
|
|
Three-year bring forward
|
< $1.48 million
|
$330,000
|
|
Two-year bring forward
|
$1.48 million to < $1.59 million
|
$220,000
|
|
Annual cap only
|
$1.59 million to < $1.7 million
|
$110,000
|
|
Nil
|
= $1.7 million
|
Nil
|
The total super balance includes all superannuation benefits, accumulation accounts, pension accounts and defined benefit pensions. Sadly, some individuals have misunderstood this definition and will exceed their NCC cap.
It is also important to understand that the NCC cap is zero in a year if the total super balance at the previous year is greater than the maximum total super balance threshold, even if the individual had triggered a bring forward in an earlier year.
Contributing above the cap – associated earnings
Where excess NCCs exist, individuals are liable for tax on associated earnings. The associated earnings amount is a substitute for fund earnings on excess NCCs and is the general interest charge rate (currently 9.1% per annum).
The associated earnings amount is calculated by the ATO and applies from the start of financial year in which the contributions were made up to the day the ATO issues the excess NCCs determination. The amount compounds daily.
The associated earnings amount is included in the assessable income of an individual and taxed at their marginal tax rate with a 15% offset in lieu of tax paid on earnings by the super fund.
Members may minimise the amount of associated earnings payable by lodging their tax return as early as possible. APRA regulated funds report contributions to the ATO when received and 30 June balances by 31 October, and the ATO will make the determination following receipt of this information. If the contribution was made to an SMSF, the associated earnings will be reduced by the SMSF lodging its annual return as soon as possible. If an SMSF lodges its annual return on 1 May, the associated earnings calculation applies for at least 670 days. If the member and the SMSF lodge returns by 30 September, the number of days reduces by approximately 200 days.
Excess determination
Where an excess exists, the ATO issues a determination notice to the member. The determination notice includes:
- the excess NCCs
- the associated earnings amount
- the total release amount (excess NCCs + 85% of associated earnings)
- an election form to release the total release amount
If the member makes an election to release the total release amount, the ATO:
- adds the associated earnings amount to the member’s taxable income
- calculates the adjusted tax amount
- includes a tax offset of 15% of the associated earnings amount
- issues an amended tax assessment to the member
- issues a release authority to the fund
The super fund then pays the release amount to the ATO. The ATO retains the amount of tax liability calculated on the associated earnings and forwards the remainder to the member. If the member does not make an election within 60 days of the ATO issuing the determination, the ATO will default the election to release the total release amount and will serve the release authority on the super fund
If the member elects not to release the total release amount (or doesn’t make an election), the ATO issues a notice of assessment for 47% of the excess contributions. The tax must be paid from the super fund and the ATO will issue a compulsory commutation notice to the fund who will pay the tax to the ATO.
Case studies
The following case studies highlight some of the areas where there is misunderstanding, and where care needs to be taken and advice sought.
1. Total super balance threshold
At 1 July 2022 George is age 73 and Mildred age 74. George read an article in the newspaper about the lifting of the work test and the ability to use the bring forward rule until age 74. The article explained the withdrawal and re-contribution strategy to potentially save tax for their adult child beneficiaries and the potential benefits of equalising the account balances of members of a couple.
In July 2022, George withdrew $660,000 and then re-contributed $330,000 to his account. George contributed $330,000 to Mildred’s account as a non-concessional spouse contribution.
The 30 June 2022 financials for the SMSF had not been completed at that time.
Now that the financials have been completed, George’s total super balance at 30 June 2022 is $1,750,000 and Mildred’s is $450,000.
The 30 June 2022 SMSF accounts and tax returns have been audited and lodged.
What is the result of George and Mildred’s contributions?
Unfortunately, George has an excess NCC of $330,000. As his total super balance at 30 June 2022 was $1,700,000 or above he has a NCC cap in 2022-23 of nil.
The SMSF trustee is not able to return the contribution as it was not made in error and the SMSF is eligible to receive the contribution because George is under 75. It just has unfortunate personal tax implications.
George has met a condition of release by virtue of being over 65, however making a benefit payment will not reduce the excess NCC. Associated earnings will accrue on the excess, compounding daily (currently at 9.1%) until he receives a release authority from the ATO.
The only thing he can do to reduce the amount of the associated earnings is to lodge his 2022-23 personal tax return and the 2022-23 SMSF annual return as soon as possible after 30 June 2023.
If George lodges his personal tax return and the SMSF tax return on 28 July 2023, his associated earnings will be approximately $34,500, which will be taxed at his marginal tax rate. If George can’t arrange for the SMSF annual return to be lodged until November and the ATO issues an excess NCC determination on 14 November 2023, the associated earnings increase to approximately $45,000.
As Mildred had a total super balance of $450,000 at 30 June 2022, she is eligible to contribute up to $330,000 in 2022-23.
2. Total super balance definition
Babak was age 69 at 1 July 2022 and is the sole member and director of the corporate trustee of the Babak SMSF. Babak had rolled back $250,000 to an accumulation account at 30 June 3017 to ensure she only had $1.6 million in pension phase at 30 June 2017.
Babak read an article in the newspaper about the lifting of the work test and the ability to use the bring forward rule until age 74.
As at 30 June 2022 Babak’s pension account was valued at $1.65 million and her accumulation account was valued at $280,000. Babak mistakenly understood that her total super balance at 30 June 2022 was $280,000 so she contributed $330,000 during 2022-23.
Unfortunately, Babak has an excess NCC of $330,000. As her total super balance at 30 June 2022 was $1,980,000 ($1,700,000 or above) she has a NCC cap in 2022-23 of nil.
3. Total super balance exceeds threshold after bring-forward triggered
Cesare was age 61 on 1 July 2021 and he had a total super balance of $1.3 million at 30 June 2021. In 2021-22 he triggered the three-year bring forward rule by contributing $120,000. He intends to contribute $210,000 in 2022-23.
As at 30 June 2022, Cesare’s total super balance is $1,750,000. Accordingly, his NCC cap for 2022-23 is nil and he cannot contribute in 2022-23 without having excess. However, if his total super balance at 30 June 2023 is below the threshold at that time, he may be able to contribute the remaining $220,000 of his bring forward. We expect that the total super balance threshold will be indexed to $1.8 million, possibly even $1.9 million.
Conclusion
Understanding all the rules that apply to the eligibility to contribute and access the bring forward concessions can assist in ensuring excess contributions and the associated tax penalties are avoided.
Julie Steed is Senior Technical Services Manager at Insignia Financial Ltd (formerly Australian Executor Trustees). This article is in the nature of general information and does not consider the circumstances of any individual.