It’s now widely recognised that the punitive penalty regime applying to excess superannuation contributions is in need of reform. The severity of Excess Contributions Tax (ECT), both in terms of the rate of tax and the manner in which the tax is applied, is one of the most significant issues currently confronting the superannuation sector.
Self-managed super fund (SMSF) members are disproportionately affected by ECT because they are the most highly engaged with their super and therefore the most likely to take advantage of legitimate opportunities to increase their retirement savings. As such, the Self-Managed Super Fund Professionals’ Association of Australia (SPAA) has devoted a significant part of its 2011 Federal Budget submission to ECT and related issues, such as the excessively low concessional contributions cap.
Given the penalty rate of tax applicable to excess contributions, and based on our members’ client situations, we consider that the vast majority of instances of excess contributions have arisen due to mistake rather than by intention.
Superannuation fund members who exceed their non-concessional contribution cap should have a genuine right to rectification and this rectification should enable members to minimise their excess contributions tax liability. To facilitate this, the Superannuation Industry (Supervision) Regulations should be amended to enable the voluntary refunding of the excessive portion of a non-concessional contribution back to the member. A non-concessional contribution which, either on its own or in aggregate, has exceeded the member’s non-concessional contribution cap should be considered a refundable excess non-concessional contribution for this purpose.
The rate of excess contributions tax should uphold the policy intent of the non-concessional contribution cap and deter members from making non-concessional contributions which exceed their non-concessional contribution cap. However, the rate of excess contributions tax should not unfairly or unjustly penalise members who inadvertently exceed their non-concessional contribution cap. A mandatory rate of excess contributions tax should be applied to refunded excess non-concessional contributions. This mandatory rate of excess contributions tax should be based on a proxy for the rate of investment earnings derived on the excess portion of the non-concessional contribution while it remained in the fund.
Non-concessional contributions which are not refunded prior to the issue of the excess contributions determination by the ATO should remain subject to excess contributions tax at the rate of 46.5 per cent, and these taxpayers would continue to have access to the limited forms of rectification which currently apply.
To simplify the contribution caps for members over age 65, and to reduce instances of unintended contribution cap breaches, the restriction that applies from age 65 to members who wish to bring forward two future years of non-concessional contributions, should be removed. This will enable the bring-forward rule to apply until age 75, consistent with the rule for non-concessional contributions which enables members to contribute up until the age of 75.
While concerned about instances of inadvertent cap breaches which are the result of excessively low contribution caps, SPAA is also concerned about the long-term impact that a low cap base will have on the level of retirement savings and ultimately the Government’s fiscal strategy.
The current excessively low concessional contribution cap base, together with the absence of adequate indexation, will deny many thousands of Australians, who typically have a greater financial capacity to save for retirement later in life, the opportunity to do so. Similarly, individuals with broken work patterns – women in particular – and individuals close to retirement with inadequate retirement savings are denied the opportunity of making reasonable catch-up contributions.
Of great concern from a public policy perspective, new research released as part of the SPAA National Conference shows that reduced annual caps are causing a significant fall in the level of concessional super contributions; that is, a fall in the nation’s retirement savings investment. Contrary to initial Government projections, the reduced concessional contributions cap, which has applied since the commencement of the 2009-10 financial year, has had a major impact on the level of concessional contributions across all income ranges.
Allowing individuals to access a higher concessional contribution cap on the proviso that their superannuation account balance is less than $500,000 is likely to impose difficult, onerous and inefficient administration and reporting practices on funds, reminiscent of the previous reasonable benefits limit (RBL) regime. Furthermore, the legislation supporting this proposal will require careful drafting to ensure strategies and practices, which could compromise the integrity of these measures, do not prevail or return Australians to an old RBL-style system. Therefore, SPAA in principle supports raising the concessional contribution cap, but does not support the capping of $500,000 superannuation balances, as proposed by the 2010 Federal Budget from 2012-13.
While mindful of the Government’s strong commitment to its fiscal strategy and the need to offset new spending with savings, SPAA recommends that the concessional contribution caps be returned to their pre 2009-10 levels.
In keeping with the spirit of our submission, we strongly encourage Treasury to consider the taxation incentives provided to superannuation – in particular, concessional and non-concessional annual contributions – against the backdrop of the Government’s own stated policy objective of reducing reliance on the age pension and promoting self-funded retirement.
It’s now widely recognised that the punitive penalty regime applying to excess superannuation contributions is in need of reform. The severity of Excess Contributions Tax (ECT), both in terms of the rate of tax and the manner in which the tax is applied, is one of the most significant issues currently confronting the superannuation sector.
Self-managed super fund (SMSF) members are disproportionately affected by ECT because they are the most highly engaged with their super and therefore the most likely to take advantage of legitimate opportunities to increase their retirement savings. As such, the Self-Managed Super Fund Professionals’ Association of Australia (SPAA) has devoted a significant part of its 2011 Federal Budget submission to ECT and related issues, such as the excessively low concessional contributions cap.
Given the penalty rate of tax applicable to excess contributions, and based on our members’ client situations, we consider that the vast majority of instances of excess contributions have arisen due to mistake rather than by intention.
Superannuation fund members who exceed their non-concessional contribution cap should have a genuine right to rectification and this rectification should enable members to minimise their excess contributions tax liability. To facilitate this, the Superannuation Industry (Supervision) Regulations should be amended to enable the voluntary refunding of the excessive portion of a non-concessional contribution back to the member. A non-concessional contribution which, either on its own or in aggregate, has exceeded the member’s non-concessional contribution cap should be considered a refundable excess non-concessional contribution for this purpose.
The rate of excess contributions tax should uphold the policy intent of the non-concessional contribution cap and deter members from making non-concessional contributions which exceed their non-concessional contribution cap. However, the rate of excess contributions tax should not unfairly or unjustly penalise members who inadvertently exceed their non-concessional contribution cap. A mandatory rate of excess contributions tax should be applied to refunded excess non-concessional contributions. This mandatory rate of excess contributions tax should be based on a proxy for the rate of investment earnings derived on the excess portion of the non-concessional contribution while it remained in the fund.
Non-concessional contributions which are not refunded prior to the issue of the excess contributions determination by the ATO should remain subject to excess contributions tax at the rate of 46.5 per cent, and these taxpayers would continue to have access to the limited forms of rectification which currently apply.
To simplify the contribution caps for members over age 65, and to reduce instances of unintended contribution cap breaches, the restriction that applies from age 65 to members who wish to bring forward two future years of non-concessional contributions, should be removed. This will enable the bring-forward rule to apply until age 75, consistent with the rule for non-concessional contributions which enables members to contribute up until the age of 75.
While concerned about instances of inadvertent cap breaches which are the result of excessively low contribution caps, SPAA is also concerned about the long-term impact that a low cap base will have on the level of retirement savings and ultimately the Government’s fiscal strategy.
The current excessively low concessional contribution cap base, together with the absence of adequate indexation, will deny many thousands of Australians, who typically have a greater financial capacity to save for retirement later in life, the opportunity to do so. Similarly, individuals with broken work patterns – women in particular – and individuals close to retirement with inadequate retirement savings are denied the opportunity of making reasonable catch-up contributions.
Of great concern from a public policy perspective, new research released as part of the SPAA National Conference shows that reduced annual caps are causing a significant fall in the level of concessional super contributions; that is, a fall in the nation’s retirement savings investment. Contrary to initial Government projections, the reduced concessional contributions cap, which has applied since the commencement of the 2009-10 financial year, has had a major impact on the level of concessional contributions across all income ranges.
Allowing individuals to access a higher concessional contribution cap on the proviso that their superannuation account balance is less than $500,000 is likely to impose difficult, onerous and inefficient administration and reporting practices on funds, reminiscent of the previous reasonable benefits limit (RBL) regime. Furthermore, the legislation supporting this proposal will require careful drafting to ensure strategies and practices, which could compromise the integrity of these measures, do not prevail or return Australians to an old RBL-style system. Therefore, SPAA in principle supports raising the concessional contribution cap, but does not support the capping of $500,000 superannuation balances, as proposed by the 2010 Federal Budget from 2012-13.
While mindful of the Government’s strong commitment to its fiscal strategy and the need to offset new spending with savings, SPAA recommends that the concessional contribution caps be returned to their pre 2009-10 levels.
In keeping with the spirit of our submission, we strongly encourage Treasury to consider the taxation incentives provided to superannuation – in particular, concessional and non-concessional annual contributions – against the backdrop of the Government’s own stated policy objective of reducing reliance on the age pension and promoting self-funded retirement.
Andrea Slattery is the CEO of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).
