What Happens When You Contribute Past the Super Limit?
Miscalculating or mistiming the payment to your super can be costly. This can be caused by your employer, your tax agent, your super accountant, or yourself due to the lack of information regarding contribution limits.
The annual cap for concessional contributions is $25,000. The unused amount on your cap can be subjected to carry-forward contributions, so long as your total super balance is below $500,000 during the previous financial year.
For non-concessional contributions, the limit is $100,000 if your total super balance is below $1.6 million. The limit can be increased up to $500,00 per year using the unused cap from the past 3 years through the carry-forward system.
Exceeding Concessional Contributions
If you exceed concessional contributions, you’ll receive determination advice from the ATO detailing the contributions you’ve made for the year. You’ll also get your income tax return and Notice of Assessment.
Exceeding Non-concessional Contributions
You’ll have 60 days to choose your next course of action after receiving the determination advice:
- Option 1 – Release excess funds from your super
You can choose to release all excess contributions and 85% of the earnings made from them. Associated earnings described in your determination will be included in the assessable income and taxed at the marginal tax rate. A non-refundable tax offset equivalent to 15% of your earnings will also be applied.
- Option 2 – Leave excess non-concessional contributions in your super
You’ll receive tax assessment on excess non-concessional contributions and the excess amount will be subjected to the highest marginal tax rate. You must also release the excess funds into another fund in the process.
Option 2 is only advisable to take if your fund is a defined benefit.
What to Do Next
The best course of action to take after confirming you’ve made excess contributions is to do nothing. Wait until the ATO issues you with a determination regarding the excess contributions.
Under the July 2018 ruling, you’re given 60 days to request the release of the excess contribution from your super. This request is done when you reply to the ATO’s determination regarding your choice of what to do with the excess contribution. After this, the ATO will have the authority to release the super fund.
The excess contribution will be released and be used to pay for any government debt or tax you haven’t paid yet. The remaining money after this deduction occurs is deposited into your account.
In case you don’t have any money left in your super, your assessable income tax statement will be adjusted to include the earnings you got from the excess contribution. The marginal tax rate will then be applied to the associated earnings.
In case you fail to respond in time, you’ll be subjected to Option 1 as the default action. This helps you avoid the disadvantageous position of having the marginal tax rate applied to the full, unreleased contribution in question.
There have been occurrences in the past wherein an individual was away for a holiday when they received the notice of determination. They were unable to reply in time and it was already too late when they received the heavily taxed excess contribution.
Associated earnings from the excess contribution will be included in your assessable income. The delay you caused for not responding on time will cost you higher tax rates on the earnings, so it’s best to give a reply within the 60-day timeframe.