Strategy for making contributions important to avoid excess risk, says expert at SPAA National Conference

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There are ways to manage excess contributions and contribution strategies to consider

The halving of the super contribution caps has resulted in rising instances of people making excess contributions and attracting tax office penalties, but strategies exist to both remedy errors and maximise savings, according to Jemma Sanderson, Principal of Cooper Partners Financial Services. Ms Sanderson was a plenary speaker at the Self Managed Super Fund Professionals’ Association (SPAA) National Conference in Brisbane today.

“With the halving of the concessional contribution cap in the 2009 Budget, minor errors involving employer and self-employed contributions resulting in excess contribution issues are much more common.

“As excess concessional contributions can be subject to up to 93% tax, getting it right is imperative. The ATO is taking a reasonably harsh view with respect to excess contributions, which is evident from recent cases and ATO publications,” Ms Sanderson said.

Errors resulting in excess contributions may typically include: a failure by investors to include their employer’s 9% superannuation guarantee contributions when calculating the remaining $25,000 or $50,000 cap they may have available; a failure to reduce amounts salary sacrificed to align with the reduced contribution cap and a misunderstanding of the timing of superannuation guarantee contributions and/or employer obligations. Problems also arise where there are multiple employers whose SG contributions collectively tip the fund member over their annual $25,000 cap.

Ms Sanderson noted that once an excess contribution is made to superannuation, it’s very difficult under current law to return the amount to the contributor.

“The best strategy is to monitor client’s contributions each year to ensure they are not excessive, as well as educate them on the implications of an excess contribution. If an excess contribution has been made in error, there are few remedies with limited application, but they can be incredibly valuable,” Ms Sanderson said.

Methods of managing excess contributions once they have been made in error include ensuring the allocation between members is correct ; use of reserving (where appropriate), returning contributions and applying for tax commissioner discretion.

Applying for tax commissioner discretion to re-allocate or disregard an excess contribution is  possible in instances where the employer is at fault and the excess contributions were not foreseeable, but these opportunities are limited, and special circumstances must be evident.

For ongoing strategies to manage large contributions, Ms Sanderson recommended savvy use of timing advantages. For example, contributions must be allocated to members within 28 days after the end of the month of the contribution. However, contributions made in June don’t need to be allocated until 28 July – the following year.

“If contributed in June and allocated in July, the contribution is assessed towards the cap in the year of allocation, not the year of contribution,” Ms Sanderson said.

“However, in the case of a self employed person making a contribution in June, the deductibility of the contribution is not affected by allocation to the member, the tax deduction for that contribution can be gained in the year the contribution is made.”

Recently, in submissions to Treasury, SPAA proposed a refunding solution for excess non-concessional contributions and a possible solution to the issue of excess concessional contributions arising from SG contributions from multiple employers.

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