The latest ATO figures show that more Australians are breaching their concessional super contributions caps than ever before and are being slugged with extreme excess contributions penalties as a result. In fact, 65,733 people breached the cap in 2009-10 - more than twice the number of people who breached the cap in the previous financial year. The situation is getting worse and many of these breaches are unintentional errors by Australians wanting to save for their retirement within the current rules. So why are they being so severely punished?
I wonder why the government is so reluctant to remove this ugly tax, particularly when many alternatives have been suggested to fix the problem of people putting ‘too much’ money into super. The longer the government waits to solve the problem, the more it looks as though the tax is a revenue raiser!
If the government is going to impose limits on the amount people can contribute to their super, then they also need to be realistic about imposing appropriate penalties for making a mistake. In order to prevent too much money going into a concessionally taxed environment, excess contributions should simply be refunded.
This is a flawed tax and is detrimental to the retirement savings of many people who are genuinely trying to do the right thing. It’s time for the government to commit to change.
I totally agree with Liz.But didn't the restrictions on deposits replace the RBL on withdrawal?
ReplyDeleteWhat good does it do for members to vent on these blogs? For goodness sake, it's time for the Institute to re-consider its approach to consultations with government. We have a large infrastructure at the Institute that is supposed to be looking after our interests and getting things done. I question why we need so many people when we seem to be faced with the same old problems all the time. Are we just becoming another large bureaucracy, part of the problem and not the solution? It's time for some courage to be shown by the Institute. Many members are frustrated not only with the ineptitude of our governments but also with the ineffectiveness of our professional body.
ReplyDeleteEven if it isn't removed there are fairer ways to implement. EG There should be a choice on whether the non-concessional contribution cap of 450k is invoked.
ReplyDeleteWe have seen many cases where an advisor wasn't informed of a small contribution of say 1k in Jul 08. This would appear to be a minor oversight, whereas in reality it can cause a 70k tax bill. The advisor then advises say a 150k contribution in June 2009 and 450k for 2010. The ATO (1.5 years later) advises the person of the 1k error causing the 450k to be invoked in 2009. Thus causing 151k breach in 2010 and thus tax of 70k.
I think the person would have preferred to pay excess contributions tax on the 1k ($465) for going over the 150k limit in 2009, rather than 70k in the subsequent year when they thought they were using the 450k cap.
Being able to elect not to start the 450k 3 year rule would prevent many of these unfair taxes being levied.
This is a disgraceful, insidious tax. How a so-called democratic, western government can impose such a spiteful, punitive tax on its citizens is beyond belief.
ReplyDeleteFrom my observations, the tax invariably arises from innocent mistake. Surely a mechanism for refunding the excess with interest and a realistic penalty is the way to go.
And Hear, Hear TEZZA. Well said.
Liz, I agree 100%! There is no forgiveness or fairness in the system as it stands. I agree that there needs to be a mechanism for enforcing the caps, but we can do it in a better way.
ReplyDeleteCheers,
Tamera Lang
(Tax Counsel for The Tax Institute)
Thanks everyone for your comments – this is a great forum to hear your ideas and suggestions and I appreciate your participation. I know a lot of people read the blog so it is also a great way for me to communicate the Institute’s position on a lot of issues.
ReplyDeleteThere is no doubt the government could make the contribution caps system more reasonable without disproportionate punishment for innocent mistakes.
To clarify, the caps were introduced along with tax free benefits for people aged over 60 to replace the old Reasonable Benefits Limit system and aged based deduction limits. The problem with the caps is the penalties for breaching them – they are causing real damage for Australians trying to save for retirement.
The Institute has been very vocal on this issue. We’ve written submissions and articles and discussed it widely with Treasury, Minister Shorten’s office and the ATO on a number of occasions.
Hopefully, the government will improve the system soon!
Dear all
ReplyDeleteI understand there is alot of industry fustration in relation to the operation of the excess contributions tax, including the transitional period, being the period 10 May 2006 to 30 June 2007 and the operation of section 292-80 of the Income Tax (Transitional Provisions) Act 1997 (C/th)
For a client recently, I looked at the 7 changes to the tax policy that occurred over the period 9 May 2006 to 27 February 2007, being a 10 month period....
Effectively, the 7 changes to the policy regarding excess contributions tax gave well advised taxpayers some 9 months to understand the super law changes and implement the changes into their retirement plan....
Pls see attached analysis that may be of interest and use
Media Releases - Simplified Super - 9 May 2006 to 27 February 2007
http://simplersuper.treasury.gov.au/media_releases.asp
(1)
9 May 2006
Media release No. 42 - Treasurer Costello - 2006 Federal Budget
(2)
13 June 2006
A Plan to Simplify and Streamline Superannuation - Transitional Issues That Apply Immediately
Media release No. 58 - Treasurer Costello
(3)
9 August 2006
Completion of consultation on the Government's plan to simplify and streamline superannuation
Media release No. 84 - Treasurer Costello
(4)
5 September 2006
Simplified Superannuation - Final Decisions
Media release No 93 - Treasurer Costello
(5)
7 December 2006
Simplified Superannuation Legislation Introduced into Parliament
Introduction of Tax Laws Amendment (Simplified Superannuation) Bill 2006 (C/th) ("the Bill")
Media release No 131 - Treasurer Costello
(6)
7 February 2007
Simplified Superannuation - Consequential Amendments Introduced to Parliament and Transitional Arrangements
Media release No 8 - Minister for Revenue and the Assistant Treasurer Dutton
(7)
27 February 2007
Super Day - Simplified Superannuation Passes the Senate
Media release No 15 - Minister for Revenue and the Assistant Treasurer Dutton
I trust the above is of assistance
Brett Young
Barrister
Fifth Floor Selborne Chambers
E. brettyoung@selbornechambers.com.au
The ECT is certainly getting very ugly.
ReplyDeleteI have no problems with the idea of an ECT that penalises overly excessive contributions, but the current system is penalising the innocent or unwary.
Instead of a simpler superannuation solution, the new contribution caps have just made the system overly complex.
I have an incident where the client had a concessional contribution of 1 cent credited to an account by an institutional superannuation fund. In the same year the client contributed $150K of non concessional contributions - the 1 cent therefore triggered the bring forward rule. Of course in following year the client contributed $450K - unaware of the 1 cent.
Some 18 months down the track they receive the letter indicating a ECT of $69,750 for a 1 cent contribution that they were unaware of!!!
Now the ATO will exercise discretion here but the amount of time wasted and stress caused on the client is uncalled for.
While the above example is extreme it does raise a number of issues.
1. Taxpayers have the responsibility to monitor their contributions. However how can you check the contributions if there is no ability to look up reported contributions.
2. In the majority of cases, that I have seen, the cascading of concessional contributions into the non-concessional contribution cap in combination with bring forward rule create the largest problems.
To overcome these problems I suggest the following -
1. Tax excess concessional contributions at 46.5%. An effective tax rate of 61.5% should be sufficient to discourage larger excess contributions. If not charge more.
2. There must be an ability to opt out of SGC where there are multiple employers - alternatively there should be no ECT on SG contributions.
3. Phase out the bring foward rule, and
4. Abolish the work test.
The effect of 3 & 4 would allow non concessional contributions to be made post age 65 (without the need to rush to get contributions in before the arbitrary age deadline). All taxpayers regardless of their employment status would be treated equally.
5. Leave the ECT rate on non-concessional contributions at 46.5%.
Self managed super funds have taken center-stage in the retirement investment field, as they provide incredible control for those that want to develop and maintain their own personal retirement plan.
ReplyDelete