Excess Contributions Tax - getting fairer

In the lead up to the Federal Budget announcement, a hot topic in the superannuation industry has been the ugly, unfair penalties that exist for those who breach the superannuation contributions caps.

Fortunately, the federal government took its first steps towards addressing this issue in its Budget announcement last night.

The government announced it will provide a one-off opportunity for people who make excess concessional contributions of less than $10,000, to have those contributions refunded. As a result, many of these people will no longer incur excess contributions tax, which could have been as high as 93%.

This is a positive step in making the superannuation system fairer and will assist Australians who are trying to save for their retirement within the current rules. For many people making minor, inadvertent breaches of their concessional caps, the proposed legislation will provide relief where they might otherwise have suffered significant tax penalties.

It is important to note, however, that the measures will not assist everybody – more significant breaches will not be eligible for correction and individuals will only be given one opportunity to correct one breach of the concessional cap. There are still a number of people who will continue to be unfairly impacted by this onerous tax.

The legislation will also only apply to excess contributions made from 1 July 2011.

It’s been a long time coming, but I am pleased that the government has taken this important step in making the superannuation system a little bit simpler and fairer for Australians saving for retirement – even if there is more work to do.

Complicating concessional caps

I recently started writing the Institute’s submission to Treasury on the implementation measures to make permanent the higher concessional contributions caps of $50,000 per annum for those over the age of 50. The catch now is that the increase will only be available where the person has a superannuation balance of less than $500,000.

I found, however, that before I could even get into the detail of the submission, the broader issues of the impact of this legislation were becoming more apparent and it worries me.

Firstly, it concerns me that the $500,000 balance limit (which will not be indexed) could send a message to Australians that once you meet this level of superannuation savings, you have enough to live on when you retire. We are an ageing population; individuals will be spending more years in retirement than ever before. It is a dangerous message for Australians to be receiving that this will be enough.

Secondly, including a maximum superannuation balance adds yet another hurdle for people to jump over in saving for retirement. It worries me that the new rules are going to exacerbate an already growing problem of people being subjected to excess contributions tax. The consequences of the concessional contributions caps legislation are already causing major problems for people – adding another factor (the $500,000 balance limit) will cause more people to falter and I believe that many more will be receiving excess contributions tax assessments as a result.

At a time when we have undergone a major review of our superannuation system in order to simplify and restore confidence in it, we should be thinking very carefully before bringing in new rules that will add complexity, cost and confusion and undermine other efforts to restore the confidence of Australians in their super.

Excess Contributions Tax – getting uglier

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.

The realities of life when saving for retirement

The Institute lodged its 2011-12 Federal Budget submission to Treasury this week. It included a number of important recommendations for superannuation.

Two of our headline recommendations in super were changes to:

1. Concessional contributions cap rules
2. Excess contributions tax.

The level of concessional contributions caps at $25,000 (for those aged under 50) and $50,000 (for those aged over 50), is simply too low. More than that, however, the current system does not adequately address an individual’s changing capacity for saving for retirement. The caps were introduced to encourage Australians to save consistently over their working life, but let’s face it; very few people have the capacity to save at each stage of life. At various times in life, we have costs like mortgages, children to feed and clothe, or school fees to pay.

It would be preferable if a person could, for example, pay less super at a stage in life when their expenses are high and more super when their expenses are lower.

The system needs to better accommodate the realities of life as a home owner, a parent or someone whose life choices necessitate lower incomes. A better option would be a carry forward provision for those caps to enable people to ’catch up’ later when they are more able to do so.

The excess contributions tax continues to cause angst for many people and the government seems reluctant to act on it. A tax this onerous, imposed as a penalty for those trying to save for their retirement within the existing rules, contradicts the government’s claims to be encouraging greater superannuation savings!

The government could implement fairer ways to ensure people only contribute within the contribution caps, such as refunding the contributions back out of the system, including any earnings on the excess contribution amounts.

This tax should not exist in its current format. Measures are needed to ensure people stay within their caps, but a system in which a person who, making an inadvertent error, contributes over their cap can be subjected to a whopping 93% tax is simply wrong.