Excess non-concessional contributions
5.6 Excess non-concessional contributions
When a member exceeds the non-concessional contributions (NCC) cap in a financial year, they have two options available as to how their excess NCCs will be taxed.
Option 1: The member can elect to withdraw excess NCC plus 85% of the associated earnings on the excess contributions, and tax is payable on the associated earnings, or
Option 2: The member is liable to pay excess contributions tax on the excess contributions.
- Election to withdraw excess non-concessional contributions (NCCs)
To avoid paying the excess NCC tax, a member can elect to withdraw the excess NCC plus 85% of the associated earnings on the excess contributions. The full amount of the associated earnings is taxed at the member's marginal tax rate, but the member is entitled to a non-refundable tax offset of 15% of the associated earnings that are included in their assessable income (given that they already paid superannuation contributions tax).
Excess non-concessional contributions tax is not imposed on excess NCCs if they are withdrawn from the superannuation fund. The ATO will issue a release authority to the super fund nominated by the member and the super fund will pay this amount directly to the ATO.
Excess non-concessional contributions election form
When a member completes the excess non-concessional contributions election form:
- The ATO will send a release authority to the super fund. They pay an amount to the ATO equal to their excess non-concessional contributions and 85% of the associated earnings amount. The super fund must action this request within 10 days.
- The ATO will amend a member's income tax assessment by including the full amount of the associated earnings as assessable income and providing a non-refundable tax offset of 15%.
- The ATO will send the member a notice of amended assessment, which may require a member to pay an amount to the ATO.
- The funds released to the ATO will be used to offset any ATO or commonwealth debts against the member may have and pay any remaining balance back to the member.
- Pay excess non-concessional contributions tax
Excess non-concessional contributions tax may be payable by a member who has excess NCCs in a year. The tax rate is 47%.
|Example: Working out how excess non-concessional contributions are taxed
Vinnie makes NCCs and exceeds his NCC cap by $100,000. Assume Vinnie already received his notice of tax assessment for the year with taxable income of $140,000.
The ATO determines the associated earnings amount is $19,000 and provides Vinnie with an excess NCC determination stating:
Vinnie has 60 days from the issue date of the determination letter to make an election and notify the ATO.
Vinnie chooses option 1 - release amounts from super
Vinnie decides to release $116,150 from his super and have the associated earnings included in his assessable income. Vinnie does this by logging onto the myGov website and completing the excess NCC election form, choosing option 1 and nominating the super fund he wants the amount to be released from.
After receiving the valid election, the ATO will add Vinnie's associated earnings amount of $19,000 to his assessment with:
The ATO will also send the super fund a release authority requiring the fund to release $116,150 from his super.
The super fund pays the ATO the $116,150 in compliance with the release authority.
Vinnie chooses option 2 - pay excess NCC tax
Vinnie logs onto his myGov account and completes the excess NCC election form, choosing option 2 to pay excess NCC tax on the amount of $100,000. Vinnie also notifies the ATO of which fund he would like a release authority issued to in order to pay his tax liability.
The ATO issues Vinnie with an excess non-concessional contribution tax assessment for $47,000 ($47% of $100,000). The ATO sends an excess non-concessional contributions tax release authority to Vinnie's super fund instructing them to release $47,000 from his super. The super fund pays the $47,000 to the ATO in compliance with the release authority. The released amount will be offset against Vinnie's debt.
Vinnie does not choose an option
If the ATO does not receive a valid election form from Vinnie within 60 days of the determination letter issue date, Vinnie will automatically be defaulted into option 1 and the process of releasing the excess non-concessional contributions from his super will commence.
Vinnie's associated earnings amount of $19,000 is added to his assessable income. A notice of amended income tax assessment is sent to Vinnie with the following:
The ATO will also send a release authority to Vinnie's super fund requiring the fund to release $116,150 from his super. The super fund pays $116,150 to the ATO in compliance with the release authority. The released amount will be offset against any outstanding tax or other Australian Government debts before any remaining balance is refunded.
This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.
Last modified: Tuesday, July 4, 2023