Making contributions to superannuation that exceed the contribution caps can result in excess contributions tax. And, things can get ugly very quickly.
This article explores how excess contributions tax comes about, what happens if your super contributions exceed the limit, the excess contributions tax rate and how to avoid excess contributions tax.
What is Excess Contributions Tax
Excess contributions tax comes about if your superannuation contributions exceed the relevant contribution caps. The excess amount is considered excess contributions and may incur excess contributions tax.
The two contribution caps that can be exceeded that may result in excess contributions tax are the concessional contribution cap and the non-concessional contribution cap.
Any excess contributions tax payable will depend on which contribution cap is exceeded.
Let’s take a look at, first, the concessional contribution cap and what happens if you exceed it; and then the non-concessional contribution cap and what happens if you exceed that.
Concessional Contributions Cap
The general concessional contributions cap is $27,500 per person, per financial year. Concessional contributions include employer contributions, salary sacrifice contributions and personal deductible contributions, which all count towards the same cap.
However, if your super balance was below $500,000 on the most recent 30 June, then you are able to carry-forward unused concessional contribution amounts from previous financial years for a 5-year rolling period, starting from the 2018/19 financial year onwards.
What Happens if I Exceed the Concessional Contribution Cap?
If you exceed the concessional contributions cap, you will receive a determination from the Australian Tax Office (ATO) stating that you have exceeded the cap. The excess amount will then be added to your personal taxable income for the year, minus an excess concessional contribution tax offset of 15%.
Excess contributions can result from exceeding the general concessional contribution cap of $27,500 if you are unable to utilise carry-forward cap amounts in the current year because you either (a) had a super balance in excess of $500,000 on 30 June of the prior year, or (b) did not have any carry-forward amounts. If either (a) or (b) are applicable, then the amount above $27,500 will be considered excess contributions.
Otherwise, excess contributions will occur if you are able to utilise your carry-forward unused amounts, but still make concessional contributions in excess of the general cap and the carry-forward amounts. In this case, the excess above these two amounts will be classified as excess contributions.
Excess Concessional Contribution Tax Rate
The excess concessional contributions tax rate is based on your individual marginal tax rate. Basically, the excess amount is added together with all of your other forms of personal taxable income and then assessed at your marginal tax rate. A 15% tax offset of the excess amount is received to account for the contributions tax already paid.
To assist with the payment of excess concessional contributions, you have the option of withdrawing 85% of the excess amount (excess contributions less contributions tax of 15%). If you choose not to withdraw the excess amount, it will automatically count towards the non-concessional contribution cap. You should be very aware of the implications of this, because excess non-concessional contributions are taxed at a very high rate. Keep reading!
Non-Concessional Contributions Cap
The general non-concessional contribution cap is $110,000 per person, per financial year. However, you are able to bring forward up to an additional two-financial years’ worth of the cap, meaning you can contribute $330,000 at any stage over a three-financial year period, with no regard to the annual cap. The bring-forward rule is automatically triggered in the financial year that you exceed the $110,000 general cap.
Non-concessional contributions are personal after-tax contributions, which are generally made from your personal bank account. However, certain employees may have non-concessional (after-tax) contributions being made from their employer directly into super. You should be able to see this on your payslip if this is the case.
You are unable to make non-concessional contributions to super if your total superannuation balance exceeds $1.7M on 30 June of the previous financial year.
What Happens if I Exceed the Non-Concessional Contributions Cap?
If you exceed the non-concessional contributions cap, you will be notified by the ATO and will have the option of either withdrawing the excess contributions or leaving the excess contributions within super.
If you choose to withdraw the excess contributions, no excess contributions tax will be payable. If you choose to leave the excess contributions within super, the excess amount will be taxed at the highest individual marginal tax rate.
Exceeding the non-concessional contribution cap includes making non-concessional contributions to super when you are ineligible due to your total superannuation balance being greater than $1.7M.
Excess Non-Concessional Contribution Tax Rate
The excess non-concessional contribution tax rate is 47% if you choose to leave the excess contributions within super. Keeping in mind that you have already paid personal income tax prior to making the contribution. Therefore, this 47% will be in addition to the income tax already paid, meaning the effective excess non-concessional contribution tax rate could total up to 94%.
If you choose to withdraw the excess non-concessional contribution amount, no excess contributions tax will be payable.
The election of whether to withdraw excess contributions or leave the contributions within super can be made within your MyGov account or via application after receiving the determination from the ATO.
How to Pay Excess Contributions Tax
Excess concessional contributions tax is paid by the excess amount being added to your personal taxable income for the year and paid as part of your standard income tax return.
Excess non-concessional contributions tax is paid by a release from your super account to the ATO. If your super fund is unable to release the excess contribution amounts (such as, if you only have a defined benefit super), then you will be liable to pay excess contributions tax personally.
How to Optimise Super Contributions
Getting the right balance between a range of super contribution types can not only significantly reduce your personal income tax, but can also ensure you have enough to get you through between now and retirement, while investing the remainder inside the tax-effective superannuation environment.
The factors influencing optimal contribution amounts include your personal income, whether you are single or a member of a couple and any carry-forward or bring-forward cap amounts.
If you’re not completely confident in the amounts that you’re currently contributing to super, then personal financial advice is highly recommended and will generally pay for itself. If you do not already have a financial adviser, our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
Frequently Asked Questions
Here are some frequently asked questions we receive around excess contribution tax.
What Happens If My Super Contributions Exceed the Limit?
If your super contributions exceed the limit you may be required to pay excess contributions tax of up to 47%. The requirement to pay excess contributions tax will depend on which contribution cap you exceeded and whether or not you chose to withdraw the excess contributions from superannuation.
The information above explains the different types of contribution caps and what happens if you exceed the relevant cap.
How Do I Avoid Excess Contributions Tax?
To avoid excess contributions tax you should attempt to not exceed the contributions caps. However, if exceeding the caps is unavoidable, excess contributions tax can be avoided simply by nominating to withdraw the excess contributions from super.
Excess contributions tax only really occurs if you exceed the non-concessional contribution cap and opt to leave the excess contributions within super. Exceeding the concessional contribution cap only results in the excess being taxed at your individual tax rate, which is what would have happened anyway, had you not exceeded the cap in the first place.
What Happens if I Contribute More than $27,500 to Super?
If you contribute more than $27,500 to super, the excess amount above $27,500 will be taxed at your individual tax rate – together with all of your other forms of taxable income. You will also have the option of releasing the excess amount from super.
However, if you have available unused concessional cap amounts from previous years, contributing more than $27,500 will simply cause the carry-forward amounts to reduce and will not result in the excess being taxed at your marginal tax rate.
You Might Also Like:
- Additional Super Contributions: How Much Extra Can You Make?
- Superannuation Contributions Tax
- Super Concessional Contributions Cap: What is the Limit?
- Carry Forward Super Contributions
- classic.austlii.edu.au. (n.d.). INCOME TAX ASSESSMENT ACT 1997 – SECT 291.20 Your excess concessional contributions for a financial year. [online] Available at: http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s291.20.html [Accessed 27 Mar. 2023].
- Office, A.T. (n.d.). Super contributions – too much can mean extra tax. [online] www.ato.gov.au. Available at: https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/super-contributions—too-much-can-mean-extra-tax/?page=4 [Accessed 27 Mar. 2023].
- Australian Taxation Office (2021). Individual Income Tax Rates. [online] Australian Taxation Office. Available at: https://www.ato.gov.au/Rates/Individual-income-tax-rates/.