Having previously resolved the problem of excess concessional contributions, the Government has now solved the problem of excess non-concessional contributions.
Essentially, excess non-concessional contributions arising in respect of 2013/14 and subsequent financial years will, at the election of the member, be returned to the member together with accrued earnings. The accrued earnings will be included in the member’s income and taxed at marginal rates. However, the returned excess contribution will not be taxed when repaid (as the member received no tax benefit in making the contributions in the first place). This is a sensible outcome.
Bert has made $540,000 of (ordinary) non-concessional contributions during 2014/15 on the basis that he was entitled to use the “three year” bring forward. Unfortunately, as Bert attained age 65 during the 2013/14 financial year, he was not eligible to invoke the “bring forward” and his non-concessional contribution cap for 2014/15 was $180,000.
Consequently, Bert has excess non-concessional contributions of $360,000 in respect of the 2014/15 financial year.
Without the proposed change Bert would be issued with a tax liability of $176,400 – which is non-concessional contributions tax rate of 49% levied on the amount (which rate will apply from 2014/15 financial year). Under the proposed change Bert will be given the opportunity to have the excessive portion of the non-concessional contributions returned.
Additionally, the fund must also pay Bert any earnings accrued on those contributions and those earnings will be taxed at Bert’s marginal tax rate.
The fine details of the proposed change have not been released. However, the Government will have to include financial disincentives in the arrangement to preclude the use of the refund as a means of transferring assessable income from the year of contribution to the year of refund.
This proposal will solve the problem of excess non-concessional contributions tax. While a member will not be compelled to have the excess contributions refunded, the effective tax rate on any excess contributions not withdrawn will be taxed at 46.5% if made during 2013/14, 49% if made during 2014/15, 2015/16 and 2016/17 and 47% if made during 2017/18 and following financial years.