Did you know that any money you put into your superannuation fund that exceeds your annual contributions cap could attract a penalty tax rate of 93 percent?

Each year you can put up to $25,000 into super as a concessional contribution, such as an employer contribution, which will be taxed at a rate of 15 percent (in the superannuation fund). You can put in more than this amount, but tax of 46.5 percent is payable on extra contributions over the non-concessional contributions cap, a separate and additional cap of $150,000 per year.

What you might not know is that if you exceed your concessional contributions cap and your non-concessional contributions cap, you could end up paying $93,000 of tax for every $100,000 contributed.

In our experience, huge bills for excess contributions tax are rarely the fault of the individual intentionally trying to put too much into super. Instead, the problem usually arises inadvertently, from simple things like bad timing or delays in electronically transferring funds. As contributions caps are looked at on a year-by-year basis, if these issues occur around year end (30 June), you could face the 93 percent tax rate.

The ATO has cracked down on excess super contributions, and is targeting over 30,000 taxpayers for excess contributions during the 2008 and 2009 years.

If you receive notice from the ATO that you have a problem with excess super contributions, you will need to take action as soon as possible.

One way - and often the only way - of fixing an excess contributions problem is to ask the Commissioner of Taxation to exercise his discretion to reallocate your super contributions to a different year.

Given the amount of tax revenue at stake, it is difficult to convince the Commissioner to exercise this discretion. According to an article in yesterday's AFR, Taxman agrees super penalties draconian (24 February 2011), the Commissioner exercises this discretion in less than two percent of cases.

The Commissioner is reluctant to alleviate the unfair outcomes caused by the excess contributions tax. Even so, in one successful application, HopgoodGanim saved a client nearly $300,000 in tax.

While every case is different, our experience tells us that it is wise to check your exposure to excess contributions tax sooner rather than later, and to obtain appropriate advice about managing excess contributions tax exposure before you're on the ATO's radar.

For more information about excess super contributions tax or applying for a reallocation from the Commissioner, please contact HopgoodGanim's Taxation and Revenue team.

Damian O'Connor, Special Counsel
T +61 7 3024 0467
d.oconnor@hopgoodganim.com.au