Q&A with Tech

Find out what your peers are asking. The IOOF TechConnect team answer some of most common questions they have received over the last couple of months.

Topic: Proposed lifetime $500,000 non-concessional cap

Q: How do you find out how much of the lifetime cap has been used so far?

A: The ATO will be the source of truth for a person’s non-concessional contributions cap. Recently the ATO has updated its website for tax practitioners. The ATO has advised that they will perform a manual calculation based on information from superannuation funds, income tax returns and excess contribution amounts released from funds. Unfortunately there is no equivalent information for individual taxpayers. Refer to the ATO update.

If your client has an accountant or tax agent, the request for information can be lodged via the accountant or tax agent. Alternatively the client can contact the ATO directly or seek assistance from an accountant or tax agent.

Many super funds will hold accurate records, however they will not be able to identify the non-concessional contributions component of monies rolled in since 1 July 2007.

Topic: Bring forward rule and proposed lifetime $500,000 non-concessional cap

Q: I have a prospective client who is working full time, will continue to work full time and turned 65 in February this year. Is he able access the bring-forward rule as he is over 65 (but was 64 at the start of this financial year)? Also, is the bring-forward rule actually still around after the proposed changes in the budget?

A: Under current rules, your client will be able to trigger the bring-forward rule as he was under 65 at the start of the financial year. The proposed lifetime non-concessional cap is not law, but if it does become law, it is intended to replace the current annual caps as well as the bring-forward rule.

You will need to check whether your client has made non-concessional contributions since 1 July 2007. The government has indicated that if the lifetime non-concessional cap becomes law, non-concessional contributions made from 3 May 2016 that will lead to going over the $500,000 cap will be treated as excess non-concessional contributions.

Although the 49 per cent excess non-concessional contributions penalty rate can be avoided by refunding excess non-concessional contributions from the superannuation fund, the excess contribution will still be subject to associated earnings.

The associated earnings amount is a calculated amount to recognise that the excess non-concessional contributions amount has benefited from investment in the superannuation fund. The full amount of the associated earnings will be included as assessable income and a non-refundable tax offset equal to 15 per cent of these associated earnings will also be applied.

An example on the ATO website indicates that an excess non-concessional contribution of $100,000 for a person with taxable income of $140,000 may result in additional tax of $4,180.

The tax due to associated earnings may be quite costly for the client (amount will vary depending on the amount of the excess, the client’s taxable income, General Interest Charge rates and when the tax return is lodged).

So while your client will be able to trigger the bring-forward rule, the potential impact of the proposed lifetime non-concessional cap should also be considered.

Topic: Temporary residents and retirement condition of release

Q: A client entered Australia under a temporary resident visa and is still a temporary resident. He is age 65 and would like to access his super benefit. Can he access it under the ‘retirement’ condition of release? How will the benefit be taxed?

A: Temporary residents are subject to restrictions on conditions of release different to those applying to permanent residents.

Unfortunately, as a temporary resident he cannot withdraw his super benefit under the ‘retirement’ condition of release.

He can access his Australian super benefits as a Departing Australia Super Payment (DASP) when he leaves Australia permanently and his visa is cancelled or expires. The benefit will be taxed as follows:

  • Tax-free component - nil tax
  • Taxable (taxed component) – 38%
  • Taxable (untaxed) – 47%

If he doesn’t withdraw his superannuation balance, his super balance is transferred to the ATO generally after six months of the temporary visa expiring or upon leaving Australia. While funds are with the ATO they earn interest at CPI (these interests are not subject to tax).

If he hasn’t withdrawn his super and has returned as a permanent resident, he has the option of either transferring this money to an Australian super fund or applying for it to be paid to him directly – either way, the payment is still considered a DASP and taxed accordingly.

Topic: Proposed lifetime non-concessional contributions (NCC) cap and excess non-concessional contributions

Q: Can you please confirm that when a client has an excess non-concessional contribution and sign the release authority to release it from super that the release authority can be served on a pension account? And if the excess is released, I assume it ceases counting towards the caps and won’t count towards the proposed $500k lifetime NCC limit so the client may have some small scope to make further NCCs if the $500k limit becomes law?

A: Yes, the release authority can be served on a pension account, unless it’s a Defined Benefit Fund or a non-commutable superannuation income stream and the fund cannot/will not release it.

Regarding whether excess non-concessional contributions that are released will cease counting towards the proposed $500k lifetime non-concessional caps, there is insufficient information in the budget papers. The budget papers did refer to the existing penalty regime but did not provide further detail.

The way current excess non-concessional contributions legislation is worded is to suit a system that operates without a lifetime cap, so there is no specific wording about whether released excess non-concessional contributions will no longer count towards the non-concessional cap. Under the current system, non-concessional caps apply on an annual, or three year if the bring forward rule is triggered, basis, so contributions that breach the annual or three year period will not be counted towards a future annual/three year period.

Having said that, the effect of the current regime is that excess non-concessional contributions that are released will not be treated as excess non-concessional contributions. So it is highly likely that released excess non-concessional contributions will not count towards the proposed lifetime NCC.

The ATO has also recently updated their website (for tax practitioners) and they seem to be taking released excess contributions into account. The following is an extract from the ATO website:

‘We calculate the amounts manually, based on information from funds, income tax returns and excess contribution amounts released from funds.’

Read the full announcement.

However it must be stressed that it is not possible to confirm the above until draft legislation is available.

The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.