SMSF STRATEGY GUIDE
REFUND OF EXCESS CONTRIBUTIONS
When the contribution limits (or caps) first came into being, the penalties for going over your contribution limits were very harsh, regardless of whether or not the breach was intentional or accidental. Thankfully, those original laws were amended and gave way to a much more sensible approach whereby SMSF trustees can go about rectifying a situation of excess contributions.
If you exceed the concessional contributions cap, the excess amount is added back to your personal assessable income and will be taxed at your marginal tax rate, with a rebate that relates to the 15% contributions tax paid on that amount by the SMSF. The excess amount (net of any contributions tax) can be refunded by the SMSF, but its not compulsory. You have to make the request for the refund.
The refund is made by the SMSF to the ATO, who will deduct any tax or interest, and refund what is left to you.
If you don't request a refund, it is treated as a non-concessional contribution and then becomes part of those limits.
Note a few things here:
the excess concessional contributions charge - this applies given the tax differential between the super contributions tax and your marginal tax rate, so that it prevents people from using this as a way of gaining from the time difference of paying tax. The rate applied is known as the shortfall interest charge.
When releasing funds, timing is important.
- You will have 21 days from the amended assessment notice to confirm to the ATO that you want to receive a refund of your excess contributions.
- When they receive that election, the ATO will request your SMSF to make payment
- your SMSF then has 7 days from that receipt of the ATO request to pay it.
If you exceed the non-concessional contributions limit (and this includes the interplay of the bring forward provisions), you can also elect to receive a refund of the excess amount from your SMSF, plus 85% of any associated earnings from that excess amount (as the earnings are generally subject to 15% tax in the fund). This associated earnings amount is included in your assessable income & taxed at marginal rates, less the 15% offset.
Again, you have to make the request to release the excess amount, after you have received the ATO assessment. If you don't elect to have the excess refunded, you will face the punitive 47% excess non-concessional contributions tax on the excess amount. That tax liability will be paid by your SMSF.
The process is that you will have 60 days from when the ATO provide you with an excess non-concessional contribution notice in which to elect to have the excess amount refunded. The ATO then releases an authority to release the required amount from the SMSF, and you then have 21 days from receiving that for your SMSF to refund you the required amount.